What is The Bitcoin Standard?

Bitcoin Standard Post Image

Amidst the jargon, the concept of the Bitcoin Standard beckons with curiosity. But beyond the buzz, what does it mean for you and the future? Let’s peel back the layers and uncover the personal implications of embracing the Bitcoin Standard.

Where Does The Bitcoin Standard Come From?

The Bitcoin standard is the idea that bitcoin will one day become the primary (standard) currency of the world, rather than the fiat standard we have today, where fiat currencies are dominant.

The idea originates in Saifedean Ammous’s book The Bitcoin Standard: The Decentralized Alternative To Central Banking, published in 2018.

Saifedean Ammous is an economist of the Austrian school of economics, which teaches classical economics as opposed to the Keynesian economics that was introduced in the early 20th Century.

He also currently works as an economic advisor in El Salvador’s Bitcoin Office, which is moving the country towards the Bitcoin standard.

What Is The Bitcoin Standard?

The world currently operates on a fiat standard. That is, all the national currencies of the world are fiat currencies.

Fiat currencies are not pegged to any commodity, or to anything at all.

The central banks that issue each currency can print as much as they like. For example, the Bank of England can print as many pounds sterling as it wants, and the Federal Reserve can print as many US dollars as it wants.

The value of fiat currencies is determined by their supply and demand. Demand is ensured by the fact that the governments that issue these currencies make them legal tender (meaning merchants have no choice but to accept them) and also demand that taxes and fines be paid in these currencies.

However, the value of these currencies is constantly deteriorating because their supply is constantly growing. This is called inflation.

We think of inflation as prices going up, but what’s actually happening is that the value of the currency is going down.

The Bitcoin standard refers to a world where bitcoin is the dominant currency, rather than the multitude of fiat currencies we have now.

It is possible, under the Bitcoin standard, to still have fiat currencies, but they would have their values pegged to bitcoin reserves.

This would make bitcoin the global reserve asset, much like how gold was under the gold standard.

Why Would The Bitcoin Standard Be Good?

Contrary to what people might think, money is not an artificial invention.

Money was actually something human beings discovered, and many different commodities took the form of money.

This is something Ammous discusses at length in The Bitcoin Standard.

Gold eventually became the dominant form of money because it fulfilled the natural requirements of money better than any other physical commodity.

Gold is:

  • Scarce – The supply of gold grows very slowly and is limited
  • Durable – Gold does not tarnish and is impossible to destroy
  • Divisible – Gold can be divided into small pieces or coins
  • Portable – Gold can be transported across large distances in large or small amounts
  • Fungible – Two pieces of gold equal in weight are of equal value

These characteristics make gold ideal for storing value, and, therefore, for use as money.

Bitcoin is the only commodity that has ever been invented that fulfils these properties better than gold.

For example, the supply of bitcoin is absolutely scarce (a maximum of 21,000,000) whereas new gold deposits are still being found.

Bitcoin is theoretically infinitely divisible (although currently only divisible into 100,000,000 satoshis, this could be increased).

It is also transportable at the speed of light since it’s digital, which also makes it much cheaper to transport.

In fact, the difficulty and expense of transporting gold gave rise to central banking, where banks would store gold deposits and give out receipts.

This led to paper money, which led to fiat money.

Because bitcoin is so cheap and easy to transport and to self-custody, it is far more difficult for a central authority to control.

Due to its decentralization and absolute scarcity, it cannot be printed or inflated by anyone.

Therefore, a Bitcoin standard would have a range of benefits including less inflation, better capital allocation, and better fiscal management from governments.

The endless rise of prices and world debt would come to an end.

In Summary

The Bitcoin standard is a scenario where bitcoin is the global currency or reserve asset.

Fiat currencies may or may not exist under this standard, but they would have to be pegged to bitcoin reserves.

This implies putting an end to central banks engaging in irresponsible money printing and governments continuously running deficits.