The Bitcoin Standard explores the history of money, from the first rock currencies to the Victorians’ love for gold to today’s new kid on the block – cryptocurrencies.
Saifedean Ammous, an economist who believes that sound money should be revived, thinks Bitcoin may be the future.
In the same way as yesteryear’s gold reserves, its unique properties make it a perfect medium of exchange that cannot be manipulated by governments.
It is great news if we want our economies to return to growth and stability and end the cycle of boom and bust.
You may be wondering if you should read the book. This book review will tell you what important lessons you can learn from this book so you can decide if it is worth your time.
At the end of this book review, I’ll also tell you the best way to get rich by reading and writing.
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The Bitcoin Standard Book Summary
Lesson 1: Gold was the backbone of a stable monetary system.
Metallurgy, the art of smelting metals, was a revolutionary technology introduced by early pre-Christian civilizations that allowed them to create the first money that resembled the small change in your pocket. This innovation allowed the minting of highly marketable coins that were both portable and small.
When it came to currency, gold was the clear winner. And why? Okay, it has a few interesting quirks. First of all, it’s extremely difficult to destroy and impossible to synthesize. The only place you can find significant amounts of gold is deep in the ground, so be sure to bring a shovel. The more gold you mine, the deeper you have to go to find even more gold. This means that the gold supply will grow slowly and predictably, even as gold mining technologies advance.
The combination of all these characteristics makes it an excellent long-term store of value with high market value. As might be expected, word has spread very quickly. Over two thousand five hundred years ago, the Greek king Croesus ordered the minting of gold coins.
Although gold has always existed, it did not become the preferred medium of exchange until the 18th, 19th and 20th centuries. There has never been a more financially secure time in human history. However, in order to define this term, some background information is first required.
These centuries were characterized by rapid development in the areas of communication and transportation. The telegraph and the railroad facilitated the transportation of people and goods. This streamlined the move away from cumbersome physical means of payment such as cash and checks in favor of more modern, digital alternatives. But how do you show shopkeepers and customers that the paper they exchange goods and services for actually has value?
As a solution, governments around the world began issuing paper currencies backed by precious metals stored in secure locations. The most common metal used in the leading European nations was gold. The British Empire pioneered the “gold standard” in 1717 with the help of Isaac Newton, head of the Royal Mint.
By 1900, some fifty other countries had formally adopted the gold standard. As more countries issued paper money backed by gold reserves, the marketability and value of gold soared. Money was now backed by gold because it was freely chosen by markets as the best store of value.
Lesson 2: Bitcoin’s rarity is what sets it apart.
It’s time for governments to return to sound monetary policy after decades of reckless spending and debt accumulation. And that’s where Bitcoin comes in. So how exactly can the first fully digital currency help economies stabilize and grow?
Recall the old gold standard. With its supply limited and unlikely to expand in a way that would significantly dilute its value, markets overwhelmingly chose gold as a safe haven for their savings. Not surprisingly, Bitcoin shares these characteristics. The amount available will never increase. The number of Bitcoins will never exceed 21,000,000 no matter what. Once that many Bitcoins have been issued, no more will be created.
The method by which new Bitcoins are created also contributes to the stability of the currency, as the total amount in circulation is guaranteed to decrease over time. The way it works is as follows. Bitcoins, like gold, must be mined from the ground. To release new Bitcoins, computers on the Bitcoin network work together to solve difficult algorithmic puzzles. After these puzzles are solved, the computers that contributed to the solution (called “miners”) are rewarded with Bitcoins.
Bitcoin’s inventor, Satoshi Nakamoto, built in a safeguard: Every four years, the stock of Bitcoins is cut in half to prevent speculative purchases of the currency. That’s the cherry on top? Much like the increasing difficulty of mining gold ensures a steady and reliable supply, the difficulty of solving algorithmic problems increases as the number of computers working on them increases. Over time, fewer and fewer Bitcoins are created until production finally ceases in 2140.
For this reason, Bitcoins are special. They are the only product whose value is determined solely by its scarcity. This is in contrast to typical commodities like oil and gas. We see them as limited, but we know that if we invest time and effort, we can likely discover additional supplies.
The world’s total proven oil reserves are growing, despite rising oil consumption. Bitcoin is completely unique. There are a finite number of coins that can exist based on a predetermined algorithm. The result is that the supply of Bitcoins can never be artificially reduced, making it an ideal store of value.
