Why Bitcoin? Why Not Just Dollars?
The most common question that people have about Bitcoin is, “Why Bitcoin. Why not just use dollars?”
In this post, I will discuss why some people not only believe that Bitcoin will become better money that US dollars, but also how Bitcoin can contribute to a more affluent society.
The concepts I write about in this post are drawn mostly from a single source; a book called The Bitcoin Standard by Saifedean Ammous.
Why Gold Emerged as Money
The beginning of this book discusses the history of money as we know it and why gold emerged as the most successful form of money. Some of they key features that made gold a great medium of exchange included that gold is practically indestructible and it is easily divisible and combinable compared to other metals.
The author points out another important feature of gold that is heavily underestimated.
Gold has a very stable and limited growth in its supply. Even in the face of huge spikes in the price of gold, the increase in the supply of gold from mining is very limited.
Why is the Supply so Important?
The growth in the supply of gold is important because if someone was able to double the existing supply of gold, it would leech the stored value out of the gold you possess. This is because every time time the supply of money increases, it puts downward pressure on the value of the money you possess. Imagine the value of your savings deteriorating for the sole reason that someone was able to cheaply produce more money!
Ammous refers to gold as sound money in major part because its limited supply growth protected the value of that medium of exchange.
Sound/Hard Money and Successful Societies
The author points out that throughout history, whenever governments honored their money supply, they tended to thrive as a society. On the other hand, whenever a government cheated the money supply, that society tended to suffer.
What does a government disrespecting the money supply look like?
At times, governments cheated the money supply to give themselves “free money”. Before paper money, governments did this by melting their gold coins and debasing them. To debase a coin means to melt the gold coin and add a cheaper type of metal in it.
When a government is debasing a metal, they may start with 100 coins, but after adding some other metal in there, they may end up with 130 coins.
During the Gold Standard
At some point, societies switched their economic system over to the gold standard. People living in this economic system used cash but it was backed by gold. When governments honored the gold standard, cash could be exchanged at any time for a fixed amount of gold held by a bank.
But governments found a way to print money (value) in this situation as well. Some governments cheated the gold standard by printing more cash without backing it with an equal amount of gold. This meant that if everyone tried to exchange their cash for gold at the same time, some people would be unable to withdraw their gold. This was a problem because the only reason people used cash for transactions was because it was backed by gold.
The Effects of Sound vs Unsound Money
When governments print money, it is not “free money.” There is no free lunch when you increase the money supply. When money is printed or debased it leeches the value out of your holdings. All of the sudden, your money can buy less things. It is a silent tax!
According to Ammous, when governments honored their money supply, it had huge implications on the success of a society. This is because sound money is the biggest influencer on something called time preference. Time preference is how much people value the present compared to the future. When you value the future over the present, you are said to have a low time preference. The author claims that the reason sound money is a major influence on time preference is because, when value is protected across time, people are incentivized to think toward their future.
Sound money (aka low time preference) societies tend to:
- Thrive economically,
- Experience stronger social and family ties,
- Engage in significant cultural projects, and
- Are more focused on long term tasks.
In contrast, a high time preference (instant gratification leaning) society allegedly is more likely to engage in conflict, self destructive behavior and experience more moral failings.
How Our Current Economy Is Affected by Unsound Money
In current times, nations abandoned the gold standard. Paper money is no longer redeemable for gold.
According to Ammous, most nations currently have an unsound monetary policy because they consistently print cash and keep the interest rate artificially low in order to incentivize businesses to invest in projects that will enhance the economy. Ammous claims that this is a horrible monetary policy. By keeping the interest rate artificially low, the economy has a harder time allocating resources where they are most needed. This leads to businesses being unable to complete their projects due to unexpected price increases which leads to unemployment and recessions.
According to Ammous, if nations adopted sound money, they would no longer experience the extreme swings in the business cycle.
Note: Ammous’s argument against the current economic system is difficult to explain in this short post. If you are interested in taking a deeper dive on his interpretation of our current economic situation, please read Ch 6: Capitalism’s Information System.
Why Bitcoin? Why Not Just Dollars?
Finally we get to the interesting part. How can Bitcoin be the soundest/hardest money that society has ever had.
Previously, gold was the hardest money that society has ever known, but the gold standard was difficult to maintain. It relied on governments honoring the amount of gold they held in reserve. As discussed earlier, governments are always tempted to debase dollars by printing more cash than they had gold.
Bitcoin is money that might be unable to be debased. Currently, the supply of Bitcoins is 17,237,100 (as of 2018–8–27) and the total number of Bitcoins that will ever exist is capped at 21 million. The increases in Bitcoin’s supply are predetermined and predictable as well.
The supply of Bitcoins is coded into the software, but it is also depends on social consensus. It is technically possible to modify Bitcoin node software to accept a fork of Bitcoin with different supply settings but, at the moment, this seems very unlikely to me. The Bitcoin community is strongly committed to the current supply cap. This is because the blockchain use case they are interested in is sound money.
Can Bitcoin Save Money and Bring a New “Golden Age”?
Another concept implied in the Bitcoin standard is that whenever a sounder form of money emerged in society, societies that adopted that medium of exchange benefited the most while people that held onto less sound currency had the value from that currency drained.
Will Bitcoin become the next world reserve currency that will bring us into the next “Golden (Bitcoin?) Age?” The argument is definitely compelling, but I rarely believe anything on the first read without further investigation. I believe a healthy level of skepticism is really important to getting closer to the truth.
Either way, if you are into crypto, The Bitcoin Standard by Saifedean Ammous is a must read. Stay skeptical, but keep on learning.
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