The Bitcoin Standard summary

The first money resembling the change in your pocket was a product of a revolutionary technology pioneered in early pre-Christian civilizations: metallurgy, the craft of smelting metals. This technology made it possible to create highly salable coins that were both small and light enough to be carried far and wide.

One metal stood out from the crowd when it came to coinage – gold. Why? Well, it has a couple of unique features. First, it’s virtually impossible to destroy and can’t be synthesized using other materials. Also, if you want gold, you better have a shovel, because underground’s the only place you’ll find any decent amount of the stuff. Furthermore, the more gold you mine, the deeper you have to go to find more gold, meaning that, even as gold-mining technologies improve, the supply of gold grows slowly and predictably.

In the first century CE, the Roman emperor Julius Caesar issued the “aureus,” a coin containing roughly eight grams of gold. It became a standard method of payment across the Roman Empire. But as growth in the Empire began to slow, rulers started “coin clipping” – a sneaky practice whereby a portion of the precious metal contained in coins was removed to bolster the government’s spending power. Easy money, right? Maybe, but it eventually drove up inflation and triggered a series of economic crises that would ultimately lead to the downfall of the once-mighty Roman Empire!

But the gold standard had one major flaw: the gold had to be stored in a small number of bank vaults. This facilitated the exchange of paper money for gold, but it also created a highly centralized system in which governments controlled the value of paper money. If they wanted to, they could always increase the supply of money without increasing the corresponding amount of gold. The salability of paper money, in other words, was entirely at their mercy.

When the First World War came to an end in 1918, the European powers that had been involved in the conflict faced the thorny issue of revaluing their currencies. The obvious solution was to return to the gold standard, but a fair revaluation compared to gold would have been an unpopular admission of how little currencies were now worth.

Returning to the old exchange rates wasn’t possible, either, as it would have overvalued paper currencies. The result would have been a flood of citizens demanding gold for their paper receipts, gold that they could then have sold abroad for a profit.

Sound money reached its high-water mark in the nineteenth century. Paper money was backed by gold, a precious metal adopted by the free market due to the qualities that made it such an effective store of value. That, in turn, underwrote an era of prosperity. Let’s take a closer look at how that worked.

The first thing to note about sound money is that it’s a great way of encouraging people to save and invest – the perfect recipe for sustainable, long-term growth. Why? Well, humans have a natural positive time preference: we prefer instant gratification over future gratification. Sound money nudges us to think more about the future. After all, if we can reasonably expect our money’s value to increase over time, it makes sense to take a look at what we can do now to maximize our future income.

Unsound-money policies like those implemented by European governments during the First World War create all sorts of problems. Two issues stand out – recessions and the endless accumulation of debt. In this blink, we’ll find out why.

Let’s start with recessions. Government interference in the market takes the form of central planning. Here’s the rub. No single person, agency or department ever has access to all the information necessary to understand the vast and constantly changing web of preferences, choices, costs and resources that define an economy. And if you don’t have that information, you’re bound to make bad decisions – and this is precisely what governments do when they manipulate the money supply. Their interventions distort markets, especially capital markets, creating a “boom and bust” cycle. During the upcycle, artificially inflated money tricks investors into thinking they can buy more capital than they can afford. The resulting boom soon becomes a bubble; when it pops, the economy goes into recession.

After decades of reckless spending and debt accumulation, it’s high time that governments mend their ways and return to sound-money policies. That’s where Bitcoin comes in. So how exactly can the world’s first digital currency help put economies on the road to recovery, stability and growth?

Think back to the gold standard. Markets chose gold to store value for two reasons – it’s scarce and it’s predictable, meaning that there’s little risk of the supply increasing enough to significantly deflate its value. Bitcoin has similar traits. In fact, its supply is literally fixed. Whatever else happens, there will never be more than 21,000,000 individual bitcoins. Once that number is in circulation, no additional bitcoins will be issued.

Sound money isn’t just about the scarcity of the unit in which its value is stored. It also needs to be secure. After all, if you’re not absolutely convinced that bitcoins are safe, you’re likely to look for an alternative. Luckily, the digital currency is also incredibly secure.

That’s because of the Bitcoin ledger, which uses an innovative technology called the public blockchain. So what’s that? Well, when mining computers crack an algorithmic puzzle, they create a block. This is essentially a record of all recent transactions and mining activity. Each block is added to a chain of older blocks, creating the Bitcoin blockchain. This ledger contains every last detail about every blockchain transaction ever completed. And here’s the kicker: all that information is available to every network user. Ownership of bitcoins is only valid once it’s been registered on the blockchain, which is only possible if the majority of network users approve it.

We know Bitcoin is both scarce and secure, but is that enough to make it more than a flash in the pan? The answer depends on how well it can master a couple of major challenges.

Take price volatility. When bitcoins were first used to complete a transaction in May 2010, an individual coin was valued at $0.000994 US dollars. Fast forward to October 2017 and that had risen to $4,200 – an increase of 422,520,000 percent! And that’s just long-term volatility. In 2017 alone, the value of a bitcoin jumped from $750 to $20,000. These fluctuations are a product of demand. The supply of bitcoins is fixed so the currency can only respond to rising interest through price. Because Bitcoin is new, demand has naturally been highly variable. The result, however, has been to undermine the currency’s status as an effective store of value. Will things settle down? Well, according to the author, these fluctuations should even out as the market grows.