While Bitcoin is an invention of the digital age, the problem it purports to solve is as old as human society itself: transferring value across time and space.
Read on...
The Bitcoin Standard analyzes the historical context to the rise of Bitcoin, the economic properties that have allowed it to grow quickly, and its likely economic, political, and social implications.
Author Saifedean Ammous takes the reader on an engaging journey through the history of technologies performing the functions of money, from primitive systems of trading limestones and seashells, to metals, coins, the gold standard, and modern government debt. Exploring what gave these technologies their monetary role, and how most lost it, provides the reader with a good idea of what makes for sound money, and sets the stage for an economic discussion of its consequences for individual and societal future-orientation, capital accumulation, trade, peace, culture, and art.
With this background in place, the book moves on to explain the operation of Bitcoin in a functional and intuitive way.
After having read the book page by page, I, hereby, list down the 52 fabulous lessons from this awesome book.
These are the examples that stuck with me.
These learnings are worded and appended in a way that makes it easier for most of us to understand and absorb.
If you are interested in reading about such learning from other all-time best-selling books, you may click here.
For now, if you wish to know about "The Bitcoin Standard", and what I learned from it, here you go...
1/ Anything can be considered money as long as it serves as a good medium of exchange. Gold, Silver, Coins, Copper, Alcohol, Cows, Goats, Stones, Cigarettes, Paper, - anything. People have different choices to choose the medium they wish to choose. Of course, every choice has a consequences and limitations.
2/ Money should solve the three basic problems in exchange of goods - sale-ability across space, time and scale. A lot of elements satisfy the problems of space and scale, but the key challenge for any money is to be sale-able across time. This means it needs to be a store of value over a period of time. The money value shouldn't erode over time. This is the second purpose of money - to be a store of value, other than a medium of exchange.
3/ Money can lose value if it is physically perishable or even if it is not, if more of it can be created easily. For anything to play a monetary role, it should be very hard or costly to produce, else money would lose its value by easy production.
4/ Whatever be the medium of exchange, it has to be widely acceptable. This allows easy liquidity of goods. Also, the goods can be priced in that widely acceptable medium.
5/ Money should also allow for capital accumulation (investment) so as to lead to specialization, improve human productivity and achieve results that were impossible to achieve without such accumulation.
6/ Good money has a high Stock to Flow ratio which helps it retain its value over time. A lot of stock meaning easy availability and liquidity, and very less flow meaning tough to add more to the existing stock.
7/ If a widely acceptable system of money fades away slowly because someone started to produce the money easily, then the entire wealth gets transferred from the current users to the easy creator of money.
8/ A money that is easy to produce is no money at all. It doesn't make the society rich. It makes most of the society poor and transfers wealth to those who produce the money easily.
9/ Anatomy of a market bubble - Sudden increased demand leads to higher prices which fuel further demand. Producers produce more and misguided savers save more by buying this commodity in high demand. Eventually, too much supply starts to stagnate and eventually crash prices. Savers lose. Producers make money. A good store of value should be able to beat this market bubble.
10/ Gold has been an exceptional commodity because of its extreme chemical stability spanning across centuries. Also, it can't be chemically produced so far. So, it's not an easy money. It has to be extracted from the earth, which is an expensive, toxic and a manual process with ever diminishing returns.
11/ Over the last century, the Stock to Flow Ratio for gold has never been more than 1.5% of the existing stockpile (which just continues to grow forever because of its chemical stability). In case of a market bubble, it's tough to increase the production by too much because of the process involved. Even if it's done, the new production becomes a part of the stockpile thus making the stock to flow ratio even lesser. It's very tough to create a market bubble for Gold.
12/ Silver comes a close second. Compared to Gold, it's easier to mine, has a lot more available in the earth, hence the flow becomes easier. The flow for Silver is typically 10-12% of the stockpile. The existing stockpile also keeps reducing because it is consumed in the industry. It's easier for silver producers to take the savers wealth if they create a bubble by massively increasing demand and subsequently increasing production, which is easier to do for Silver.
13/ The advent of telegram and network across Europe allowed banks to use cheques, bills and paper receipts and debit the accounts rather than physically transfer the required metal currencies. The paper receipt was fully redeemable with either Gold or Silver. Silver's only edge of being cheaper was lost with paper money and cheques since Gold could now back up any small unit via paper.
