The Bitcoin Standard: The Decentralized Alternative to Central Banking by Saifedean Ammous


Really useful explanation of money and Bitcoin, obscured by really terrible editing and writing.

I had to up-rate this after re-reading my notes, as there IS a wealth of information and interesting ideas within this book. It's just not packaged very well.

“Every government election is an advanced auction on stolen goods . ” - H . L . Mencken

Some key points:


Money solves the problem of how to move economic value across time and space.

Money is a good purchased not to be consumed (a consumption good), nor to be employed in the production of other goods (an investment, or capital good), but primarily for the sake of being exchanged for other goods.

Money meets these qualities: medium of exchange, unit of account, store of value, standard of deferred payment.

Barter / Direct Exchange

The simplest way for people to exchange value is to exchange valuable goods with one another . This process of direct exchange is referred to as barter, but is only practical in small circles with only a few goods and services produced.

The larger the market, the more the opportunities for specialization and exchange, but also the bigger the problem of coincidence of wants — what you want to acquire is produced by someone who doesn't want what you have to sell.

These three problems make direct exchange highly impractical and result in people needing to resort to performing more layers of exchange to satisfy their economic needs:

  1. Lack of coincidence in scales. What you want is not equal in value to what you have. Division into smaller units may not be practical. (Imagine trading shoes for a house. You cannot buy part of a house with one pair of shoes.)
  2. Lack of coincidence in time frames. What you want to sell is perishable but what you want to buy is durable, making it hard to accumulate enough of your perishable good to exchange for the durable good at one point in time.
  3. Lack of coincidence of locations. You want to sell a house in one place to buy a house in another location, but houses cannot move.

Investments vs. Money

Investment is distinct from money in three respects:

  1. It offers a return, which money does not offer.
  2. It involves a risk of failure, whereas money is supposed to carry the least risk.
  3. Investments are less liquid than money, necessitating significant transaction costs every time they are to be spent.

This is why there will always be demand for money, and why holding investments can never entirely replace money.

The Price of Money

It is common sense and age‐old wisdom in virtually all human cultures for individuals to want to store some portion of their wealth in the form of money because it is the most liquid holding possible. It allows the holder to quickly liquidate if she needs to, and because it involves less risk than any investment.

The price for the convenience of holding money comes in the form of the forgone consumption that could have been had with it, and in the form of the forgone returns that could have been made from investing it.

The Easy Money "Trap"

Anything used as a store of value will have its supply increased, and anything whose supply can be easily increased will destroy the wealth of those who used it as a store of value.

The corollary to this trap is that anything that is successfully used as money will have some natural or artificial mechanism that restricts the new flow of the good into the market, maintaining its value across time. For something to assume a monetary role, it has to be costly to produce. Otherwise, the temptation to make money on the cheap will destroy the wealth of the savers, and destroy the incentive anyone has to save in this medium. A slow drain of its monetary value over time (increase of supply) will slowly transfer the wealth of its holders to those who can produce the medium at a low cost.

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.

Money is a necessary condition for economic development and specialization

Only with a uniform medium of exchange acting as a unit of account does complex economic calculation become possible, and with it comes the possibility for specialization into complex tasks, capital accumulation, and large markets.

Sound Money

Sound money allows people to think about the long term and to save and invest more for the future. Saving and investing for the long run are the key to capital accumulation and the advance of human civilization. Money is the information and measurement system of an economy, and sound money is what allows trade, investment, and entrepreneurship to proceed on a solid basis, whereas unsound money throws these processes into disarray.

Transition from Metals to Paper Money

With these two innovations:

  1. The telegraph, first deployed commercially in 1837, and
  2. The growing network of trains, allowing transportation across Europe.

It became increasingly feasible for banks to communicate with each other, sending payments efficiently across space when needed and debiting accounts instead of having to send physical payments. This led to the increased use of bills, checks, and paper receipts as monetary media instead of physical gold and silver coins.

Gold as Money (the Gold Standard)

Different currencies were simply different weights of physical gold, and the exchange rate between one nation's currency and the other was the simple conversion between different weight units, as straightforward as converting inches to centimeters. The British pound was defined as 7.3 grams of gold, while the French franc was 0.29 grams of gold and the Deutschmark 0.36 grams, meaning the exchange rate between them was necessarily fixed at 26.28 French francs and 24.02 Deutschmark per pound. In the same way metric and imperial units are just a way to measure the underlying length, national currencies were just a way to measure economic value as represented in the universal store of value, gold.

