Could Bitcoin Become Money?

A Review of The Bitcoin Standard by Saifedean Ammous

Over the holidays I spent some time reading Saifedean Ammous’ The Bitcoin Standard. Ammous is part of the cryptocurrency camp known as Bitcoin Maximalists. This means he views Bitcoin as the only existing cryptocurrency with any plausible claim to hold intrinsic value as a form of money. As a friend of mine pointed out, while the supply of any given cryptocurrency may be limited, the supply of cryptocurrencies generally is infinite. And indeed we have seen a mass proliferation of them as vehicles for speculation. The trade value of anything that is infinite in supply is close to zero, so only Bitcoin Maximalism represents a coherent view compatible with rational economics.

I’ll pause here to give my basic understanding of what Bitcoin is if I had to explain it to a junior high student. Bitcoin is more or less a giant text file, called a blockchain, showing the amount of Bitcoin held by different accounts and every historical transaction between accounts. Through the clever scheme of public-private key cryptography, using really complicated math, the accounts in this giant text file can transfer Bitcoins to each other using secret passwords, and mutually check each others’ secret passwords are authentic without revealing the passwords themselves. Since this giant text file of accounts and transactions exists across millions of computers on the Bitcoin network, Bitcoin cannot be controlled by any central authority. Through an even more clever scheme of making computers do really hard math problems that require burning lots of electricity to process transactions, and having expensive specialized computers compete to “mine” these transactions by solving the math problems, the network then operates like a democracy with each computer on the network verifying and voting for the legitimacy of each slug of transactions. The brilliant part of the math is that valid blocks are extremely easy to mathematically verify quickly, but extremely difficult to produce. Ammous claims the only way to take over Bitcoin would be to make a ludicrous investment in millions of specialized mining computers such that the attacker would have a majority of the math problem-solving ability. As Ammous points out, any successful attacker would then have ruined Bitcoin: it would no longer be trusted as a store of value, and the Bitcoins stolen would be worth only a tiny fraction of the cost of stealing them.

Ammous also argues that the limited transaction volume of the Bitcoin blockchain, about 5 per second, is arguably a feature, not a bug of Bitcoin. The lower transaction volume means it’s easier to create full Bitcoin nodes. The more Bitcoin nodes there are, the harder it is for an attacker to get a majority of nodes and take over the network. He makes the case that in the very long-term, if Bitcoin becomes money, the main Bitcoin blockchain will be reserved for larger transactions, with smaller, lower risk transactions taking place among service providers who will settle up on the main chain at necessary intervals, just like banks do today. In other words, Bitcoin is more secure by having fewer transactions and thus more nodes, and everyday transactions can easily occur somewhere else.

Note that nowhere directly in Bitcoin does Bitcoin process dollars. To get Bitcoin, an account that already has some must transfer some to a new account. The price of Bitcoin in dollars is the average cost of buying into Bitcoin on the various exchanges that allow trading dollars for Bitcoins for a small fee - i.e. you will pay a little more than the quoted price when you buy, and you will sell for a little less. The price of Bitcoin at any given time is simply the best market price someone is willing to buy or sell it for, not a measure of on-demand value like a bank balance.

To build the case for Bitcoin, Ammous spends most of his book talking about the nature of money. Mankind has used all sorts of things as money, from glass beads and seashells to gold and silver. One Pacific Islander tribe used giant stones that were never moved or physically exchanged but simply transferred “ownership” publicly, in an obvious parallel to Bitcoin. In Ammous’ view, and I think this somewhat undeniable, money is a natural monopoly. Just like it would be inefficient to have two different companies physically supplying electricity to any given home, it’s inefficient in an economy to have more than one kind of money. One single form of money makes it much easier for people and businesses to make decisions, by having one standard to judge economic value. Money in his view accomplishes three functions: a unit of account for making economic decisions, a medium of exchange that’s portable and divisible so people don’t have to trade goods directly, and a store of value into the future.

