Bitcoin Standard

Money has been a fundamental aspect of human life since ancient times, with its roots in bartering and the use of gold as a medium of exchange. The modern era saw the adoption of paper currency backed by gold, which was simple but effective. This led to unprecedented economic expansion and the abandonment of the gold standard in the early 20th century. However, the rise of cryptocurrency has provided a solution for financial stability, as it can be used anywhere and at any time, just like gold.

Early money was based on barter or direct exchange, but it wasn't always effective. The Yap Islanders used Rai stones, visible and divisible, to trade goods and services. However, the supply of stones was limited, and their value remained stable over time. In the late 1800s, David O'Keefe began importing large quantities of Rai stones in exchange for coconuts, reducing them to mere stones.

Gold became the foundation of sound money, as the first money resembling the change in your pocket was created by metallurgy, the craft of smelting metals. Gold stood out as a highly salable material due to its near-impossibility to destroy, its ability to be found underground, and its slow and predictable supply growth. The love affair between money and gold only blossomed in the eighteenth, nineteenth, and twentieth centuries, known as the age of sound money.

Advances in communication and transportation technology led to the increasing use of nonphysical forms of payment, such as checks, paper receipts, and bills. Governments worldwide devised a solution to persuade merchants and consumers that the paper they use to buy and sell is worth anything. The gold standard, introduced by Britain in 1717, was the most commonly used metal in leading European nations. By 1900, around 50 other countries had officially adopted the same standard. As more nations issued paper currency backed by gold reserves, gold became more marketable and thus more valuable.

However, the gold standard had a major flaw: it had to be stored in a limited number of bank vaults, simplifying the exchange of paper money for gold and establishing a highly centralized system in which governments controlled the value of paper money. In 1914, nearly every major European power decided to take advantage of the situation by printing new money without "backed" by gold. Within a few weeks, the countries fighting in World War One suspended the convertibility of paper money into gold, and the standard had been dropped.

During the First World War, gold-backed money was replaced by government-issued money. After World War I ended in 1918, the victorious nations began planning the postwar economic order with a plan called Bretton Woods. This involved a fixed exchange rate linking all currencies in circulation with US dollars, with gold's value tied to the dollar at a fixed exchange rate. However, the ruse was dropped, and gold was no longer used as a standard.

Sound money, which was at its peak in the nineteenth century, encourages people to save and invest, leading to long-term, sustainable growth. This is because humans have a natural positive time preference, preferring immediate gratification over future gratification. Investment leads to capital accumulation, which can be used to create other goods and revenue streams in the future. However, unsound money distorts capital accumulation due to government intervention in the money supply and prices, which provide investors with the necessary information to make sound decisions.

Recessions and debt are caused by unsound money policies, such as those implemented by European governments during World War I. Central planning, a form of government intervention, distorts markets, particularly capital markets, resulting in a "boom and bust" cycle. Governments often expand the money supply during recessions, leading to a never-ending crisis.

To address these issues, governments must return to sound money and establish a new gold standard. Bitcoin, the world's first digital currency, can help in the recovery, stability, and growth of economies. Bitcoin exhibits similar characteristics to gold as a store of value, being scarce and predictable, with little risk of supply increasing sufficiently to significantly deflate its value. Its creation process involves mining computers on the Bitcoin network to solve complex algorithmic problems, rewarding them with bitcoins.

Satoshi Nakamoto, the creator of Bitcoin, built in a failsafe system, halving the number of bitcoins issued every four years. The algorithmic problems become increasingly difficult to solve as the number of computers working on them increases, ensuring a steady and reliable supply. Bitcoin will continue to be issued in ever-smaller quantities until 2140, when no new coins will be issued. This makes it an ideal store of value, as there is no amount of time or resources that can be spent to create more coins than the algorithmically programmed supply allows.

Bitcoin's security is unparalleled due to its use of public blockchain technology, which creates a log of all recent transactions and mining activity. This ledger allows every network user to access all the information, making Bitcoin ownership valid only after a majority of network users approve it. This self-sustaining network eliminates the need for a centralized authority to oversee transactions.

Verifying transactions is less difficult than cheating, as would-be fraudsters require significant processing power to create fraudulent blocks. Bitcoin's security stacks against cheaters, reducing the risk of eroded trust and causing demand and value to fall.

However, Bitcoin faces challenges such as price volatility and reliance on large, centralized institutions. The daily transaction limit for Bitcoin is currently set at 500,000, and the more transactions occur, the more nodes are required, increasing transaction fees and processing power. This raises the possibility of bitcoin trade-off the blockchain, or bitcoin-backed trade-in currencies, which would set a new standard but also necessitate the formation of centralized institutions to manage the system.

Bitcoin could serve as the foundation for establishing a modern sound-money policy, but its future remains uncertain.