Breaking the Gold Standard / Government Fiat Money

With the simple suspension of gold redeemability, governments' war efforts were no longer limited to the money that they had in their own treasuries, but extended virtually to the entire wealth of the population. For as long as the government could print more money and have that money accepted by its citizens and foreigners, it could keep financing the war. Previously, under a monetary system where gold as money was in the hands of the people, government only had its own treasuries to sustain its war effort, along with any taxation or bond issues to finance the war. This made conflict limited, and lay at the heart of the relatively long periods of peace experienced around the world before the twentieth century.

This, in effect, takes wealth away from people who produce it and gives it to people who specialize in the control of money without actually producing things valued by society, in the same way European traders could pilfer African society by flooding them with cheap beads.

A sound money, on the other hand, makes service valuable to others the only avenue open for prosperity to anyone, thus concentrating society's efforts on production, cooperation, capital accumulation, and trade.

[In short: The government issuers of fiat money can suck wealth from the users of the money (the citizens) by debasing the entire supply, until the entire national wealth has been depleted and/or there is a currency crisis and the citizens stop using that money.]

The average growth of money supply is 32.16 % per year per country. The average for the ten most internationally liquid currencies is 11.13% for the period 1960 – 2015 , and only 7.79% for the period between 1990 and 2015. The currencies that are most accepted worldwide, and have the highest salability globally, have a higher stock‐to-flow ratio than the other currencies, as this book's analysis would predict.

Remember that most fiat currencies are worthless outside their national boundaries. The market for foreign exchange, at $5 trillion of daily volume, exists purely as a result of this inefficiency of the absence of a single global homogeneous international currency.

The problem with government-provided money is that its hardness depends entirely on the ability of those in charge to not inflate its supply. Only political constraints provide hardness, not physical, economic, or natural factors.

Unsound money is a particularly dangerous tool in the hands of modern democratic governments facing constant reelection pressure. Modern voters are unlikely to favor the candidates who are upfront about the costs and benefits of their schemes; they are far more likely to go with the scoundrels who promise a free lunch and blame the bill on their predecessors or some nefarious conspiracy. Democracy thus becomes a mass delusion of people attempting to override the rules of economics by voting themselves a free lunch and being manipulated into violent tantrums against scapegoats whenever the bill for the free lunch arrives via inflation and economic recessions.

Why is government money still used?

1. Taxes must be paid in government money.

2. Banking regulations prevent banks from transacting in non-government sanctioned money.

3. Legal tender makes it illegal to use other forms of money as payment.

4. Government money is still backed by gold reserves, or currencies backed by gold.

= Governments coerce their populations using the threat of violence to use government money.

Gold is used monetarily between Central Banks, individuals use government money.

Money and Time Preference

Sound money facilitates civilization, peace, and prosperity:

  1. It protects value across time, incentivizes future planning, and lowers individual time preference.
  2. Facilitates trade through a stable unit of measurement, creating larger markets.
  3. Facilitates individual freedom, by preventing states / actors from controlling money creation (and power over wealth).

As individuals lower their time preference, they produce more capital goods (goods for more effective production of future goods).

While microeconomics has focused on transactions between individuals, and macroeconomics on the role of government in the economy, the reality is that the most important economic decisions to any individual's well‐being are the ones they conduct in their trade‐offs with their future self. The main factor determining a man's choices in life is his time preference — a man's lot in life will be largely determined by the trades between him and his future self.

Note that politicians, who are in charge of money, operate on short time horizons of 3 to 4 years (election cycles).

The Economic Role of Prices

Prices are the information system of economic production, communicating knowledge across the world and coordinating the complex processes of production.

However, prices are measured in money terms. The value of money, supposed to be the unit of account with which all economic activity is measured and planned, went from being the value of the least volatile good on the market to being determined through the sum of three policy tools of the government — monetary, fiscal, and trade policy — and most unpredictably, through the reactions of individuals to these policy tools.

The Ultimate Resource

The only limited resource, and in fact the only thing for which the term resource actually applies, is human time. Each human has a limited time on earth, and that is the only scarcity we deal with as individuals. As a society, our only scarcity is in the total amount of time available to members of a society to produce different goods and services.

The eternal dilemma humans face with their time concerns how to store the value they produce with their time through the future. While human time is finite, everything else is practically infinite, and more of it can be produced if more human time is directed at it.

Until Bitcoin's invention, all forms of money were unlimited in their quantity and thus imperfect in their ability to store value across time. Bitcoin's immutable monetary supply makes it the best medium to store the value produced from the limited human time.


Bitcoin is a distributed software that allows for permissionless transfer of value, using a currency protected from unexpected inflation, without relying on trusted third parties.

Bitcoin makes the functions of a modern central bank predictable and virtually immutable by programming them into decentralized code that cannot be altered without majority consensus.  

Bitcoin is the first demonstrably reliable operational example of digital cash and digital hard money.

