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Notes – The Bitcoin Standard: The Decentralized Alternative to Central Banking

By Saifedean Ammous

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Bitcoin can be best understood as distributed software that allows for transfer of value using a currency protected from unexpected inflation without relying on trusted third parties. In other words, Bitcoin automates the functions of a modern central bank and makes them predictable and virtually immutable by programming them into code decentralized among thousands of network members, none of whom can alter the code without the consent of the rest.

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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.

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one‐time collapse in the value of a monetary medium is tragic, but at least it is over quickly and its holders can begin trading, saving, and calculating with a new one. But a slow drain of its monetary value over time will slowly transfer the wealth of its holders to those who can produce the medium at a low cost.

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money that is easy to produce is no money at all, and easy money does not make a society richer; on the contrary, it makes it poorer by placing all its hard‐earned wealth for sale in exchange for something easy to produce.

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For anything to function as a good store of value, it has to beat this trap: it has to appreciate when people demand it as a store of value, but its producers have to be constrained from inflating the supply significantly enough to bring the price down.

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It is the author’s opinion that the history of China and India, and their failure to catch up to the West during the twentieth century, is inextricably linked to this massive destruction of wealth and capital brought about by the demonetization of the monetary metal these countries utilized. The demonetization of silver in effect left the Chinese and Indians in a situation similar to west Africans holding aggri beads as Europeans arrived: domestic hard money was easy money for foreigners, and was being driven out by foreign hard money, which allowed foreigners to control and own increasing quantities of the capital and resources of China and India during the period. This is a historical lesson of immense significance, and should be kept in mind by anyone who thinks his refusal of Bitcoin means he doesn’t have to deal with it. History shows it is not possible to insulate yourself from the consequences of others holding money that is harder than yours.

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It is only through the lowering of time preference that individuals begin to appreciate investing in the long run and start prioritizing future outcomes.

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the only thing for which the term resource actually applies, is human time.

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The real cost of a good, then, is always its opportunity cost in terms of goods forgone to produce it.

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In all human history, we have never run out of any single raw material or resource, and the price of virtually all resources is lower today than it was in past points in history, because our technological advancement allows us to produce them at a lower cost in terms of our time.

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Individual Sovereignty

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Productive capital becomes more embodied in the individuals themselves, making the threat of violently appropriating it increasingly hollow, as individuals’ productivity becomes inextricably linked to their consent.

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Davidson and Rees‐Mogg predict with remarkable prescience the form that the new digital monetary escape hatch will take: cryptographically secured forms of money independent of all physical restrictions that cannot be stopped or confiscated by government authorities.

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Bitcoin, and cryptography in general, are defensive technologies that make the cost of defending property and information far lower than the cost of attacking them.

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It makes theft extremely expensive and uncertain, and thus favors whoever wants to live in peace without aggression toward others. Bitcoin goes a long way in correcting the imbalance of power that emerged over the last century when the government was able to appropriate money into its central banks and thus make individuals utterly reliant on it for their survival and well‐being.

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The historical version of sound money, gold, did not have these advantages. Gold’s physicality made it vulnerable to government control. That gold could not be moved around easily meant that payments using it had to be centralized in banks and central banks, making confiscation easy.

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Bitcoin’s advantage, rather, is that by bringing the finality of cash settlement to the digital world, it has created the fastest method for final settlement of large payments across long distances and national borders.

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On the one hand, Bitcoin’s strict scarcity makes it a very attractive choice for a store of value, and an ever‐growing number of holders could tolerate the volatility for long periods of time if it is heavily skewed to the upside, as has been the case so far. On the other hand, the persistence of volatility in bitcoin’s value will prevent it from playing the role of a unit of account, at least until it has grown to many multiples of its current value and in the percentage of people worldwide who hold and accept it.

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Yet, considering that the world’s population today has only lived in a world of volatile fiat currencies shifting against each other, bitcoin holders should be far more tolerant of its volatility than generations reared under the certainty of the gold standard. Only the best fiat currencies have been stable in the short‐term, but the devaluation in the long term is evident. Gold, on the other hand, has maintained long‐term stability, but it is relatively unstable in the short term. Bitcoin’s lack of stability does not seem like a fatal flaw that would prevent its growth and adoption given that all its alternatives are also relatively unstable.

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Monetary status is a spontaneously emergent product of human action, not a rational product of human design.9 Individuals act out of self‐interest, and technological possibilities and the economic realities of supply and demand shape the outcomes of their actions, providing them incentives to persist, adapt, change, or innovate. A spontaneous monetary order emerges from these complex interactions; it is not something that is conferred through academic debate, rational planning, or government mandate. What might appear like a better technology for money in theory may not necessarily succeed in practice. Bitcoin’s volatility may make monetary theorists dismiss it as a monetary medium, but monetary theories cannot override the spontaneous order that emerges on the market as a result of human actions. As a store of value, Bitcoin may continue to attract more savings demand, causing it to continue appreciating significantly compared to all other forms of money until it becomes the prime choice for anyone looking to get paid.

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every thwarted attack on the network is a notch on its belt, another testament and advertisement to participants and outsiders of the security of the network.

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Any exploits or weaknesses found in the specification of the code will attract some of these coders to offer solutions, debate them, test them, and then propose them to network members for adoption.

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Is a CFA® Charterholder and founder of Crypto Jungle. A site devoted to helping people hack through the weeds to find the crypto gems. The CFA designation is globally recognized and attests to a charterholder’s success in a rigorous and comprehensive study program in the field of investment management and research analysis.

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