Book review: The Bitcoin Standard

The Bitcoin Standard by Saifedean Ammous is one of the few books about bitcoin that isn’t about trading. Here’s a review for financial independence campaigners.

The premise of The Bitcoin Standard

The loose premise of The Bitcoin Standard is that throughout history the world has benefitted from sound money. The “harder” the money, the more economies and individuals can prosper. This peaked with the European gold standard, as all money could be valued by its gold content.

Now that we’re on the fiat standard, we’re incentivised to spend instead of saving. We also make unsound investment choices as a result.

We could solve this problem by switching to a hard money, outside of government control, that is more convenient than gold. That’s Bitcoin.

What is “hard money”?

Saifedean makes the case that hard money keeps its spending power over time. Hard money is stuff that is rare, difficult to make, and not at risk of having the market flooded with new money.

Gold is the classic example in the book. No matter how much you try to mine, you’re barely going to impact the overall gold supply. It’s hard to mine in economically viable quantities. Gold doesn’t perish, so pretty much all gold ever mined is still in circulation. It’s also pretty rare, so the chance of you finding the amount of gold you’d need to grow the overall supply by 5% is… huge. It’s almost impossible to flood the gold market. Gold is therefore very hard money.

Soft money – such as seashells, fiat currency (e.g. the £GBP), even silver coins – is prone to inflation caused by flooding the market with money. For example, Saifedean gives evidence that civilisations that used seashells for money tended to have their economies destroyed when European explorers turned up and industrially farmed seashells to trade with these people, flooding the market and making their seashell-based currencies worthless.

I wrote a post on how money is made, which might help to explain why the good ol’ GBP is soft money.

Why Bitcoin is hard money

Bitcoin is hard money for the following reasons:

1. Fungibility: you can (pretty much) exchange any Bitcoin or parts thereof (called “satoshis” or “sats”) for any other, without really noticing a difference.
2. Hard to make: you need to “mine” it, which is now so difficult to do that you need to invest a lot of time, electricity and capital to do it.
3. Difficult to fake: the network is now suitably complex that the “51% attack” required to trick the network isn’t economically viable.
4. Rarity: There can only be 21 million over the lifetime. You can’t flood the market with Bitcoin for any meaningful length of time.
5. Immutable. There were attempts early on to change Bitcoin’s make-up. Technology exists to make it a faster, more efficient network. However, to do so requires pretty much all the network validators to approve the change, which historically they haven’t done. It’s basically immutable now.
6. Trustless: you don’t need to check the purity of Bitcoin, and you can verify if someone has the amount that they say they have.
7. Inflation is capped: the way it’s mined means that there’s a cap on the maximum amount that can be mined in a year, so inflation in supply is predictable – and it’s also disinflationary, as supply drops ever 4 years.

Saifedean goes so far as to say that Bitcoin is the hardest money in existence.

Bitcoin versus gold

What’s interesting about the book is that Bitcoin doesn’t feature until the last few chapters. Before that, Saifedean appears to simply make the case for hard money, and he effectively sings gold’s praises.

However, he identifies that Bitcoin has a few advantages over gold.

Firstly, it’s hard to debase. Gold coins aren’t usually 24-carat (i.e. notionally pure) gold. I’ve written about how to buy gold before, and I’ve bought physical gold sovereigns in the past, but these are only 91.6% pure gold. In the case of sovereigns, that’s mainly to toughen them up for regular use (they used to be our money!) but there’s nothing to stop an unscrupulous government throwing a bit of lead into the melting pot to bulk up the supply. You just can’t do that with Bitcoin.

Secondly, it’s more convenient. Carrying a lot of gold coins is as pain in the bum, especially for a big transaction. It’s also difficult to conduct international transactions in gold, which is why paper money became a thing in the first place. With Bitcoin, you can carry as much as you want and send it anywhere globally around the network by using your public and private keys.

Hasn’t Bitcoin failed as a global currency?

The Bitcoin whitepaper specifies that Bitcoin was meant to be a digital cash replacement. However, it has significant price volatility (way above inflation) that means it’s probably not going anywhere as a cash replacement. It also struggles to hit global scale, and even the country that uses it as formal legal tender (El Salvador) is using a version of a second-layer network to make it usable in the country.

There’s a strand of thought that Bitcoin has failed to achieve the original Satoshi Nakamoto vision.

The Bitcoin Standard argues that Bitcoin is best used as a store of value. It can also be used for international trade and the basis of the global scale economy.

Why it would be good to switch to a Bitcoin standard

By switching to a hard money, the wealth of individuals could be maintained over time. Thus, a hard money incentivises savings. Without a hard money, individuals are incentivised to spend as soon as they can, or even to go into debt, because inflation will devalue the currency.

Staying on unsound money means that projects which offer no real benefit get funding, since organisations need to get rid of the cash anyway. Does HS2 sound familiar? In the rush to spend fiat while it still has buying power, there is an encouragement to invest in assets without careful prior scrutiny, since delay comes with an inflation cost.

A hard money dis-incentivises unproductive investment. A global standard hard money also removes the otherwise unproductive forex industry, as you don’t need foreign exchange of cash if everyone is on the same thing.

Bitcoin does this best and is cheapest in the long run. It’s certainly cheaper to settle the balance of trade between countries by Bitcoin than to ship crates of gold bullion.