14/ Britain was the first to introduce a gold standard and stayed with it until 1914. Slowly, all nations started moving to the gold standard. It made gold more marketable. India switched from Silver to Gold in 1898. China and HK were the last ones to switch in 1975.
15/ When both Gold and Silver were used for monetary roles, the ratio of their prices was 1:15. Silver started to fall once it lost its monetary role. By 20th century, the ratio was 1:47 and off late it's around 1:75.
16/ History shows that it's impossible to insulate yourself from the consequences of others holding money that's harder than yours.
17/ Though gold standard was one of the best things to happen across the century, governments started to take control of the gold reserves. It was too tempting not to.
18/ World War 1 in 1914 started the era of government money. The common name for government money is fiat money, which means order, decree or authorization.
19/ Government money can be redeemable in gold or even irredeemable - both run by the government. The first is a part of gold standard. In the gold standard, the government just assumes the responsibility of getting everything managed effectively, printing paper backed by gold, and creating physical gold bars, coins where necessary. But the govt doesn't control the supply of gold. In the second case, government paper acts as money and the government can print more paper as it seems fit - with no correlation to gold.
20/ By the start of World War 1, it was very tempting to give away the gold standard rather than asking for more taxes from the citizens to fund wars. Until now, governments had limited gold standard money to fund wars, but now, they had unlimited fiat money to keep funding wars. Unlimited money was one of the strongest reasons for World War 1 happening in the first place.
21/ By the end of WW1 in 1918, the currencies of most European nations got devalued by 30-70% because of Fiat money.
22/ Post war, no government wanted to go back to the gold standard because of this devaluation and hence came up a system of monetary nationalism where governments forced people to use fiat money and controlled everything from inflation to interest rates etc.
23/ On Aug 15, 1971, US president Nixon announced the complete disconnection of dollar from gold. In effect, this meant that the US is defaulting on its dollar convertibility to gold.
24/ The US dollar value dipped but the US printed more, and the values dipped further. Other countries who had USD as reserve currency fared even worse. This completed the process that began with WW 1 - to go away from the gold standard and move to a standard of currencies issues by several governments.
25/ Seller and Buyers across countries and continents now had different currencies rather than one standard gold currency. So, a buyer needs the currency of the seller to buy the item because the seller doesn't want buyer's currency. All this led to significant currency conversion costs and creation of currency exchange markets.
26/ Paper money has seen far bigger growth than gold and hence gold keeps appreciating wrt paper money.
27/ The US M2 money supply has grown at an average annual rate of 6.7% since last 50 years.
28/ Hyperinflation is a unique phenomenon associated only with government fiat money. The cost of production of government money is almost zero. It is possible that the buying power of paper money can eradicate within a few months or even weeks, not giving enough time for its holders to exchange it with gold or other stronger, harder currencies.
29/ With money under government control and no more free market money, the definition of sound money has changed to include the money that is completely decided by the free markets and completely under the owner's control.
30/ An unsound money is in control of someone who is not the owner, and this gives the entity the same advantage as the producers of easy money in primitive times. The controllers of such money can control it. create money at will, lowering its value, at the cost of those who legitimately hold it.
31/ Sound Money has few qualities. (a) It allows preservation of value over time. This allows the humans to live in peace and encourages civilization. (b) It has a widely acceptable single unit of measurement, thus allowing free trade - away from govt coercion and interference. With free trade comes growth and economic progress.
32/ When people delay consumption, they save for capital accumulation so that the accumulated capital can be used for business loan from the banks. The rate of interest in sound money and fair market is driven by the saved money. The more the saved money, the less the rate of interest, the more the business loans, the more the production and vice versa. But in centralized banking driven by fractional reserve money printing, central banks decide to lower interest rates by intervention, thus leading to more production of money. This devalues money and poor are the worst sufferers.
33/ Recessions are the inevitable outcomes of interest rate manipulations. That's because the businesses that took money that wasn't available in actual realize that there input costs go up since the consumption have slowed and thus businesses become unviable.
34/ Devaluing a currency doesn't help exports in the long run. It just makes the currency holders poor. When exports are strong (because of quality or tech), currency actually appreciates. Government intervention in currency is an unnecessary evil.
35/ Any quantity of money is sufficient for any size of the economy. All that matters is the purchasing power of money, and not it's quantity. Printing money just changes the quantity but the overall purchasing power with everyone remains the same.
