The Bitcoin Standard: The Decentralized Alternative to Central Banking

by Saifedean Ammous

Though no politician has ever been elected by acknowledging this reality, the ballot box cannot overturn the fundamental scarcity of human time.

While such a conception might appeal to ivory‐tower idealists who imagine it will only lead to positive outcomes, in reality this leads to the destruction of the market mechanisms necessary for economic production to take place. In such a system, money stops functioning as an information system for production, but rather as a government loyalty program.

A money which can be easily produced will lead to more economic resources and human time being dedicated toward its production. As money is acquired not for its own properties, but to be exchanged for other goods and services, its purchasing power is important, not its absolute quantity.

In a globalized world, the bezzle is not restricted to national governmental organizations, but has grown to include international governmental organizations, a globally renowned drain of time and effort to no conceivable benefit to anyone but those employed in them. Being located away from the taxpayers that fund them, these organizations face even less scrutiny than national governmental organizations, and as such function with even less accountability and a more relaxed approach toward budgets, deadlines, and work.

Academia is another good example, where students pay ever‐more‐exorbitant fees to enter universities only to be taught by professors who spend very little time and effort on the teaching and mentoring of students, focusing most their time on publishing unreadable research to get government grants and climb the corporate academic ladder. In a free market, academics would have to contribute value by teaching or writing things people actually read and benefit from. But the average academic paper is rarely ever read by anyone except the small circle of academics in each discipline who approve each other's grants and enforce the standards of groupthink and politically motivated conclusions masquerading as academic rigor.

The dean of today's Keynesian economists, Paul Krugman, has even written of how an alien invasion would be great for the economy as it would force government to spend and mobilize resources.25

From this we see how banking has evolved into a business that generates returns without risks to bankers and simultaneously creates risks without returns for everyone else.

In other words, Bitcoin would bring the desirable features of physical cash (lack of intermediaries, finality of transactions) to the digital realm and combine them with an ironclad monetary policy that cannot be manipulated to produce unexpected inflation to benefit an outside party at the expense of holders.

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Governments would never allow private parties to issue their own private currencies and transgress on the main way in which government funds itself and grows. So government would always want to monopolize money production and face too strong a temptation to engage in the increase of the money supply.

For the bitcoin price to rise, people must hold it as a store of value, and not just spend it.

By November 2017, the total market value of all the bitcoins in circulation was in the range of $110 billion, giving it a value larger than the broad money supply of the national currencies of most countries.

Had Bitcoin been created with an easy‐money policy, such as what a Keynesian or Monetarist economist would recommend, it would have had its money supply grow in proportion to the number of users or transactions, but in that case it would have remained a marginal experiment among cryptography enthusiasts online. No serious amount of processing power would have gone to mining it, as there would be no point in investing heavily in verifying transactions and solving proof‐of‐work in order to get tokens that will get devalued as more people use the system. The expansionary monetary policies of modern fiat economies and economists have never won the market test of adoption freely, but have instead been imposed through government laws, as discussed earlier.

Peer‐to‐peer network is a network structure in which all members have equal privileges and obligations toward one another. There are no central coordinators who can change the rules of the network.

With a growing network of users worldwide, BitTorrent at some point represented about a third of all Internet traffic worldwide.

What constitutes the practical and realistic limit to the quantity of any resource is always the amount of human time that is directed toward producing it, as that is the only real scarce resource (until the creation of Bitcoin).

As a society, our only scarcity is in the total amount of time available to members of a society to produce different goods and services.

As Figure 20 shows, even as consumption and production continue to increase year on year, the proven reserves increase at an even faster rate.1 According to data from BP's statistical review, annual oil production was 46% higher in 2015 than its level in 1980, while consumption was 55% higher. Oil reserves, on the other hand, have increased by 148%, around triple the increase in production and consumption.

The only scarcity, as Julian Simon brilliantly demonstrated, is in the time humans have to produce these metals, and that is why the global wage continues to rise worldwide, making products and materials continuously get cheaper in terms of human labor.

This is one the hardest economic concepts for people to understand, which fuels the endless hysteria that the environmental movement has foisted upon us through decades of apocalyptic scaremongering.

In 1980, Simon challenged Ehrlich to name any raw materials and any period longer than a year, and bet him $10,000 that the price of each of these metals, adjusted for inflation, would be lower at the end of the period than before it. Ehrlich picked copper, chromium, nickel, tin, and tungsten, which were all materials he had predicted would run out. Yet, in 1990, the price of each of these metals had dropped, and the level of annual production had increased, even though the intervening decade had seen human population increase by 800 million people, the largest increase in a single decade before or since.

Technology is by its nature both a non‐excludable good (meaning that once one person invents something, all others can copy it and benefit from it) and a non‐rival good (meaning that a person benefiting from an invention does not reduce the utility that accrues to others who use it).

Larger populations will thus produce more technologies and ideas than smaller populations, and because the benefit accrues to everyone, it is better to live in a world with a larger population.

Kremer illustrates this by showing that as the population of the earth has increased, the rate of population growth has increased rather than declined. Had humans been a burden consuming resources, then the larger the population, the lower the quantity of resources available to each individual and the lower the rate of economic growth and thus population growth, as the Malthusian model predicts. But because humans are themselves the resource, and productive ideas are the driver of economic production, a larger number of humans results in more productive ideas and technologies, more production per capita, and a higher capacity for sustaining larger populations.

It is a misnomer to call raw materials resources, because humans are not passive consumers of manna from heaven. Raw materials are always the product of human labor and ingenuity and thus humans are the ultimate resource, because human time, effort, and ingenuity can always be used to produce more output.

