The Decentralized Alternative to Central Banking

By Saifedean Ammous

• Bitcoin can be best understood as distributed software that allows for transfer of value using a currency protected from unexpected inflation without relying on trusted third parties. In other words, bitcoin automates the functions of a modern central bank and makes them predictable and virtually immutable by programming them into code decentralized among thousands of network members, none of whom can alter the code without the consent of the rest.
• Money that is easy to produce is no money at all, and easy money does not make a society richer; on the contrary, it makes it poorer by placing all its hard-earned wealth for sale in exchange for something easy to produce.
• Anytime a person chooses a good as a store of value, she is effectively increasing the demand for it beyond the regular market demand, which will cause its price to rise.
• The anatomy of a market bubble: increased demand causes a sharp rise in prices, which drives further demand, raising prices further, incentivizing increased production and increased supply, which inevitably brings prices down, punishing everyone who bought at a price higher than the usual market price. Investors in the bubble are fleeced while producers of the asset benefit. For copper and almost every other commodity in the world, this dynamic has held true for most of recorded history, consistently punishing those who choose these commodities as money by devaluing their wealth and impoverishing them in the long run, and returning the commodity to its natural role as a market good, and not a medium of exchange.
• For anything to function as a good store of value, it has to appreciate when people demand it as a store of value, but its producers have to be constrained from inflating the supply significantly enough to bring the price down.
• The clear winner in this race throughout human history has been gold, which maintains its monetary role due to two unique physical characteristics that differentiate it from other commodities: gold is so chemically stable that it is virtually impossible to destroy and gold is impossible to synthesize from other materials + can only be extracted from its unrefined ore, which is extremely rare in our planet.
• The demonization of silver in effect left the Chinese and Indians in a situation similar to West Africans holding aggri beads as Europeans arrived: domestic hard money was easy money for foreigners, and was being driven out by foreign hard money, which allowed foreigners to control and own increasing quantities of the capital and resources of China and India during the period.
• By 1900, around fifty nations were officially on the gold standard, including all industrialized nations, while the nations that were not on an official gold standard still had gold coins being used as the main medium of exchange. Some of the most important technological medical, economic, and artistic human achievements were invented during the era of the gold standard...With the majority of the world on one sound monetary unit, there was never a period that witnessed as much capital accumulation, global trade, restraint on government, and transformation of living standards worldwide.
• The fatal flaw of the gold standard was that settlement in physical gold is cumbersome, expensive, and insecure, which meant it had to rely on centralizing physical gold reserves in a few locations - banks and central banks - leaving them vulnerable to being taken over by governments.
• Price controls are always counterproductive, resulting in surpluses and shortages.
• International Monetary Fund - express aim of achieving stability of exchange rates and financial flows...Attempted to achieve through central planning what the international gold standard of the nineteenth century had achieved spontaneously.
• Hyperinflation is a form of economic disaster unique to government money...Far more pernicious phenomenon than just the loss of a lot of economic value by a lot of people; it constitute a complete breakdown of the structure of economic production of a society built up over centuries and millennia. With the collapse of money, it becomes impossible to trade, produce, or engage in anything other than scraping for the bare essentials of life.
• Government money requires only the fiat of the government. The constantly increasing supply means a continuous devaluation of the currency, expropriating the wealth of the holders to benefit those who print the currency, and those who receive it earliest.
• In its Infancy, bitcoin already appears to satisfy all the requirements of Menger, Mises, and Hayek: it is a highly salable free-market option that is resistant to government meddling.
• Sound money is a prime factor in determining individual time preference an enormously important and widely neglected aspect of individual decision making. Time preference refers to the ratio at which individuals value the present compared to the future...The lower an individual’s time preference, the more likely he is to engage in investment, to delay gratification, and to accumulate capital. The more capital is accumulated, the higher the productivity of labor, and the longer the time horizon of production.
• The move from money that holds its value or appreciates to money that loses its value is very significant in the long run: society saves less, accumulates less capital, and possibly begins to consume its capital; worker productivity stays constant or declines, resulting in the stagnation of real wages...
• One of the key problems caused by a currency whose value is diminishing is that it negatively incentivizes saving for the future. Time preference is universally positive: given the choice between the same good today or in the future, any san person would prefer to have it today.