The book “the Bitcoin Standard” by Saifedean Ammous was really influential in convincing me there is value in Bitcoin. Money is a complex, emotionally laden topic, with a rich history, and this book definitively deserves a read. Here is a summary of the 10 key points from my perspective.
#1 Money is a concept
Any value in a currency is an agreement between humans that there actually IS value there. I.e. no chimpanzee will agree there is value in the USD, Yuan, gold, seashells etc. Money – starting out as a medium of exchange – is a concept, such as the nation state or a company and does not ‘exist’ in the physical world.
#2 – Money Transfers Value over Time and Space
For ‘money’ the value primarily exists due to its salability – to transfer Value over Time and Space. In a free market humans have over time selected gold over millennia to be used as money, mainly due to criteria – such as being scarce, it’s divisible, it’s recognizable, other humans agree there is value there and you can’t easily find/create more of it – i.e. it has a high ‘stock to flow’ ratio. (stock to flow ratio means how much exists ‘in stock’ – eg above ground gold – compared to how much new flow – eg gold can be dug up – annually). The high stock to flow ratio is key as it means that the money can’t be inflated by market actors.
#3 – Money is a Network
Currency / money is a network between humans, and desirable qualities of money resemble those of gold. However should a better money emerge (say Bitcoin), in a free market humans would choose the money which best fulfills the criteria of money (ie that Best transfer Value over Time and Space). We have learned the hard way in some countries like Venezuela, Argentina what happens if Money doesn’t transfer Value over time.
#4 Bitcoin is open source Money
The number of Bitcoin is set algorithmically –there will be 21M bitcoins by 2140, the stock to flow ratio of Bitcoin will in 2025 be lower than that of gold, and the flow will be halved every four years.
It is also a remarkable innovation in terms of solving in code the ‘Byzantine Generals Problem’, that is how to co-ordinate distributed forces (think nodes) where some nodes might be traitors or corrupt. This solution establishes a consensus in the network about which transactions are legitimate, so it resolves the double-spending problem.
That is “Bitcoin can be best understood as distributed software that allows for transfer of value using a currency protected from unexpected inflation without relying on third parties”.
#5 Bitcoin network value
You can track the number of humans who agree there is Value in Bitcoin by tracking different metrics – eg market cap, number of wallets, hash rate, price etc. As more people consider it a store of value, that is the price grows higher, it also incentivizes more miners to secure the network – which in turn makes the network safer.
The value in Bitcoin is there due to network effects, and there are real switching costs involved- eg a fork won’t do any good. It’s the difference between an open source library that is copied, waiting to be executed, and a Live network that is running with transactions, users, data etc.
#6 Money printer go “Brrr”
Recent actions by central banks to print money – eg 5 Trillion in the US in response to the Covid pandemic – alter the perception humans have of their national currencies, and as central banks are inflating the supply, they are increasing the flow compared to the stock, and eroding the value in the currency.
While most of the world trusts markets for the pricing, allocation of capital goods – nonetheless there is a central planning board in every country of the world for the most important market – the market of capital.
#7 – Keynesian economics
JM Keynes was an influential economist in the 1930s who has influenced governments around the world that in a recession, governments should ‘stimulate’ the economy to make up for the slack from the private sector. Keynesian economics are the mainstream economics that are taught in Economics schools, opposed to classical/Austrian economics, with one of the main tenets of Keynesianism being that inflation is good, and should be ‘managed’ to about 2% per year. What is then not often mentioned is that the money in your wallet declines by 2% per year.
Ammous points out the example of the ‘depression that never happened’ – in 1921, where the government did not take ANY action, wages initially dropped 10%, but within 9 months the economy was strongly growing again leading to the ‘roaring 1920s’.
This is in opposition to the Depression in 1933 where the government froze wages, stimulated with public works programs and by confiscating US gold reserves, and eventually devalued the dollar 70% from $20/oz of gold to $35/oz.
#8 – A deflationary currency leads to lower time-preferences
An individual with a low time preference chooses to defer gratification, and work on items where the pay-off is further out in the future. We know from psychology this is good for individuals, and economics tells as investment in the future is beneficial. Therefore a money that is deflationary, that retains or increases in value, should be preferred by society and individuals alike.
However the opposite is taught today as beneficial – more consumer spending to satisfy cravings, wants, and less saving is good. Less capital therefore available for investment and growth, and pressure on companies to perform in the short term.
#9 – Bitcoin as a concept is many things
A concept has the ability to be multiple things at the same time – that is Bitcoin was initially planned to be a digital currency to be used for day to day purchases, however at the moment due to the price volatility and transaction speeds it is not feasible for that at the moment. There are eg second layer solutions (eg Lightning network or Strike ) that are working to resolve the issues. Taxation issues would have to be resolved as well.
#10 – Bitcoin as an option / hedge
Currently Bitcoin can more appropriately be thought of as
- an option (hedge) towards central banks eroding the value in national currencies
- an option on a true global money
- a volatile investment with a lot of possible upside
- but also a chance of going to zero.
If you’ve made it this far – I will again recommend you check out this book – “the Bitcoin Standard” by Saifedean Ammous. It can change how you think about money, as it did for me.
Thanks for reading,
Oskar