36/ Societies with appreciating currencies will save more for the future, leads to delayed but significant consumption in the long run. On the other hand, societies with depreciating currencies will invest in riskier assets just to beat inflation and devaluation of money.
37/ Unsound money gives too much power in the hands of few individuals that impacts every single citizen.
38/ There are only two types of transactions - cash (which requires two parties face to face) and digital (which required a trusted third party, is not face to face usually, but is slow and costly). Bitcoin was the first digital payment that didn't require a trusted third party. So, it was the first digital cash.
39/ Bitcoin is the hardest currency ever invented. Unlike Gold, whose production increases as the price rises, Bitcoins production can't be increased because of the in-built feature known as Difficulty Adjustment. Only more power is needed and that power goes to make the network more secure since the problems become more complex to solve.
40/ If someone tries to do a fraudulent transaction, the person has to spend ever increasing processing power to come up with a fraud only to be quickly invalidated and voted out by a majority of the nodes. It's very tough to do a transaction and very easy to verify the same by peer nodes.
41/ Bitcoin transactions are based on 100% verification (by nodes) and 0% trust - unlike 3rd party transactions which are purely trust based.
42/ Bitcoin totally supply is 21 M coins each of which is divisible into 100M sats - making them highly liquid and usable.
43/ We have never run out of any natural resources until today. In fact, with tech advancements, we are discovering even more. And this includes oil and gold.
44/ The only truly limited resource on earth is human time. Humans want to spend their time to produce something they can store, that lasts long and can retain value. If that product can be easily produced, then it will be produced by someone else to unlock its value.
45/ As Bitcoin continues to appreciate, it will be bought by institutional investors and HNIs, and then it will start to attract central banks. The fiat currency backed by Bitcoin settlement at the end of the day will be the future.
46/ Bitcoin is the most secure technology in the world by its design. In spite of money at stake, the number of successful attacks is far lesser than any other financial network.
47/ No one person, group, country controls bitcoin. No one entity can thus alter its design. Either people have to use it the way it is or not use it.
48/ Bitcoin code is 100% open source. Any node can update it but for that change to become a part of the network, majority of the nodes have to be in consensus. That is precisely where its security lies. No central authority controls it.
49/ Bitcoin exhibits a very strong status quo bias. Any attempt to alter the network significantly has resulted in a resounding failure. Bitcoin is immutable and resistant to change.
50/ Anyone can copy the Bitcoin code and create a new currency but so far, there's has been no currency which is not controlled by a person or a team. And this lack of control and decentralization is what makes Bitcoin unique.
51/ Blockchain technology by itself is highly inefficient and slow compared to centralized solutions. The only benefit is elimination of the need for trust on any third party.
52/ Blockchain technology is useful only for creating digital cash and Bitcoin is the only proven digital cash successfully working and adopted by millions worldwide.
3/ Money can lose value if it is physically perishable or even if it is not, if more of it can be created easily. For anything to play a monetary role, it should be very hard or costly to produce, else money would lose its value by easy production.
4/ Whatever be the medium of exchange, it has to be widely acceptable. This allows easy liquidity of goods. Also, the goods can be priced in that widely acceptable medium.
5/ Money should also allow for capital accumulation (investment) so as to lead to specialization, improve human productivity and achieve results that were impossible to achieve without such accumulation.
6/ Good money has a high Stock to Flow ratio which helps it retain its value over time. A lot of stock meaning easy availability and liquidity, and very less flow meaning tough to add more to the existing stock.
7/ If a widely acceptable system of money fades away slowly because someone started to produce the money easily, then the entire wealth gets transferred from the current users to the easy creator of money.
8/ A money that is easy to produce is no money at all. It doesn't make the society rich. It makes most of the society poor and transfers wealth to those who produce the money easily.
9/ Anatomy of a market bubble - Sudden increased demand leads to higher prices which fuel further demand. Producers produce more and misguided savers save more by buying this commodity in high demand. Eventually, too much supply starts to stagnate and eventually crash prices. Savers lose. Producers make money. A good store of value should be able to beat this market bubble.
10/ Gold has been an exceptional commodity because of its extreme chemical stability spanning across centuries. Also, it can't be chemically produced so far. So, it's not an easy money. It has to be extracted from the earth, which is an expensive, toxic and a manual process with ever diminishing returns.