The best money for accomplishing the latter, according to Ammous, is that which has a high “stock to flow” ratio. That is, if something is going to store value, it’s important that the existing supply is relatively big compared to our ability to make more of it. If we used copper coins as money and their value went up, for example, copper producers could easily produce tons more copper and sink the price, capturing that value for themselves. Central bankers do the same today when they print more paper dollars.

This is why gold was almost the perfect form of money. It’s inherently hard to produce because it’s rare in the Earth’s crust and we haven’t gotten much better at making more, relative to its existing supply, since the dawn of civilization. Because it doesn’t react with other elements and is not consumed significantly in industry, virtually all of the gold that has ever been produced still exists in the world, making the supply much larger than annual production, which stabilizes its price.

Gold had two problems as a medium of exchange. One problem was that it was so valuable per ounce that it wasn’t useful for a lot of everyday, low-value transactions like buying food. This is why more common silver co-existed with gold as a form of money for most of its history to enable smaller transactions. Its other problem was the opposite. Once the industrial revolution got going and the scale of the economy grew, sometimes very large transactions were necessary. A ten million dollar transaction, for example, in today’s money would require transferring about 350 pounds of gold. Certainly doable, but not exactly convenient when such transactions happen thousands of times a day in advanced economies.

According to Ammous, both of these problems were solved with the invention of gold-backed paper money, enabled by the telegraph and railroad. Banks could hold gold reserves, and customers could transfer gold (or the equivalent in local, gold-backed currency) with paper notes and checks. Instead of each individual holding his or her own gold supply, the banks would hold a common supply divided among their account holders. Banks could verify transactions over telegraph and securely transfer large quantities of gold via railroad between themselves from time to time to “settle up” net transactions. Only one physical transaction was necessary to square up thousands of individual customer transactions. Since paper notes and bills representing gold could be written just as easily in any amount, both of gold’s small and large problems of scale were solved. Predictably, as paper banking based on a gold standard took off, silver lost its status as money and its price collapsed relative to gold.

Ammous credits the fastest historical rise in human living conditions in the 19th to early 20th centuries to sound economic decision-making enabled by sound gold-backed paper money. As an Austrian-school economist, he tends to reduce all societal virtues or ills to the availability or lack of sound money. I think he proves a little too much here, in that I think there are other credible explanations for the Industrial Revolution. It’s at least true that the increasing prosperity enabled by the specialization of labor required a more efficient form of money, and as often happens in history, if something is technologically possible it tends to appear when it is needed.

This innovation would also prove the undoing of the gold standard. As people got more and more used to transacting with paper, they would rarely redeem their paper for physical gold. The banks figured out they could issue more paper than they had gold in their vaults. If this was done in limited amounts, the bank could profit by inflating the money supply slightly. But greedier banks could keep issuing currency recklessly, which would result in a run on the bank. Those unfortunate enough to have money deposited in such an institution were ruined.

Eventually, the banks figured out that the more reckless banks were endangering their ability to issue this fake but profitable money. This led to the demand for central banks to both control all of the physical gold backing currency, as well as regulating the degree to which banks could issue money in excess of their deposits. Once centralized under government control, it was only a matter of time before governments decided to end reliance on gold entirely, creating entirely fiat currency backed by nothing at all. At first, during “emergencies” or wartime, governments would temporarily halt gold redemptions. Eventually, beginning in the 1930’s, the United States government would criminalize the ownership of gold, seize all gold held by citizens at a fixed price in dollars, and only allow redemptions of dollars for gold from other nations’ central banks.

Ammous documents how the rise of paper money, unbacked by gold, enabled the horrific wars of the late 19th and early 20th centuries. The American Civil War was funded in such a way, and was one of the first mass-scale “total wars” waged by and against an entire population, military and civilian. Money printing enabled the governments, North and South, to suspend the rule of law and seize much more of the economy for the war effort than citizens would have tolerated through taxation, prolonging conflict at a great cost in human life. Europe watched in horror, and some degree of smugness, as the new technologies of war enabled the fledgling American republic to immolate itself in four short years.

