The Bitcoin Standard – by Saifedean Ammous
Date read: 12/11/21. Recommendation: 8/10.
If you’re new to Bitcoin or cryptocurrency and you’re seeking a deeper understanding of this space and why it matters, this is the book to start with. Ammous provides a helpful overview of the history of money which serves to anchor your understanding. His perspective is particularly relevant in current market conditions, as he explains how hyperinflation is a form of economic disaster unique to government money. And money supply management is the problem masquerading as its solution. Even if you’re skeptical of digital currencies, I’d highly suggest reading this so you consider another perspective as you further develop your own opinion.
See my notes below or Amazon for details and reviews.
My Notes:
Bitcoin fundamentals:
Definition: “Bitcoin can be best understood as distributed software that allows for transfer of value using a currency protected from unexpected inflation without relying on trusted third parties.” SA
“Bitcoin automates the functions of a modern central bank and makes them predictable and virtually immutable by programming them into code decentralized among thousands of network members, none of whom can alter the code without the consent of the rest.” SA
Bubbles:
Anatomy of a market bubble: “Increased demand causes a sharp rise in prices, which drives further demand, raising prices further, incentivizing increased productions and increased supply, which inevitably brings prices down, punishing everyone who bought at a price higher than the usual market price.” SA
“For anything to function as a good store of value, it has to beat this trap: it has to appreciate when people demand it as a store of value, but its producers have to be constrained from inflating the supply significantly enough to bring the price down.” SA
Gold standard:
A single, sound monetary unit encourages progress: “With the majority of the world on one sound monetary unit, there was never a period that witnessed as much capital accumulation, global trade, restraint on government, and transformation of living standards worldwide.” SA
Outbreak of WWI in 1914 led major economies off the gold standard which governments replaced with unsound government money. Centralization allowed governments to expand money supply beyond their gold reserves (reducing the value of their currency).
Prior to WWI, governments were limited by the amount of money they had in their own treasuries. But WWI and shift away from gold standard led to disaster. “The ease with which a government could issue more paper currency was too tempting in the heat of the conflict, and far easier than demanding taxation from citizens.” SA
Relationship between unsound money and war:
Three fundamental reasons that drive this relationship: “First, unsound money is itself a barrier to trade between countries, because it distorts value between countries and makes trade flows a political issue…Second, government having access to a printing press allows it to continue fighting until it completely destroys the value of its currency, and not just until it runs out of money….Third, individuals dealing with sound money develop a lower time preference, allowing them to think more of cooperation rather than conflict.” SA
Inflating money supply:
Average annual percent increase in money supply for US between 1990-2015 was 5.45%. But growth at that rate will double money supply in only 15 years.
“Hyperinflation is a form of economic disaster unique to government money. There was never an example of hyperinflation with economies that operated a gold or silver standard.” SA
“The problem with government-provided money is that its hardness depends entirely on the ability of those in charge to not inflate its supply. Only political constraints provide hardness, and there are no physical, economic, or natural constraints on how much money government can produce….History has shown that governments will inevitably succumb to the temptation of inflating the money supply.” SA
“Central bank planning of the money supply is neither desirable nor possible. It is rule by the most conceited, making the most important ignorant enough of the realities of market economies to believe they can centrally plan a market as large, abstract, and emergent as the capital market. Imagining that central banks can “prevent,” “combat,” or “manage” recessions is as fanciful and misguided as placing pyromaniacs and arsonists in charge of the fire brigade.” SA
No escaping the negative consequences: “If the central bank stops the inflation, interest rates rise, and a recession follows as many of the projects that were started are exposed as unprofitable and have to be abandoned, exposing the misallocation of resources and capital that took place. If the central bank were to continue its inflationary process indefinitely, it would just increase the scale of misallocations in the economy, wasting even more capital and making the inevitable recession even more painful.” SA
Sound money:
Holds value across time (salability), transfers value effectively across space, can be divided and grouped into small and large scales, cannot be manipulated by coercive authorities.
Attributes of sound money: durability, portability, fungibility, verifiability, divisibility, scarcity, established history, censorship resistance.
Move from money that holds its value to money that loses its value has significant consequences: “society saves less, accumulates less capital, and possibly begins to consume its capital; worker productivity stays constant or declines…civilizations prosper under a sound monetary system, but disintegrate when their monetary system is debased, as was the case with the Romans, the Byzantines, and modern European societies.” SA
Socialism:
“The fatal flaw of socialism that Ludwig von Mises exposed was that without a price mechanism emerging on a free market, socialism would fail at economic calculation, most crucially in the allocation of capital goods.” SA
Owning and controlling the means of production (acting as buyer and seller) stifles the market, making pricing impossible. “Without a market for capital where independent actors can bid for capital, there can be no price for capital overall or individual capital goods. Without prices of capital goods reflecting their relative supply and demand there is no rational way of determining the most productive uses of capital, nor is there a rational way of determining how much to produce of each capital good.” SA
Employment:
“The normal workings of a free market will witness many people lose or quit their jobs, and many businesses will go bankrupt or shut down for a wide variety of reasons, but these job losses will roughly cancel out with newly created jobs and businesses…Only when a central bank manipulates the money supply and interest rate does it become possible for large-scale failures across entire sectors of the economy to happen at the same time, causing waves of mass layoffs in entire industries, leaving a large number of workers jobless at the same time, with skills that are not easily transferrable to other fields.” SA
Money supply management:
“The fundamental scam of modernity is the idea that government needs to manage the money supply.” SA
“Money supply management is the problem masquerading as its solution.” SA
Digital money:
“As bitcoin’s value rises, more effort to product bitcoins does not lead to the production of more bitcoins. Instead, it just leads to an increase in the processing power necessary to commit valid transactions to the bitcoin network, which only serves to make the network more secure and difficult to compromise.” SA
“Bitcoin, and cryptography in general, are defensive technologies that make the cost of defending property and information far lower than the cost of attacking them.” SA
Severely reduces time + costs of sending money: no issues of trading currencies or settlement challenges between institutions or layers of intermediation. Bitcoin eliminates counterparty risk and “makes global processing of payments and final clearance available for anyone to perform at a small cost, and it replaces human-directed monetary policy with superior and perfectly predictable algorithms.” SA
Bitcoin is also neutral, doesn’t give any country privilege of issuing global reserve currency (and along with that the power to manipulate or inflate).