The Bitcoin Standard

Well, here’s another Bitcoin book. It’s probably the one that received the most attention in the past year, even beyond the crypto industry - Saifedean Ammous’ The Bitcoin Standard. Ammous is an Economics Professor at the Lebanese American University, disciple of the Austrian School and notably Friedrich Hayek and Ludwig von Mises.

Austrian Economics has a large fanbase in the Bitcoin community. Crypto-anarchists have been Austrians at heart, propagating individual freedom and despising any form of government intrusion. Bitcoin is a direct response to the mess that has been fabricated with the great financial crisis of 2008. The genesis block notably includes the London Times headline from 3rd January 2009 “Chancellor on brink of second bailout for banks.”

“The fundamental scam of modernity is the idea that government needs to manage the money supply,” claims the author. Every attempt had ended with economic disaster. Ammous mocks the two main ‘government-approved’ schools of economic thought, Keynesians and Monetarists. Notwithstanding their fundamentally opposed methodologies and analytical frameworks, they’d still agree on the fact that the government needs to expand money supply.

Before governments ruled monetary policy, the world had the ‘gold standard’, fixed exchange rates linked to the price of gold. The gold standard allowed “unprecedented global capital accumulation and trade by uniting the majority of the planet’s economy on one sound market-based choice of money.” Sound money is necessary for people to think long term and invest in the future, rather than giving rein to intemperate consumption in the present. Individuals would act rationally rather than impulsively, create capital goods, make production more sophisticated and technologically advanced, so goes the theory. 

The second half of the 19th century would be the “greatest period for human flourishing, innovation and achievement”. Until 1914, when the major economies went off the gold standard, to replace it with unsound government money. Thinking about how to finance their wars, the various regimes in charge could now easily inflate their currencies and tap into the wealth of their population.

For a short time the Bretton Woods system, orchestrated in 1944, would reinstate fixed exchange rates. The US dollar took over the role of a world reserve currency, backed by the large amount of gold reserves stored on US soil. When France and Germany started to buy back gold with their weakening US dollar funds, President Nixon ended the peg unilaterally in 1971. It was the start of an unprecedented expansion of monetary policy.

Enter Bitcoin. For Ammous, Satoshi Nakamoto was clearly influenced by Austrian theories when he was putting a hard cap on the total supply of bitcoins (21 million is the maximum number of coins that can be mined). “An asset that holds its value is preferable to an asset that loses value,” he lectures. Savers looking for a medium of exchange would gravitate towards assets that hold value over time.

Bitcoin is therefore solving the problems of salability (the ease with which a good can be sold), soundness and sovereignty. Bitcoin is sovereign, with own rules that are nearly impossible to modify for outsiders, including governments. That guarantees a high degree of economic freedom, as users don’t have to ask for permission to send money, and they can do so anonymously. But most importantly, the money cannot be confiscated. It’s a pure peer-to-peer system that cuts out third parties. (I tell you, most of those folks don’t really trust banks!)

The book is of course one-sided, reflecting the view of what is known as a “Bitcoin maximalist”, who only considers the original Bitcoin as the real thing. Ammous still makes a (small) effort to find value in other corners of the crypto space. His main point is a valid one though. With Satoshi gone, there is no owner of the bitcoin network, other than the users who are running the nodes. It’s the only truly decentralised currency. 

Saifedean Ammous: The Bitcoin Standard. Published by John Wiley & Sons, 2018.