Bitcoinist Book Club: “The Bitcoin Standard” (Ch. 9, Part 2, Instant Settlement)

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It’s time for The Bitcoin Standard to speculate. How can bitcoin’s status as a store of value and even as an international reserve currency evolve in the future? As the asset and the network prove their value as a new alternative to traditional finance, the world will look at bitcoin in a new light. How will legacy players react as they understand the new kid on the block’s superiority?

To finish the ninth chapter, Dr. Saifedean Ammous explores bitcoin’s possible role in international settlement and as a global unit of account. 

Remember, The Bitcoin Standard was published in 2018. Most of what you’re about to read are predictions that came true. But first… 

About The Coolest Book Club On Earth

The Bitcoinist Book Club has two different use cases: 

1.- For the superstar-executive-investor on the run, we’ll summarize the must-read books for cryptocurrency enthusiasts. One by one. Chapter by chapter. We read them so you don’t have to, and give you just the meaty bits. 

2.- For the meditative bookworm who’s here for the research, we’ll provide liner notes to accompany your reading. After our book club finishes with the book, you can always come back to refresh the concepts and find crucial quotes. 

Everybody wins.

So far, we’ve covered:

• Prologue and Chapter 1
• Primitive Moneys (Chapter 2)
• Why Gold? (Chapter 3, Part 1) 
• History (Chapter 3, Part 2) 
• Gold Standard (Chapter 4, Part 1) 
• Government Money (Chapter 4, Part 2) 
• Money and Hyperinflation (Chapter 4, Part 3)
• Time Preference (Chapter 5, Part 1) 
• Capital Accumulation (Chapter 5, Part 2)
• Price (Chapter 6, Part 1)
• Unsound Money (Chapter 6, Part 2)
• Economic Thought (Chapter 7, Part 1)
• Inflation (Chapter 7, Part 2)
• Digital Money (Chapter 8, Part 1)
• Proof-Of-Work (Chapter 8, Part 2)
• Buy The Future (Chapter 9, Part 1)

And now, let’s return to The Bitcoin Standard: “Chapter 9, Part 2: Instant Settlement”

The section begins by framing the bitcoin network as “a new independent alternative mechanism for international settlement that does not rely on any intermediary and can operate entirely separate from the existing financial infrastructure.” And establishing one of bitcoin the asset’s most important characteristics, “It is far easier to move around with a Bitcoin private key than with a hoard of gold, and far easier to send it across the world without having to risk it getting stolen or confiscated.”

Then, it’s time for the first prediction. This one hasn’t come true:

“Bitcoin can be seen as the new emerging reserve currency for online transactions, where the online equivalent of banks will issue Bitcoin-backed tokens to users while keeping their hoard of Bitcoins in cold storage, with each individual being able to audit in real time the holdings of the intermediary, and with online verification and reputation systems able to verify that no inflation is taking place.”

Plus, there doesn’t seem to be a necessity for any other token. Bitcoin itself is divisible enough. However, projects like fedimint propose Bitcoin-backed tokens, so maybe Ammous is just too ahead of the curve. 

The Bitcoin Standard On Instant Settlement

The book recognizes one of bitcoin’s key advantages, it offers instant final settlement. And does so for large payments, “across long distances and national borders.” As a medium for settlement payments, bitcoin doesn’t only compete with central banks and traditional financial institutions, “it compares favorably to them due to its verifiable record, cryptographic security, and imperviousness to third-party security holes.”

Then, The Bitcoin Standard predicts The Lightning Network:

“The number of transactions in a Bitcoin economy can still be as large as it is today, but the settlement of these transactions will not happen on Bitcoin’s ledger, whose immutability and trustlessness is far too valuable for individual consumer payments.”

BTC price chart for 09/12/2022 on Bitstamp | Source: BTC/USD on TradingView.com Can Bitcoin Become A Global Unit Of Account?

This section starts by describing a problem. When the world abandoned the gold standard, it “destroyed people’s ability to conduct indirect exchange using a single medium of exchange.” In turn, that lead to “the growth of a massive foreign exchange industry” that’s worth billions but doesn’t produce anything of value.

The market seems ripe for bitcoin adoption, but there’s a slight problem:

“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.”

While using gold, the world had a monetary standard that was “independent of the control of any single government or authority.” And bitcoin promises a return to that ideal state. However, “for this possibility to materialize, Bitcoin would need to be adopted by an extremely large number of people in the world, most likely indirectly, through its use as a reserve currency.” 

For a moment there it seemed that we were near that time, but it was a mirage. We’re far away. We’re so early.

The Bitcoin Standard Foresees The Need For Something Stable

The book predicts that bitcoin will one day be “stable in value, as daily transactions in it would be marginal compared to the quantities held.” However, that’s nowhere near guaranteed because “monetary status is a spontaneously emergent product of human action, not a rational product of human design.” That’s not as bad as it sounds, however:

“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 bitcoin adoption increases and money gets into the system, “the level of demand for it will become far more predictable and stable, leading to a stabilization in the value of the currency.” If that happens, The Bitcoin Standard paints the possibilities as endless:

“Should it achieve some sort of stability in value, Bitcoin would be superior to using national currencies for global payment settlements, as is the case today, because national currencies fluctuate in value based on each nation’s and government’s conditions, and their widespread adoption as a global reserve currency results in an “exorbitant privilege” to the issuing nation.”

What The Bitcoin Standard is trying to say is that, when all is said and done, bitcoin can be that neutral currency for global settlements that the world so desperately needs. It might even be the only option with the necessary characteristics to fulfill the role. If needed, bitcoin will be there. Validating block after block after block.

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OhNoCryptocurrency via https://www.ohnocrypto.com/ @Eduardo Próspero, @Khareem Sudlow