Bitcoin as Hard Money

By placing a hard cap on the total supply of Bitcoins, Nakamoto was clearly influenced by the Austrian school, which argues that the quantity of money itself is irrelevant, that any supply of money is sufficient to run an economy of any size, because the currency units are infinitely divisible, and because it is only the purchasing power of money in terms of real goods and services that matters, and not its numerical quantity.

Nobody wants to have in his cash holding a definite number of pieces of money or a definite weight of money; he wants to keep a cash holding of a definite amount of purchasing power.

Bitcoin's Role as Digital Gold / The New Reserve Currency

The future use of Bitcoin for small payments or everyday transactions will likely not be carried out over the distributed ledger, but through second layers. Bitcoin can be seen as the new emerging reserve currency for online transactions, where the online equivalent of banks will issue Bitcoin‐backed tokens to users while keeping their hoard of Bitcoins in cold storage. This would allow an infinite number of transactions to be carried out online without having to pay the high transaction fees for on-chain transactions .

Even at the time of writing, with Bitcoin at a relatively small level of public adoption, the majority of Bitcoin transactions are not recorded on‐chain, but occur in exchanges and various types of Bitcoin‐based online platforms such as gambling and casino websites. These businesses will credit or debit Bitcoins to their customers on their own internal records and then only make transactions on the Bitcoin network when customers deposit or withdraw funds.

Game Theory: A Theoretical Reverse Bank Run

Since the supply of Bitcoin is strictly limited, there may be a tipping point:

If Bitcoin continues to appreciate while a Central Bank / company / individual doesn't own any of it, then the market value of their reserve currencies and gold will be declining in terms of Bitcoin, placing the Central Bank at a disadvantage the later it decides to acquire reserves.

The point at which Central Banks start to consider using it is the point at which they are all engaged in a reverse bank run on Bitcoin. The first Central Bank to buy Bitcoin will alert the rest of the Central Banks to the possibility and make many of them rush toward it. The first Central Bank purchase is likely to make the value of Bitcoin rise significantly and thus make it progressively more expensive for later Central Banks to buy it. The wisest course of action in this case is for a Central Bank to purchase a small share of Bitcoin. If the Central Bank has the institutional capacity to purchase the currency without announcing it, that would be an even wiser course of action, allowing the Central Bank to accumulate it at low prices.

Only the real world will tell how these dynamics will unfold. Monetary status is a spontaneously emergent product of human action, not a rational product of human design.

Sovereignty vs. Custody

The vast majority of people prefer to not have their money under their responsibility for fear of theft or abduction. Deposit banking is a legitimate business which people have demanded for hundreds of years around the world. People have happily paid to have their money stored safely so they only need to carry a small amount of money on them and face little risk of loss. This likely makes modern society safer than it would be otherwise, because most potential assailants these days realize they are not likely to come across a victim carrying significant amounts of cash.

Bitcoin Scaling

Bitcoin is scaling through an increase in the value of on‐chain transactions, not through a rise of their number. More and more transactions are being carried out off‐chain, settled on exchanges or websites that handle Bitcoin, turning Bitcoin into more of a settlement network than a direct payment network.

Replacements to Bitcoin

Bitcoin is the only truly decentralized digital currency which has grown spontaneously as a finely balanced equilibrium between miners, coders, and users, none of whom can control it. It was only ever possible to develop one currency based on this design, because once it became obvious that it is workable, any attempt at copying it will have been a top‐down and centrally controlled network which will never escape the control of its creators.

Altcoins - A Negative Take

But the notion that new web apps require their own decentralized currency is the desperately naïve hope that somehow un-solving the problem of lack of coincidence of wants could be economically profitable. There is a reason real‐world businesses don't issue their own currency, and that is that nobody wants to hold currency that is only spendable in one business. The point of holding money is holding liquidity which can be spent as easily as possible. Holding forms of money which can only be spent in particular vendors offers very little liquidity and serves no purpose. People will naturally prefer to hold the liquid means of payment, and any business that insists on payment in its own freely‐trading currency is just introducing significantly high costs and risks to its potential customers.

For any process which will still require some form of trust in a third party to implement any small part of it, the extra costs of decentralization cannot be justified. For implementing contracts dealing with real‐world businesses under legal jurisdictions, there will still be legal oversight relating to the real‐world implementation of these contracts that can override the network consensus, making the extra cost of decentralization pointless. The same applies for decentralizing databases of financial institutions that will remain as trusted third parties in their own operations with one another or with their clients.

It is outside the realm of possibility that a technology designed specifically to eliminate third‐party intermediation could end up serving any useful purpose to the intermediaries it was created to replace.