By switching to a Bitcoin standard, you also prevent central banks from being to intervene in the free markets, which Saifedean believes is disastrous.

What I liked about this book

I really liked the economic history in the early chapters. One of the examples discusses the Rai stones, a carved ownership ledger on limestones on the island of Yap. Short version? The idea of Bitcoin is nothing new, it’s just that money hasn’t been digital before.

I’m also generally convinced on the value of crypto as a potential sound money. Again, this isn’t entirely novel, and it was predicted in The Sovereign Individual too.

Controversial points in The Bitcoin Standard

Despite liking this book on the whole, there were some arguments that Saifedean makes that I just don’t agree with.

Crypto is only good as sound money

Saifedean is highly critical of Ethereum, which at the time of his writing was the main useable smart contract capable platform. He goes so far as to suggest that everything other than Bitcoin or something like Bitcoin is a waste of time.

The argument is that a centralised database could do smart contracting better than a blockchain, and it could do it cheaper. In his eyes, there’s no point investing the capital to set up a blockchain network unless it’s to make hard money.

I think this is short-sighted. There are some things that are worth capital investment in blockchain, particularly where they are international.

The entire insurance industry – both the pooling of capital to make an insurance fund and distribute risk, and the proof of coverage – could be made more efficient by blockchain.

Licences and qualifications distributed as NFTs (non-fungible tokens, i.e. unique items) would be a game-changer in some industries.

Construction warranties, some of which last for twelve years, could also benefit from being trustless and publicly verifiable.

There may even be uses that I haven’t considered yet. The point is that Saifedean has taken a very conservative view on the use of the term “value”. This conservative approach also underpins my next criticism.

The arts are getting worse because we’re on unsound fiat money

The argument in the book is that arts, culture and society have somehow degraded since the era of the gold standard. This is something Saifedean reiterates in the sequel, which I’ll review when I’ve finished it.

The examples to which he refers are symphonic music and minimalist/ dada art. He says that the quality is incomparable to the past masters, that both mediums are devolving, and now modern music is just about sex.

I wish to raise two heavily-shortened counterarguments against this.

1. Art has always been weird

The few masterpieces not involving sex in the Louvre or the Tate are pretty exceptional, to have survived through time. Art has generally been about sex, power or politics. Here’s a post from the blog “Culture Trip”: Painting Prostitution: 8 Infamous Portraits of Art’s Illicit Muses. One of the things you’ll note is that most of the paintings come from the 19th Century, which is pretty much the peak of the gold standard era.

If Saifedean was right, this kind of thing would have evolved out of existence in fine art by then.

My suspicion here is that Saifedean is very culturally conservative, and his cultural bias here is being applied to his love of sound money, rather than it being a credible argument.

2. Classical music tended to be composed on commission, and when it didn’t… it was also weird

Saifedean is quite rightly critical of modern music. To be honest, I agree. Quality generally dropped after Metallica’s Master of Puppets.

OK, fine! Jokes aside though, Saifedean seems to forget that classical symphonies were written by commission. A rich guy paid for them; having a composer on hand was serious swagger back in the days of European aristocracy. Nowadays, your ultra-rich might buy a boat or a Lamborghini instead, but this just wasn’t open to them.

This means that classical music doesn’t actually relate to the tastes of the time. The fact is, popular music definitely existed – folk music is making a resurgence, and that’s a pretty old style – it’s just that it doesn’t usually keep as well.

To say that fiat cash killed classical music is, well, ludicrous.

In fact, here’s a fun thing for you. When composers weren’t on commission and just did their own thing, they could go weird. Mozart once wrote a song that’s basically called “Kiss my arse!“. There’s even an article by Classic FM titled “50 Shades of Classical Music – the sexiest pieces of all time“, many of which pre-date the end of the gold standard in 1914.

My point is that The Bitcoin Standard is presented as factual, but has a lot of the author’s personal biases woven into it. You should read it with an open yet critical mind.

Who is this book suitable for?

This book is a great insight into the mainstream philosophy underpinning the value of Bitcoin today.

I’d recommend it for anyone who doesn’t understand the appeal of Bitcoin, whether they agree with it or not, as it’s certainly an original point of view.

Overall thoughts

I agree with the benefits of a hard money system. This book is worth reading in tandem with The Sovereign Individual and A New Case for Gold, as a lot of the themes seem to interweave nicely.

That said, the social commentary angle which the book tries to squeeze in feels like a cheap attempt at gaining shock value. “Our very way of life is in danger! Argh! By Bitcoin immediately!“. It’s not well argued or presented, and I think detracts from the good work done on the basic economic arguments.

Nonetheless, the book is still worth a read, and I still recommend it.

How I’m using The Bitcoin Standard in my FI campaign

This book did make me rethink Bitcoin. Just as importantly, it also made me rethink gold.

I use gold in my portfolio as a diversification away from equities. I may also consider investing a bit more into Bitcoin as a similar diversification measure. The advantage it would offer me is that I can lend it to generate a return, which I can’t do with gold sovereigns.

My 2022 campaign plan does involve a temporary overweight into crypto while I (potentially) relocate. I intend to make some of that allocation into Bitcoin as a result of my combined reading.