Europe would similarly immolate a few decades later in the first worldwide war, using many of the same technologies and techniques of the American Civil War, only perfected and expanded in their scope and efficiency in killing and psychological manipulation of the population. From this war would follow the next world war and the murder of tens of millions worldwide by totalitarian regimes, all only halted by the final threat of mutually assured destruction as the world entered the atomic age. It would be silly to say all of these horrors were caused by fake money, but fake money was at least a necessary if not sufficient condition for them. Ammous makes a solid case that all who love peace should also love hard money.

But even past World War II, the major economies would only temporarily leave the gold standard. Convertibility would be paused, bonds and debt would be issued, but eventually paid back, at least by the victors, in peacetime. While Americans could not own or exchange dollars for gold, foreign central banks could, and since the US was the reserve currency of the world, this sort of indirect gold standard was less wildly inflationary than what was to follow. The 1960s strategy of “guns and butter” made this permanently unsustainable. Lyndon Johnson printed money to provide both for the Vietnam War and a massive expansion of entitlement programs domestically. Foreign governments got jumpy about the true value of their dollar reserves and began redeeming them for gold from Fort Knox. As US gold reserves dwindled, Richard Nixon closed this foreigners-only “gold window” in 1971. From this time on, dollars would be entirely untethered from any physical backing, and only as scarce as the government wanted them to be.

Interestingly, 1971 turns out to be a year when many trends turned negative in our country. There’s a website, wtfhappenedin1971.com, that catalogs all of the negative societal trends that happened to begin approximately when this weakened gold standard was finally cut loose. This adds weight to Ammous’ claim that a lot of societal ills are at least exacerbated by easy money.

Ammous makes similarly broad claims for the moral, spiritual, and cultural decline associated with fake money. I can’t follow him all the way to concluding that fiat currency is the efficient cause of all of this, but it certainly served as an accelerant to preexisting trends. Easy money rewards those who take the most insane risks and creates an economic elite disproportionately composed of sociopaths. If people mostly just copy each other in their desires, as the Christian philosopher René Girard claims, then creating such a degenerate elite would have downstream effects on the broader culture. This helps explain the increasingly ugly art, architecture, and literature of the last 100 years. A gold standard, which rewards self-controlled “ants” over grasshopper types, creates a different kind of elite with more refined, classical tastes compared to the aesthetic freak show associated with fiat money.

Ammous of course goes further than attacking fiat currency and defending the gold standard; he advocates Bitcoin as a new monetary standard that would be superior to both. I can think of four major objections to his position: the desirability of a fixed supply of money, whether money can come to exist without any current or former physical backing, security issues associated with Bitcoin, and whether money really needs to be a long-term store of value. I’ll work through these objections by stating them and then attempting to make counterarguments.

Bitcoin’s Fixed Money Supply

Central to Ammous’ advocacy for Bitcoin is that it can serve as a hard currency like gold. Sound money, though, is relative. Ammous documents how the gold mining historically increased the gold supply by something like 1-2% annually. He assumes this is a somewhat bad thing in which Bitcoin, with a long-term fixed supply, would be superior. But this strikes me as an assumption. An occasional economics blogger I follow, Lyall Taylor, makes the case that the ideal currency is slightly inflationary. Perhaps gold was such a good currency because it was slightly inflationary, but its inflation rate was not subject to opportunistic manipulation by monetary authorities. Such a point is now moot in a sense, as all fiat currencies are subject to opportunistic manipulation, and the gold standard had its weaknesses which ultimately caused its demise, but it makes me question whether the inherently deflationary aspects of Bitcoin will be good or bad relative to the period when money was truly backed by gold.

