Reading serves as a source of entertainment for me, and I spend numerous hours indulging in it. However, certain books go beyond mere enjoyment and offer profound insights and valuable lessons. “The Bitcoin Standard” by Saifeden Ammous is one such eye-opening work that has significantly contributed to my understanding of money, economics and Bitcoin (BTC).
The book, spanning 300 pages, is a reservoir of knowledge, making it challenging to encapsulate its richness in an article. Nevertheless, I am eager to share three particularly invaluable lessons that I’ve gleaned from its pages.
“This book is written to help the reader understand the economics of Bitcoin and how it serves the digital iteration of many technologies used to fulfil the function of money throughout history. This book is not an advertisement or invitation to buy into the Bitcoin currency, far from it.
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“The value of Bitcoin is likely to remain volatile at least for a while, it might succeed or fail and using it requires technical competence and carries risks that make it unsuitable for many people.
“The book aims to help elucidate the economic properties of the network and its operation to allow readers an informed understanding before deciding whether they want to use it. Only after in-depth understanding, one should decide whether they should use it,” wrote the author.
Lesson 1: How does a medium of exchange emerge
The challenge of transferring economic value across time and space has persisted throughout human history.
Although barter has been a longstanding practice, its impracticality in modern societies is evident, especially in transactions between unfamiliar parties.
Barter is ineffective form exchange due to various issues, such as the lack of coincidence in scale, where exchanging goods of vastly different values becomes problematic. The non-alignment of timeframes poses challenges, as perishable goods may not align with the durability of the desired items, making the accumulation of exchangeable goods difficult.
Furthermore, the lack of coincidence in location complicates direct exchanges, necessitating the emergence of an intermediary in the form of a medium of exchange.
The solution to this complexity manifests in the form of a single medium of exchange, commonly known as money.
Money serves to simplify transactions, eliminating the intricacies associated with direct exchanges involving undefined mediums. Its quintessential function as a medium of exchange defines its role — it is acquired not for consumption or production but primarily for facilitating exchanges.
Individuals invariably reserve a portion of their wealth in money due to its unparalleled liquidity. However, this decision comes at a cost, as holding money requires forgoing potential consumption and returns that could be generated through investments.
The perpetual demand for money underscores its status as the most liquid form of capital.
In “The Bitcoin Standard” are highlighted the challenges in transferring economic value across time and space, explaining the historical evolution of money as a solution to these challenges, and the need to have a stable medium of exchange serving as a reliable store of value across space and time.
The author emphasizes the importance of a monetary system that transcends the limitations of direct barter, providing individuals with a universally accepted and durable medium with a fixed supply and unalterable fundamentals.
According to the book, such a monetary system fosters economic stability and facilitates exchanges with confidence, and it posits that Bitcoin is the only currency that fully embodies these characteristics.
The author contends that Bitcoin’s decentralized nature, limited supply, and mathematical underpinnings position it as a unique and optimal solution to the challenges presented by gold, silver and contemporary fiat currencies.
And argues that Bitcoin addresses the shortcomings of traditional precious metals, providing a more secure and globally accessible alternative. Additionally, Bitcoin’s inherent scarcity, enforced by its algorithm, contrasts with the potential for inflation associated with fiat currencies, making it a compelling choice for those seeking a stable and reliable form of money.
Lesson 2: Bitcoin the only sound money
Delving into the inherent issues that money seeks to address enables us to discern the distinguishing characteristics of money, and in particular of sound and unsound money.
The conceptual framework of sound and unsound money facilitates a comprehensive understanding of how monetary systems may fail or effectively fulfill the societal objective of preserving value over time and the benefits that come with it.
Money is sound when its value is stable and it is thus able to perform its functions as a medium of exchange, a unit of account and a store of value.
Historically, commodities such as gold and silver have exemplified sound money characteristics.
Sound money, in essence, empowers individuals to adopt a long-term perspective, encouraging saving and investment for future endeavors.
The significance of sound money in facilitating investment and entrepreneurship lies in its role as a stable and reliable medium of exchange. When individuals and businesses can trust that the value of their currency will remain relatively constant over time, it reduces uncertainty and encourages long-term planning.
This stability enables entrepreneurs to make informed decisions about investments, as they can more accurately assess risks and potential returns.
Moreover, sound money contributes to a more predictable economic environment. In the absence of extreme inflation or deflation, entrepreneurs can better allocate resources efficiently and this predictability is crucial for the success of businesses.
Described as a “distributed software that allows the transfer of value using a currency protected from unexpected inflation without relying on third parties,” in the book.
Bitcoin stands as a technological solution to age-old concerns surrounding the issues of sound money. In embracing its attributes, Bitcoin emerges as a transformative force in reshaping the landscape of financial systems, aligning with the enduring principles of sound money.
Lesson 3: The key properties of money
In the history of humans, we have used gold, silver, copper, sea shells, glass beads, salt and cattle as money, and even cigarettes in certain conditions. “There isn’t a right or wrong form of money, but there are consequences for choosing a certain type of money,” wrote Saifeden Ammous.
Addressing the challenges of durability, portability, divisibility, and recognizability in the context of a medium of exchange is relatively easy to fulfil.
However, achieving scarcity across time is notably more challenging. In this context, scarcity over time denotes the ability of a good to retain its value in the future.
For a good to exhibit scarcity across time, it should be immune to any time of deterioration. Physical integrity over time is a necessary but insufficient condition for a good to be a medium of exchange, as a good can lose its value even if its condition remains unchanged.
Ensuring that the supply of the good does not experience a drastic increase during the period of ownership is also a key factor in achieving scarcity across time. Some restriction on the increase in supply is integral to preserving the value of the good over an extended duration.
The notion of scarcity, therefore, encapsulates not only the physical resilience of the good but also its ability to retain its value over time.
Bitcoin’s achievement of scarcity is fundamentally rooted in its algorithmic design and the deliberate imposition of a fixed supply limit. The protocol governing Bitcoin dictates that only 21 million coins will ever exist.
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This capped supply is a foundational element that sets Bitcoin apart and reduces the risk of inflationary pressures that could erode its value. The decentralized nature of Bitcoin’s blockchain, serving as a public ledger, ensures that no single entity has control over its supply.
For individuals contemplating an investment in Bitcoin, it is highly advisable to prioritize adding “The Bitcoin Standard” by Saifedean Ammous at the top of their reading list. This seminal work not only serves as an authoritative guide to the technical intricacies of Bitcoin but also provides a profound exploration of its historical, economic, and philosophical foundations.
“The Bitcoin Standard” navigates readers through the evolution of money, drawing parallels with historical forms of currency and providing a critical analysis of the current fiat monetary system. Saifedean Ammous skillfully examines Bitcoin’s role as a decentralized, censorship-resistant digital currency and its potential to serve as a robust store of value in comparison to traditional assets like gold.
“Should you come out of reading this book thinking that Bitcoin is something worth owning. Your first investment should not be in buying bitcoin, but in time invested understanding how to buy, store and own BTC securely. It’s the inherent nature of BTC that such knowledge can’t be delegated or outsourced. There is no alternative to personal responsibility for using this network, and it’s a real investment that needs to be made to get into BTC,” wrote Saifedean Ammous.
Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.