Until Bitcoin's invention, all forms of money were unlimited in their quantity and thus imperfect in their ability to store value across time. Bitcoin's immutable monetary supply makes it the best medium to store the value produced from the limited human time, thus making it arguably the best store of value humanity has ever invented. To put it differently, Bitcoin is the cheapest way to buy the future, because Bitcoin is the only medium guaranteed to not be debased, no matter how much its value rises. (See Figure 21.3)

In The Sovereign Individual, James Davidson and William Rees‐Mogg argue that the modern nation‐state, with its restrictive laws, high taxes, and totalitarian impulses, has grown to a level of burdensome repression of its citizens' freedom comparable to that of the Church in the European Middle Ages,

As the scope of communication and travel grew larger in the nineteenth century, requiring financial transactions over longer distances, gold moved out of people's hands and into the vaults of banks, and eventually, central banks.

Bitcoin is money free of counterparty risk, and its network can offer final settlement of large‐volume payments within minutes.

Settlements between central banks and large financial institutions take days, and sometimes weeks, to clear, during which time each party is exposed to significant foreign exchange and counterparty risk.

Being separated from any particular country's economy, its value will not be affected by the volume of trade denominated in it, averting all the exchange rate problems that have plagued the twentieth century.

Bitcoin's capacity for transactions is far more than what the current number of central banks would need even if they settled their accounts daily. Bitcoin's current capacity of around 350,000 transactions per day can allow a global network of 850 banks to each have one daily transaction with every other bank on the network.

A global network of 850 central banks can perform daily final settlement with one another over the Bitcoin network. If each central bank serves around 10 million customers, that would cover the entire world's population. This is offered as an absolute worst‐case scenario in which Bitcoin's capacity is not increased in any way whatsoever.

In a world in which no government can create more bitcoins, these Bitcoin central banks would compete freely with one another in offering physical and digital bitcoin‐backed monetary instruments and payment solutions.

Without a lender of last resort, fractional reserve banking becomes an extremely dangerous arrangement and it would be my expectation the only banks that will survive in the long run would be banks offering financial instruments 100% backed by Bitcoin.

Actually there is a very good reason for Bitcoin‐backed banks to exist, issuing their own digital cash currency, redeemable for bitcoins. Bitcoin itself cannot scale to have every single financial transaction in the world be broadcast to everyone and included in the block chain. There needs to be a secondary level of payment systems which is lighter weight and more efficient. Likewise, the time needed for Bitcoin transactions to finalize will be impractical for medium to large value purchases.

I believe this will be the ultimate fate of Bitcoin, to be the “high‐powered money” that serves as a reserve currency for banks that issue their own digital cash.

The number of transactions in a Bitcoin economy can still be as large as it is today, but the settlement of these transactions will not happen on Bitcoin's ledger, whose immutability and trustlessness is far too valuable for individual consumer payments. Whatever the limitations of current payment solutions, they will stand to benefit immensely from the introduction of free market competition into the field of banking and payments, one of the most sclerotic industries in the modern world economy, because it is controlled by governments that can create the money on which it runs.

In the current monetary global system, national central banks hold reserves mainly in U.S. dollars, euros, British pounds, IMF Standard Drawing Rights, and gold. These reserve currencies are used to settle accounts between central banks and to defend the market value of their local currencies. Should Bitcoin's appreciation continue in the same manner it has experienced over the past few years, it is likely to attract the attention of central banks with an eye on the future.

If the central bank has the institutional capacity to purchase the currency without announcing it, that would be an even wiser course of action, allowing the central bank to accumulate it at low prices.

If the modern world is ancient Rome, suffering the economic consequences of monetary collapse, with the dollar our aureus, then Satoshi Nakamoto is our Constantine, Bitcoin is his solidus, and the Internet is our Constantinople. Bitcoin serves as a monetary lifeboat for people forced to transact and save in monetary media constantly debased by governments.

As it stands, given that Bitcoin constitutes less than 1% of the global money supply, large individual transactions in Bitcoin can have a large impact on price, and small variations in demand can cause large swings in price.

Bitcoin token today can be considered an investment in the fast growth of the network and currency as a store of value, because it is still very small and able to grow many multiples of its size and value very quickly.

Should central banks sell their gold reserves, the net effect will be that tons more gold will be utilized in industrial applications over the coming few years, with a small impact on gold's price. In this trade, the central bank would only gain a fiat currency it can print itself, and would lose an asset which will likely gain value over its own currency.

Only the best fiat currencies have been stable in the short‐term, but the devaluation in the long term is evident. Gold, on the other hand, has maintained long‐term stability, but it is relatively unstable in the short term.

An international settlement currency should be neutral to the monetary policy of different countries, which is why gold played this role with excellence during the international gold standard.

PoW are verified by a majority of the network nodes, a set quantity of bitcoin is issued to reward the node that correctly solved the PoW. This is known as the block subsidy, and the process of generating the new coins has been referred to as mining, because it is the only way that the supply of coins is increased, in the same way that mining is the only way to increase the supply of gold.

The reward to nodes for verifying transactions has proven to be a profitable use of processing power. In January 2017, the processing power behind the Bitcoin network is equivalent to that of 2 trillion consumer laptops. It is more than two million times larger than the processing power of the world's largest supercomputer, and more than 200,000 times larger than the world's top 500 supercomputers combined. By monetizing processing power directly, Bitcoin has become the largest single‐purpose computer network in the world.

These Application Specific Integrated Circuits (ASICs) were first introduced in 2012, and their deployment has made adding processing power to the Bitcoin network more efficient, because no electricity is wasted on any irrelevant computing processes that would be present in any other, non‐Bitcoin‐specific computing unit.

All of these miners have no conceivable purpose but verifying Bitcoin transactions and solving proof‐of‐work. Should Bitcoin fail for whatever reason, these ASICs would be rendered useless and their owners' investment would be lost, so they have a strong incentive to maintain the honesty of the network.