The Bitcoin Standard

BOOKS | Saifedean Ammous

The Economic Function and Salability of Money

Money is a tool used to solve the problem of indirect exchange, functioning as a medium that is not consumed directly but held to be traded for other goods and services. Historically, the selection of a monetary medium is determined by its salability, which describes the ease with which an asset can be sold on the market with minimal loss in value. This property is assessed across three dimensions: salability across scales, involving divisibility; salability across space, involving ease of transport; and salability across time, involving the ability to maintain purchasing power into the future. For an asset to be salable across time, it must be immune to physical deterioration and, crucially, protected from significant increases in its supply.

The hardness of money is measured by its stock-to-flow ratio, which compares the existing stockpiles of an asset to the amount produced in a specific period. A high ratio indicates that new supply is small relative to existing stock, making the asset difficult to debase. Conversely, easy money is characterised by a low stock-to-flow ratio, leaving its holders vulnerable to the easy money trap, where increased demand leads to expanded production that devalues existing holdings and expropriates the wealth of savers.

Primitive Moneys and Monetary Metals

Throughout history, various artefacts served as money due to their relative scarcity in specific contexts. The Rai stones of Yap Island functioned effectively for centuries because their limestone composition was not native to the island, ensuring a high stock-to-flow ratio maintained through difficult quarrying and transport. However, this system collapsed when modern technology allowed outsiders to produce the stones at a negligible cost, crashing the stock-to-flow ratio and destroying the stones' monetary value. Similarly, aggry beads in West Africa lost their monetary status when European glassmaking technology enabled mass production, transferring vast wealth from African savers to European producers.

The ascent of monetary metals represented a technological advancement in the solution to the problem of money. Gold emerged as the premier monetary standard because it is chemically indestructible and impossible to synthesize, resulting in a stock-to-flow ratio that is consistently higher than any other physical commodity. While silver also served a monetary role for millennia, its lower value per unit of weight and higher supply elasticity led to its demonetisation in the late 19th century as gold-backed paper and telegraphic transfers improved the salability of gold across scales and space.

The Impact of Sound Money on Civilisation

Sound money is defined as money chosen freely by the market and remaining under the control of its owner, resistant to coercive intervention or debasement. The presence of sound money is a primary determinant of a society's time preference, the ratio at which individuals value the present against the future. A hard money standard encourages low time preference, incentivising individuals to defer immediate gratification in favour of saving and long-term investment. This process initiates the civilising process, facilitating capital accumulation, technological innovation, and the development of sophisticated production cycles.

The era of the international gold standard in the late 19th century, often referred to as la belle époque, witnessed unprecedented global trade, capital accumulation, and scientific achievement. During this period, the majority of the planet utilised a single golden monetary standard, which provided a stable unit of account and allowed for the expansion of markets across the globe. In contrast, unsound money or inflationary currency leads to high time preference, resulting in capital consumption, increased indebtedness, and the erosion of the family unit and cultural standards.

Monetary Nationalism and Government Money

The outbreak of World War I marked the end of the market-chosen monetary era and the beginning of monetary nationalism. Belligerent nations suspended gold convertibility to finance military operations through inflation rather than taxation, allowing conflicts to persist far longer than would have been possible under a sound money standard. This shift placed the global economy on a fiat money standard, where the money supply is directed by central banks rather than market demand.

Central planning of the money supply corrupts capitalism's information system by distorting price signals. The manipulation of interest rates by central banks creates a discrepancy between actual savings and loanable funds, leading to malinvestments and the boom-and-bust business cycle. Furthermore, government control over money enables the growth of the managerial state, which can finance perpetual war and welfare programs by devaluing the currency, effectively taxing the population without their explicit consent.

Bitcoin as Digital Cash and Absolute Scarcity

Bitcoin represents the first digital solution to the problem of money, offering a peer-to-peer electronic cash system that operates without trusted third-party intermediaries. It achieves digital scarcity through a decentralised network that utilises proof-of-work to verify transactions and prevent the double-spending problem. The network is secured by a difficulty adjustment mechanism, which ensures that the rate of new coin issuance remains constant regardless of the total computational power dedicated to mining.

A defining characteristic of Bitcoin is its absolute scarcity, with a total supply capped at 21 million coins. This preprogrammed issuance schedule makes it the first liquid asset with a fixed supply, positioning it as the hardest money ever invented. By the year 2025, Bitcoin’s stock-to-flow ratio is projected to exceed that of gold, continuing to rise until it becomes infinite upon the mining of the final coin.

Sovereignty and International Settlement

Bitcoin provides individuals with sovereignty over their wealth, as it is a bearer instrument that can be stored and transferred globally without the permission of any central authority. Its digital nature makes it highly salable across space, while its divisibility into satoshis ensures salability across scales. Because Bitcoin is resistant to censorship and confiscation, it functions as a monetary lifeboat for individuals living under regimes with capital controls or hyperinflationary currencies.

In the context of the global financial system, Bitcoin is uniquely suited to serve as a neutral international settlement currency. It offers a digital alternative to gold, allowing for the final settlement of large-value payments across borders in minutes rather than days, without counterparty risk. As the network matures, it may evolve into a reserve currency for a new form of decentralised banking, where layers of payment processing occur off the main blockchain while the ledger is used for high-value clearance.

The Limitations of Blockchain Technology

While the blockchain is an integral component of Bitcoin’s operation, its utility as a standalone technology for other applications is often overstated. The only advantage offered by a blockchain is the elimination of the need for trusted third parties, a benefit achieved at the cost of immense inefficiency and redundancy. For any application where a central authority remains necessary—such as asset registries or legal contracts—a centralised database is invariably faster, cheaper, and more efficient than a blockchain. Consequently, the only commercially successful application of blockchain technology remains electronic cash in the form of Bitcoin.

Bitcoin may be compared to a sovereign digital fortress, whose walls are forged from pure mathematics and energy, providing an unassailable sanctuary for value in an age of monetary instability.