Lesson 3: Bitcoin’s high level of security is unparalleled.
A limited supply of medium of exchange is only part of what makes money stable. It also needs to be secure. After all, if you have doubts about Bitcoin’s security, you are more likely to look elsewhere. Fortunately, the security of digital currency is similarly high.
This is thanks to the public blockchain, an innovative technology used by the Bitcoin ledger. However, can you explain this? You see, a block is created when mining computers solve an algorithmic puzzle. Here you can find a log of all recent transactions and mining activities.
The Bitcoin blockchain is created when new blocks are added to an existing chain of blocks. The entire history of all blockchain transactions is recorded in this ledger. The real kicker is that all of this data is accessible to anyone who uses the network. Bitcoin property is only recognized after it has been recorded in the blockchain, which requires a consensus of the network’s users.
Since no authority is needed to monitor Bitcoin transactions, the network can operate autonomously. In terms of security, this means that it is easier to verify transactions than to commit fraud. As Bitcoin grows in popularity, it becomes more difficult to create a fraudulent block because potential fraudsters have to devote more resources to it.
This is made possible by Nakamoto’s difficulty adjustment. However, verifying new blocks consumes almost no energy. The majority of the network’s nodes can unanimously reject a suspicious block without significantly impacting the network’s computational capacity.
Since it increases the difficulty of fraud, it serves as an effective security measure. A user would gain very little even if they spent a lot of time and effort hacking the majority of nodes on the network to approve a fraudulent block. If Bitcoin’s security were compromised, the cryptocurrency’s trustworthiness and value would quickly decline. What would it be like to make a pig out of a pig?
Lesson 4: Bitcoin has the potential to become the new standard.
It’s true that Bitcoin is a secure and rare cryptocurrency, but is that really enough to make it more than just a fad? The answer depends on how successfully it overcomes two major obstacles.
Let us take market uncertainty. In the very first Bitcoin transaction in May 2010, one Bitcoin was worth $0.000994 at the time. By October 2017, it had quadrupled in value to $4,200, or 422,520,000 percent. Not to mention, that’s just the long-term volatility. The value of a Bitcoin increased from $750 in 2016 to $20,000 in 2017, and the ups and downs are a result of consumer demand.
Since there will always be a maximum number of Bitcoins in circulation, the increasing demand for them can only be met by an increase in price. The volatility of demand can be attributed to the relative newness of Bitcoin. However, this has diminished the value of the currency as a store of value. Hopefully, the situation will settle down over time. However, the author believes that these fluctuations should stabilize as the market expands.
This leads us to Bitcoin’s second major difficulty. To become the new standard, the currency must expand, but expanding monetary systems, including Bitcoin, inevitably require an ever-increasing reliance on large, centralized institutions. That’s a problem if the point of a currency is to provide its users with an alternative to traditional money changers like banks.
There just does not seem to be a way to make this triangle fit. Currently, a maximum of half a million bitcoin transactions can be processed per 24 hours. This number could be raised, but regardless of the total number of transactions, there will always be a daily limit.
Another factor to consider is the issue of price. The larger the transaction volume, the greater the demand for network nodes. Because of this, transaction fees and energy consumption will increase as more copies of the Bitcoin ledger need to be updated.
Considering all these factors together, there is a strong case for decentralizing Bitcoin trading (or trading of currencies backed by Bitcoin) from the blockchain. This would create a new norm, but it would also require the establishment of authoritative, centralized bodies to oversee the system.
It is possible that Bitcoin could serve as the foundation for the development of a modern sound monetary policy. But the future is clouded by whether or not it will suffer the same fate as the gold standard. Only time will tell how things will develop.
The Bitcoin Standard Book Review
Throughout the centuries there have been many different currencies, but only gold-backed paper has withstood the test of time. During the time when the “gold standard” was in effect, the world was relatively peaceful and prosperous.
When European governments needed money for war in the early twentieth century, they abandoned gold and fiscal restraint. Since then, the world has been plagued by rising debt and periodic economic ups and downs.
We desperately need a new approach. And that’s where Bitcoin comes in. It functions as a reliable medium of exchange, much like gold. However, if the digital currency is to usher in a new era of stable currencies, it will have to overcome some growing pains.
About the Author
Saifedean Ammous is a former economist at Columbia University’s Center on Capitalism and Society.
He currently teaches at Lebanon’s Adnan Kassar School of Business.
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