According to Taylor, currency should be invisible, something you don’t really think about. Its purpose is to enable transactions between and among productive assets or consumer goods. Neither gold nor Bitcoin are productive assets or consumable goods. They don’t produce or provide anything that makes anyone’s life better. From a societal standpoint, just as inflationary fiat currency incentivizes unproductive financialization and speculation, a fixed currency would incentivize unproductive HODLing, as the currency which produces nothing gets increasingly more valuable as the economy grows around it. Maybe gold, with its 1-2% annual supply increase impervious to meddling, was the Goldilocks of currencies.

A counterargument to this is that Bitcoin, at the moment, is still slightly inflationary. Its supply is still increasing at about 1.7% a year as new coins are mined. Its inflation rate will slowly decline until all Bitcoins that will ever exist have been mined, sometime after 2100. But for now, and during any currency transition over the next 10-20 years, to the extent a slow, non-discretionary inflation rate is desirable, it provides that.

A second counterargument is that it doesn’t really matter what would be theoretically best for a currency. Ultimately money is chosen by the marketplace. If enough of a business’ customers want to pay with Bitcoin, then merchants will accept it. And from the average person’s point of view, there’s a lot to like about Bitcoin’s low, declining inflation rate. I think the average person is less concerned about investment gains than investment losses. People badly want to be able to save a certain amount of money and be confident that money will buy the same goods in the future. The only way to do that right now is to entrust money to investment managers who fleece them with fees and take risks in the market the average person doesn’t want to take.

Overall, I find my initial objection to Bitcoin’s inelastic money supply to be less relevant to the discussion. Even with zero inflation, investors will always seek returns that exceed the natural growth of the economy. They will just do so more carefully when there is no tailwind of inflation to soften debt obligations. I’m not convinced that’s a bad thing.

Bitcoin Is Not a Useful Commodity

Central to Austrian economic theory is that money starts off as an independently useful commodity that incidentally becomes useful as money. The stock-to-flow ratio and density (value per ounce) play a role in the usefulness of money. Gold checks a lot of these boxes which is why it eventually crowded out every other competitor. But gold is not merely an arbitrary store of value. It was and is a desired material for jewelry due to its beauty and imperviousness to rot or rust. There are some industrial uses for gold as well.

Ammous shows how our current dollar, which is backed by nothing, successfully “borrowed” value from the previous gold-backed dollar. Think about a 30-year mortgage initiated under the gold standard. The creditor loaned dollars, which were backed by gold. Once the gold standard was removed, the borrower could now pay back this same loan with dollars not backed by gold. That’s the power of the government to set legal tender for “all debts, public and private” as noted on our currency. Dollars backed by nothing remained valuable because debt and taxes due under the old gold standard could now be paid back with fiat dollars, which remained relatively scarce. While paper dollars are theoretically easy and cheap to produce, try counterfeiting some and see what happens to you. The government, even under a fiat regime, is still the only entity allowed to produce dollars, and the graft works better if it’s slow and gradual, on the order of a few percent a year. Still, however, no fiat currency currently in use started that way; all began as gold-backed currencies.

So the question is whether Bitcoin which is backed by nothing and has always been backed by nothing can become currency. I think it’s possible. Examples abound in our culture where items of very low commodity or material value achieve high subjective value solely due to their scarcity. Think of things like fine art, or price premiums attached to product drops from brands like Supreme. Clearly the non-material can achieve value. So I find this to be a relatively minor problem for Bitcoin.

Bitcoin Security & Sovereignty

I see three major security issues with Bitcoin.

Ownership of Bitcoin is essentially knowing a password that others do not. The moment someone steals it, or tricks or compels you to reveal this password, your Bitcoin is gone forever. I personally would not be comfortable directly possessing any significant amount of Bitcoin. I would want a custodian who is fully insured managing my private keys. If my local bank gets robbed, I still have my money. That’s part of the reason I use a bank instead of keeping a bunch of cash in my possession.