11/ Over the last century, the Stock to Flow Ratio for gold has never been more than 1.5% of the existing stockpile (which just continues to grow forever because of its chemical stability). In case of a market bubble, it's tough to increase the production by too much because of the process involved. Even if it's done, the new production becomes a part of the stockpile thus making the stock to flow ratio even lesser. It's very tough to create a market bubble for Gold.
12/ Silver comes a close second. Compared to Gold, it's easier to mine, has a lot more available in the earth, hence the flow becomes easier. The flow for Silver is typically 10-12% of the stockpile. The existing stockpile also keeps reducing because it is consumed in the industry. It's easier for silver producers to take the savers wealth if they create a bubble by massively increasing demand and subsequently increasing production, which is easier to do for Silver.
13/ The advent of telegram and network across Europe allowed banks to use cheques, bills and paper receipts and debit the accounts rather than physically transfer the required metal currencies. The paper receipt was fully redeemable with either Gold or Silver. Silver's only edge of being cheaper was lost with paper money and cheques since Gold could now back up any small unit via paper.
14/ Britain was the first to introduce a gold standard and stayed with it until 1914. Slowly, all nations started moving to the gold standard. It made gold more marketable. India switched from Silver to Gold in 1898. China and HK were the last ones to switch in 1975.
15/ When both Gold and Silver were used for monetary roles, the ratio of their prices was 1:15. Silver started to fall once it lost its monetary role. By 20th century, the ratio was 1:47 and off late it's around 1:75.
16/ History shows that it's impossible to insulate yourself from the consequences of others holding money that's harder than yours.
17/ Though gold standard was one of the best things to happen across the century, governments started to take control of the gold reserves. It was too tempting not to.
18/ World War 1 in 1914 started the era of government money. The common name for government money is fiat money, which means order, decree or authorization.
19/ Government money can be redeemable in gold or even irredeemable - both run by the government. The first is a part of gold standard. In the gold standard, the government just assumes the responsibility of getting everything managed effectively, printing paper backed by gold, and creating physical gold bars, coins where necessary. But the govt doesn't control the supply of gold. In the second case, government paper acts as money and the government can print more paper as it seems fit - with no correlation to gold.
20/ By the start of World War 1, it was very tempting to give away the gold standard rather than asking for more taxes from the citizens to fund wars. Until now, governments had limited gold standard money to fund wars, but now, they had unlimited fiat money to keep funding wars. Unlimited money was one of the strongest reasons for World War 1 happening in the first place.
21/ By the end of WW1 in 1918, the currencies of most European nations got devalued by 30-70% because of Fiat money.
22/ Post war, no government wanted to go back to the gold standard because of this devaluation and hence came up a system of monetary nationalism where governments forced people to use fiat money and controlled everything from inflation to interest rates etc.
23/ On Aug 15, 1971, US president Nixon announced the complete disconnection of dollar from gold. In effect, this meant that the US is defaulting on its dollar convertibility to gold.
24/ The US dollar value dipped but the US printed more, and the values dipped further. Other countries who had USD as reserve currency fared even worse. This completed the process that began with WW 1 - to go away from the gold standard and move to a standard of currencies issues by several governments.
25/ Seller and Buyers across countries and continents now had different currencies rather than one standard gold currency. So, a buyer needs the currency of the seller to buy the item because the seller doesn't want buyer's currency. All this led to significant currency conversion costs and creation of currency exchange markets.
26/ Paper money has seen far bigger growth than gold and hence gold keeps appreciating wrt paper money.
27/ The US M2 money supply has grown at an average annual rate of 6.7% since last 50 years.
28/ Hyperinflation is a unique phenomenon associated only with government fiat money. The cost of production of government money is almost zero. It is possible that the buying power of paper money can eradicate within a few months or even weeks, not giving enough time for its holders to exchange it with gold or other stronger, harder currencies.
29/ With money under government control and no more free market money, the definition of sound money has changed to include the money that is completely decided by the free markets and completely under the owner's control.
30/ An unsound money is in control of someone who is not the owner, and this gives the entity the same advantage as the producers of easy money in primitive times. The controllers of such money can control it. create money at will, lowering its value, at the cost of those who legitimately hold it.
31/ Sound Money has few qualities. (a) It allows preservation of value over time. This allows the humans to live in peace and encourages civilization. (b) It has a widely acceptable single unit of measurement, thus allowing free trade - away from govt coercion and interference. With free trade comes growth and economic progress.
