Views expressed in this article are the opinions of the author and do not necessarily reflect the views of AIER.
Perhaps the most important innovation since the internet, bitcoin is changing the way people around the world view money, but can it reign supreme over competitor cryptocurrencies?
With numerous price spikes since its creation in 2009, the cryptocurrency has garnered media attention and attracted big financial players. Even with repeated price fluctuations and a technological design that befuddles the average person, bitcoin continues to have observers on the edge of their seats.
Like any revolutionary technological development, bitcoin has attracted significant competition from other cryptocurrencies that attempt to dethrone it. With the rise of an industry consisting of hundreds of competitors, newcomers naturally feel overwhelmed by such a vast array of options.
But they won't if they read economist Saifedean Ammous’s The Bitcoin Standard: The Decentralized Alternative to Central Banking. Taking a back-to-basics approach, Ammous does not beat around the bush in showing how bitcoin is the one cryptocurrency to rule them all.
According to Ammous, bitcoin’s meteoric ascent as the top cryptocurrency is predicated on its sound-money features. Even though it is an invention of the digital age, the problems it attempts to address are, as Ammous brilliantly puts it, “as old as human society itself.”
Ammous starts out by outlining the history of currencies. From the Rai stones on Yap island to the gold standard of the late 19th and early 20th centuries, he analyzes how money has evolved and enabled economic progress.
The weaving of economic, historical, and political analysis used to explain money’s evolution throughout history is nothing short of brilliant. Many individuals see money as a mundane medium of exchange, but as Ammous highlights, it’s a foundational pillar of functioning markets and civilized societies. When money does not have the right properties and is in the hands of wreckless governments, it can have catastrophic consequences for society at large. One only needs to see the experiences of the Roman Empire and present-day Venezuela.
In contrast, when a given society adopts sound money, economic growth and prosperity follow. Ammous points to the Gilded Age (United States) and Belle Époque (Europe). In just one generation (1870-1914), individuals saw some of the most important economic, industrial, medical, and technological innovations in human history unfold before their eyes. The unprecedented growth of the era was no coincidence; it was bolstered by the gold standard and limited government.
Another particularly interesting feature of The Bitcoin Standard is its use of insights from the Austrian school of economics to explain the emergence of free-market currencies such as bitcoin. According to Carl Menger, the founder of the Austrian school, the market will freely adopt a good as a money based on its salability—that is, how easily said good can be sold on the market at any time with minimal loss of value.
Later in the 20th century, economists such as Ludwig von Mises, Friedrich Hayek, Murray Rothbard, and Joseph Salerno expanded upon Menger’s insights by adding that a money’s soundness should also be determined by its resistance to control by a sovereign. This proved to be gold’s Achilles heel, as many governments consolidated their control over gold by centralizing physical reserves in a few locations such as banks and central banks.
In addition, Ammous does a remarkable job explaining the concept of time preference—the extent to which people value current consumption over future consumption—in layman’s terms. Those with high time preferences value the present more, whereas individuals with low time preferences will delay gratification and value their future more.
Sound money better rewards delayed gratification by offering high expected future value. In turn, the stable value incentivizes people to forego present consumption and instead allocate resources and time toward activities that boost production in the future. Consequently, this leads to increased capital accumulation and improved living standards.
Beyond quantitative increases in prosperity, systems that encourage low time preferences have civilizing effects on human behavior. It is no coincidence that the collapse of the Roman Empire was also marked by socially destructive acts of hedonism as the once great civilization gradually spiraled out of control.
On the more practical side of things, Ammous does not fall for the Silicon Valley hype about blockchain technology and other buzzwords surrounding cryptocurrencies. He believes that bitcoin’s strict purpose is functioning as sound money, nothing more, nothing less. Ammous contends that bitcoin will ultimately function as a “store of value and a network for settlement between large financial institutions” as opposed to a daily transactional currency to buy groceries.
Nevertheless, bitcoin provides potential users with a genuinely decentralized, censorship-resistant, market alternative to the 20th-century model of central banking. The sky is the limit as far as the potential enhancements to individual freedom and prosperity are concerned.
Bitcoin’s importance simply cannot be overstated. With the Bismarckian welfare state in operation for over a century, many countries across the globe will have to face tough economic realities when fiscal chickens come home to roost in the next decade or so. The arrival of bitcoin has completely changed the game, since the world now has a sound money that could finally bring back economic and fiscal normalcy to nations across the globe.
All 272 pages of The Bitcoin Standard are worth the read. If you’re a bitcoin enthusiast, you’re doing yourself a disservice by not picking up a copy. Your knowledge of bitcoin’s socioeconomic implications is truly incomplete without this powerful text.