The problem is, as far as I know none of the Bitcoin custodians out there, including the largest, Coinbase, are fully insured. Coinbase is only insured for the 2% of Bitcoin keys they keep online, with the rest in “cold storage” - that is, the passwords are kept on hard drives and paper backups off the Internet. In no case does Coinbase’s insurance cover compromise of one’s personal credentials. In my personal bank account, there are limits and protections if my information is compromised. Not so with Coinbase.

I’m not sure Bitcoin is actually insurable. With gold, a thief has to go through the trouble of physically moving it out of highly secure vaults in the real world. With Bitcoin, any actor or insider who can somehow discover the private key can steal it, instantly and irretrievably. Given no Bitcoin custodian provides full insurance, my guess is that insurers find it very hard to quantify the risk and thereby give a reasonable premium. Bitcoin is only preferable in certain niche situations, like getting money out of developing countries with unreliable property rights. Even then, anyone with a significant amount of Bitcoin exiting such a situation would want to eventually reinvest in a less volatile local currency or productive assets.

The need for a custodian also undermines the possibility of Bitcoin to escape state power, at least in major jurisdictions like the United States. A custodian will most certainly follow a court order to transfer Bitcoin from my account. So anyone seeking to hold Bitcoin is in a double bind: to protect oneself from the state, one must keep one’s own private keys; even then, judges have their ways of compelling compliance. But to protect against the much more common threat of loss or theft, one must deposit Bitcoins with an uninsured custodian.

The second Bitcoin security issue relates to the network itself. I mentioned earlier Ammous’ claim that one would have to control a ludicrous amount of computing power to take over Bitcoin, a majority of the processing power behind miners. That may not be quite right.

I admit I don’t understand this fully. Whereas miners process transactions, “nodes” on the network vote to confirm the validity of blocks of transactions. It appears nodes are run like a democracy, with each node getting one vote to accept or reject a new block on the chain as produced by the Bitcoin miners. Nodes are also much cheaper to run than mining Bitcoin (a $150 computer can be a node). Theoretically, someone could control Bitcoin by creating a bunch of full nodes and controlling the majority vote for each new block of transactions. I believe that would be cheaper than controlling a majority of the mining computers, which are more expensive. A quick Google search shows more technical people don’t necessarily have good answers to this question. And while financially motivated actors would devalue Bitcoin (and thus the value of their heist) by compromising it, reducing their incentive to actually go through with such a plan, politically motivated actors, such as governments threatened by Bitcoin, would see Bitcoin’s compromise and devaluation doubly accomplishing their desired objectives.

The third security issue for Bitcoin is its vulnerability to legal tender laws. If Bitcoin ever became stable enough to use as money, loans would be denominated in it instead of dollars. But typically loans are for assets ultimately controlled by the state. My “ownership” of a piece of real estate, for example, is entirely a fiction, a literal piece of paper at the courthouse, and at the complete mercy of the government. If I don’t pay my property taxes, eventually they will send men with guns to remove me from my property, and if I resist those men with guns, they will kill or imprison me. If I pay my taxes, they will similarly send men with guns to remove or exclude anyone from my property who is there without my permission. This is the base reality of life in a fallen world: all “rights” are fictions that can only pretend to be real when backed by the ultimate threat of violence. Paying taxes is just a euphemism for paying protection money to a local warlord, in our case democratically elected warlords but warlords nevertheless.

I will address this more in the next section, but anyone with real wealth does not simply hold currency. They own productive assets which require the threat of state-backed violence for their productive use. If I own an oil well, or a hydroelectric dam, or a factory, I need someone to protect that asset in the real world. Just keeping a password secret won’t secure my interests, I need the state to provide law and order.

That same state has and will dictate what is legal tender in its territory. If loans in Bitcoin ever become a significant problem for the government, it is entirely free to “print” its own fake Bitcoins, or declare so many of its dollars are equal to a Bitcoin, and require that creditors accept fake government-issued Bitcoins or an arbitrary amount of dollars as satisfaction for debt payments denominated originally in Bitcoin. Any creditor who attempts to enforce the original contract and repossess a property with such a mortgage will find the state’s men with guns preventing them from doing so.