32/ When people delay consumption, they save for capital accumulation so that the accumulated capital can be used for business loan from the banks. The rate of interest in sound money and fair market is driven by the saved money. The more the saved money, the less the rate of interest, the more the business loans, the more the production and vice versa. But in centralized banking driven by fractional reserve money printing, central banks decide to lower interest rates by intervention, thus leading to more production of money. This devalues money and poor are the worst sufferers.
33/ Recessions are the inevitable outcomes of interest rate manipulations. That's because the businesses that took money that wasn't available in actual realize that there input costs go up since the consumption have slowed and thus businesses become unviable.
34/ Devaluing a currency doesn't help exports in the long run. It just makes the currency holders poor. When exports are strong (because of quality or tech), currency actually appreciates. Government intervention in currency is an unnecessary evil.
35/ Any quantity of money is sufficient for any size of the economy. All that matters is the purchasing power of money, and not it's quantity. Printing money just changes the quantity but the overall purchasing power with everyone remains the same.
36/ Societies with appreciating currencies will save more for the future, leads to delayed but significant consumption in the long run. On the other hand, societies with depreciating currencies will invest in riskier assets just to beat inflation and devaluation of money.
37/ Unsound money gives too much power in the hands of few individuals that impacts every single citizen.
38/ There are only two types of transactions - cash (which requires two parties face to face) and digital (which required a trusted third party, is not face to face usually, but is slow and costly). Bitcoin was the first digital payment that didn't require a trusted third party. So, it was the first digital cash.
39/ Bitcoin is the hardest currency ever invented. Unlike Gold, whose production increases as the price rises, Bitcoins production can't be increased because of the in-built feature known as Difficulty Adjustment. Only more power is needed and that power goes to make the network more secure since the problems become more complex to solve.
40/ If someone tries to do a fraudulent transaction, the person has to spend ever increasing processing power to come up with a fraud only to be quickly invalidated and voted out by a majority of the nodes. It's very tough to do a transaction and very easy to verify the same by peer nodes.
41/ Bitcoin transactions are based on 100% verification (by nodes) and 0% trust - unlike 3rd party transactions which are purely trust based.
42/ Bitcoin totally supply is 21 M coins each of which is divisible into 100M sats - making them highly liquid and usable.
43/ We have never run out of any natural resources until today. In fact, with tech advancements, we are discovering even more. And this includes oil and gold.
44/ The only truly limited resource on earth is human time. Humans want to spend their time to produce something they can store, that lasts long and can retain value. If that product can be easily produced, then it will be produced by someone else to unlock its value.
45/ As Bitcoin continues to appreciate, it will be bought by institutional investors and HNIs, and then it will start to attract central banks. The fiat currency backed by Bitcoin settlement at the end of the day will be the future.
46/ Bitcoin is the most secure technology in the world by its design. In spite of money at stake, the number of successful attacks is far lesser than any other financial network.
47/ No one person, group, country controls bitcoin. No one entity can thus alter its design. Either people have to use it the way it is or not use it.
48/ Bitcoin code is 100% open source. Any node can update it but for that change to become a part of the network, majority of the nodes have to be in consensus. That is precisely where its security lies. No central authority controls it.
49/ Bitcoin exhibits a very strong status quo bias. Any attempt to alter the network significantly has resulted in a resounding failure. Bitcoin is immutable and resistant to change.
50/ Anyone can copy the Bitcoin code and create a new currency but so far, there's has been no currency which is not controlled by a person or a team. And this lack of control and decentralization is what makes Bitcoin unique.
51/ Blockchain technology by itself is highly inefficient and slow compared to centralized solutions. The only benefit is elimination of the need for trust on any third party.
52/ Blockchain technology is useful only for creating digital cash and Bitcoin is the only proven digital cash successfully working and adopted by millions worldwide.
Hope these 52 fabulous lessons will help shape up your thought process to some extent and help you appreciate life much better.
Don't have time to read the entire book?
Then, you can read the crux of some of the best-selling books ever written.If you are interested in reading about such learning from other all-time best-selling books, you may click here.
Regards
Manoj Arora
Official Website | Elite Program | Elevate Newsletter | My Amazon Book Store
Official Website | Elite Program | Elevate Newsletter | My Amazon Book Store
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