What it's about in one sentence:
An explanation of money and Bitcoin's potential as a new monetary standard.
Bullet Point Outline and Summary
- The key characteristic of effective money is its ability to retain value and facilitate transactions across a community.
- Before money, people used barter systems where goods were directly exchanged, but this method was inefficient because not all trading partners had mutually desired items. Money emerged as a solution, enabling indirect exchange by providing a universally accepted medium of value.
- Yap Islanders used Rai stones (disc-shaped stones with a hole in the middle) for transactions until technological advances made them commonplace. This illustrates that a key feature of money is its scarcity or limited supply.
- “As with Rome, the fall of Constantinople happened only after its rulers had started devaluing the currency.”
- Metallurgy enabled the creation of coins, with gold emerging as the ideal currency due to its durability,
scarcity, and difficulty of extraction.
- During the 18th, 19th, and 20th centuries, governments worldwide adopted the gold standard, backing paper money with gold reserves to create a reliable and marketable form of currency. Britain first adopted the gold standard in 1717, which was subsequently adopted by around 50 other countries by 1900.
- During World War I, European governments abandoned the gold standard to fund war efforts, printing money without corresponding gold reserves. This decision dramatically devalued currencies and undermined the economic stability of European nations. Gold-backed currencies like the Swiss franc did not experience such devaluation.
- After World War I, European governments replaced gold-backed money with fiat money due to the impracticality
of returning to pre-war gold standards.
- The Bretton Woods system established in 1944 temporarily tied currencies to the US dollar, which was linked to gold, but this arrangement ultimately collapsed due to widespread currency inflation.
- In 1971, President Nixon ended US dollar convertibility to gold, marking the final transition to a global system of fiat currencies determined by market interactions.
- Sound money, characterized by currencies backed by gold in the 19th century, encourages saving and long-term investment by maintaining a stable value that rewards future-oriented economic decisions.
- By preventing government manipulation of the money supply, sound money allows prices to accurately reflect market movements, enabling more informed investment choices.
- Unsound monetary policies create economic instability where government interference distorts market signals
and misleads investors into making poor capital allocation decisions.
- For example, the Keynesian approach of increasing money supply during recessions encourages present-focused spending and accumulating unsustainable debt.
- These interventions lead to perpetual boom‐and‐bust cycles that can only be addressed by returning to more stable monetary principles.
- “The average savings rate of the seven largest advanced economies was 12.66% in 1970, but has dropped to 3.39% in 2015, a fall of almost three‐quarters.”
- The prevailing belief that the government should manage the money supply is harmful, as it's unsupported by evidence and has led to economic disasters. Many economists are ignoring the historical success of gold.
- Government-led money supply expansion leads to a culture of reckless spending and short-term thinking. It also distorts markets, fuels perpetual war by removing financial constraints, and empowers tyrannical governments by allowing them to circumvent economic realities.
- Bitcoin provides a technological solution to the problems of unsound monetary policies.
- Bitcoin offers a form of digital scarcity, with a permanently fixed maximum supply of 21 million coins that will be released at a predictably diminishing rate until 2140.
- Unlike other commodities, Bitcoin's supply cannot be manipulated, making it immune to devaluation and establishing it as a potentially stable store of value.
- Bitcoin's scarcity mirrors gold's scarcity.
- Bitcoin's security is ensured through its decentralized public blockchain, which requires majority network
approval for any transaction and makes fraudulent activities computationally impractical.
- The Bitcoin blockchain's transparent ledger records every transaction, allowing all network users to verify exchanges without a central authority.
- Bitcoin is the first successful digital cash. Its growing adoption and market capitalization suggest a potential future as a widely used and stable form of money.
- Bitcoin's biggest challenge is its price volatility.
- “With a supply schedule utterly irresponsive to demand, and no central bank to manage the supply, there will likely be volatility, particularly at the early stages when demand varies very erratically from day to day, and the financial markets that deal with Bitcoin are still infant. But as the size of the market grows, along with the sophistication and the depth of the financial institutions dealing with Bitcoin, this volatility will likely decline.”
- Bitcoin is good for:
- Store of value: its scarcity due to fixed supply positions it as potentially the best store of value ever invented.
- Individual sovereignty: Bitcoin enables permissionless global value transfer free from government control.
- International and online settlement: Bitcoin provides a decentralized, fast, transparent, cost-effective, secure, and borderless payment system that operates without intermediaries. It can serve as a neutral reserve currency that is not tied to any nation's economic performance.
- Global unit of account: “Bitcoin standard” could become the new gold standard.
- Common questions about Bitcoin:
- Is Bitcoin mining a waste? Bitcoin mining is essential as it converts electricity into verifiable records through proof-of-work, which secures the system against attacks.
- Is Bitcoin for criminals? Bitcoin is poorly suited for serious crimes due to its pseudonymous, permanently traceable blockchain, which actually increases the risk of criminal identification.
- Can Bitcoin be broken? Technically yes. A 51% attack on Bitcoin involves an attacker controlling over half the network to create fraudulent transactions. But the economic incentives discourage such an attack, as it would undermine Bitcoin's value and require massive, prohibitively expensive computational resources.
- What about altcoins? While there are over 732 digital currencies as of 2017, Bitcoin is still the only truly decentralized and immutable system with unmatched market demand.
The Bitcoin Standard: Resources
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