Does Money Really Need to Be a Long-Term Store of Value?

One big problem for Bitcoin is that it can only become money if its price stabilizes. But its price can only stabilize if enough people are willing to hold Bitcoin instead of dollars, and most dollars are held by really wealthy people and firms.

The cartoon vision of wealth is Scrooge McDuck swimming in his vault of gold coins and cash. Wealthy people and firms, however, tend to hold very few dollars relative to total assets, usually just a buffer of working capital for expenses. Any large windfalls of dollars are reinvested in productive assets that produce income, whether debt or equity. The only exception to this is if one thinks asset prices will fall in the near future, but even here one is holding dollars (or more likely, interest-bearing T-bills or money market debt) in expectation of eventually buying a productive asset at a lower price.

So what those with a majority of the dollars really want is something that is extremely stable in short-term value, with some degree of indifference towards long-term value. Except for the brief period they hold cash, value is preserved through the productive asset bought, not holding the currency. Even the most conservative investment, 90-day Treasury bills, which are risk-free, cash-like debt your broker will allow you to access with a credit card or check, have historically adequately protected against inflation. $100 invested in treasury bills in 1928, for example, would be worth about $2080 today. Even after taxes, this more or less compensates for inflation since that time. The small-time dollar holder with a savings account or a pension lost value, but the wealthy, if they had any sense, did not. This has manifestly not held true the last decade, though, with the Fed’s increased money printing suppressing treasury bill interest rates, but as long as adequate investment alternatives are available, no major holder of dollars will want to hold Bitcoin as a safe store of value.

This is perhaps my biggest objection to Bitcoin becoming currency. The majority of global wealth is not holding dollars as a store of value; it’s just not a function that’s desired. It is easier than ever for anyone to invest in the public markets. No one need hold dollars beyond an emergency fund of personal expenses and as a temporary store of value between transactions for productive assets. This is Bitcoin’s giant chicken and egg problem. It is a poor short-term store of value due to its volatility. Yet the volatility will continue if it doesn’t become a short-term store of value for those currently using dollars for this purpose.

Could Bitcoin Become Money?

Probably not, but I’ll make the case for how it could happen, despite all of the problems detailed previously. Bitcoin could continue to follow its bottom-up path to mainstream acceptance, reaching critical political mass too late for the government-banking complex to take effective action.

The best analogy I can make is comparing Bitcoin to gun ownership in the United States. The US establishment would very much like to seize the guns like in every other developed country. Sometime in the 1970’s, however, activists took over the formerly sleepy National Rifle Association and realized that the Second Amendment was in severe danger of modification by the courts if cultural trends weren’t reversed. The NRA and the weapons industry doubled down, producing more guns than ever and arming more and more Americans. This created an extremely motivated constituency across the political spectrum who could be motivated to vote on this single issue. The Democratic Party learned to avoid antagonizing gun owners if they wished to hold on to enough of their moderate working class base to win enough elections to actually govern. Beyond lip service, gun control is mostly dead in the United States, and neither party realistically believes they can do much about it. The gun lobby is a great example of Taleb’s dictatorship of the intolerant minority.

Bitcoin could emerge as politically unstoppable in the same way. The people who are enthusiasts for it could become a large bloc of one issue voters, preventing the government from taking action to undermine its use and stability, and making interference with Bitcoin a third rail politically like gun control. People love, perhaps more than anything else, a moral crusade that also happens to make them rich. While getting too caught up in a moral cause makes for bad investment judgment generally, this moral element of Bitcoin could be key to its gaining widespread adoption. Some of the devotion to Bitcoin borders on religious. Ammous refers to its origination by an pseudonymous, selfless, now absent creator known by the alias Satoshi Nakamoto as an “immaculate conception.” The early Bitcoins mined by Nakamoto have never been exchanged or cashed out, despite their being worth over $70 billion.

Those who care deeply about freeing humanity from the central banks ought to be doing everything possible to make Bitcoin as widely adopted as possible, and this seems to be happening, more than purely economic interests would predict. Most of the smartest people in tech are at least closet libertarians and are adding Bitcoin options to many of the popular alt-banking cash apps. Not a few of them are quietly but deeply irritated at woke culture and its effect on their ability to enjoy running their businesses, something they care about much more deeply than additional wealth. Nothing would make some of these “tech bros” happier than to break the back of a system that provides for these annoyances that would not be sustainable in a natural, hard money ecology. As use widens, particularly in developing countries with more serious currency problems, the price could stabilize. If the price stabilizes at a significant level, it becomes a currency.

Sometimes those with a conservative bent are prone to unnecessary conspiratorial thinking. In my own life the maxim “never ascribe to malevolence what can be explained by incompetence or stupidity” has proven extremely useful. As I’ve gotten older, I’m convinced few people in leadership have a master plan. If it looks like we live in a world run by clowns, we probably are. With the Ivy League high on its own supply, the time of mere elite hypocrisy has passed. These are increasingly unserious people who may not see the threat Bitcoin poses to them until it is too late to do anything about it. If they continue printing money to service their ever-growing unproductive clientele and to avoid an economic correction, the resulting inflation could power Bitcoin’s ascent.

Overall, I give Bitcoin something like a 5% chance of achieving the status of a major currency. In the meantime, extreme volatility will continue. Given other attractive inflation-protected investment opportunities, and the security risks in holding Bitcoin, it would only make sense to hold a small amount, perhaps 1% of assets, as a hedge.

The main thing to avoid with crypto is FOMO. Focus on being productive and owning productive assets. Even if the crypto nerds are right and we all wish we had gotten in early, they’re still going to need to trade that crypto for goods and services in the real world. In the event it becomes money, Bitcoin’s price will become boring in its daily movements, and productive people and assets will capture economic value as they always have.

Coda

I highly recommend Ammous’ books, as they made me think deeply about economics. He makes an interesting case that all cryptocurrencies besides Bitcoin are either inferior or useless except as vehicles for speculation. Some people will certainly make a ton of money, but only those who get in and out early as they rise and fall. The cultural enthusiasm for them may be a manifestation of growing inequality and lack of economic opportunity, a symptom rather than a cure for the Fed’s destructive money printing.

All coins claiming to be a form of money are less secure and more manipulatable than Bitcoin, due to smaller networks of miners and nodes, and lack Bitcoin’s unbroken track record of irreversible transactions. Since money is a natural monopoly, these coins, unless they can overtake Bitcoin in their number of nodes and mining capacity, are inherently inferior at being a currency. If any of them ever do overtake Bitcoin, the value proposition of cryptocurrency as a store of value generally is undermined because people would have to worry about picking winners among the tens of thousands of options.

For those blockchain technologies that claim to do something else, Ammous makes the point that everything Bitcoin does (listen to the Internet, maintain and update a text file of transactions every ten minutes) could be done by a $400 laptop computer. The distributed nature of Bitcoin makes it a trillion times less efficient than it would be if its functions were executed by a centralized database. The only application worth that kind of cost in his view is a reliable hard currency, to keep the government’s greedy hands off the money supply. Ethereum, the second place cryptocurrency, functions like a distributed computer, but the simplest instructions a smartphone could handle instantly cost $40-$50 a transaction.

Bitcoin’s emergence as a form of money is well in the future. The key statistic to track is its volatility, a measure of how unstable its price is from day to day. Its becoming less volatile than gold on a dollar basis would be a significant milestone, but currently it is at least twice gold’s historical volatility.

I suspect this will be a popular post. I am currently reading Ammous’ follow-up book, The Fiat Standard, and if any new arguments appear interesting I may do another update on this topic.