The Bitcoin Standard Book Summary

Part II: What Is Sound Money?

Part II: What Is Sound Money?

In 2009, an exchange sold 5,050 bitcoin for $5.02, which is about $1 per 1,000 bitcoin. In 2010, someone paid 10,000 bitcoin to buy pizzas for $25. Today, bitcoin is worth about $21,000usd, and that pizza would cost $210,000,000. So how did these values come to be? For the exchange transaction of 5,050 bitcoin, they calculated the value using the cost of energy it took to produce those coins. And the pizza was done on a peer-to-peer value and set the tone for bitcoin's peer-to-peer market moving forward. A bank was not needed for that transaction, and it was the start of a reliable and operational example of digital sound money. 

Sound money is money that can't have its supply inflated. Sound money allows people to think long-term and invest their hard-earned capital to appreciate for their future generations. This is key for human civilizations because, without sound money, people can’t properly plan for their future because they think too short term. And without people planning for their own personal futures, how can humans improve as a society?

Inflation isn't things getting more expensive; it's the money those things are valued in decreasing in worth. This happens because the government artificially inflates the supply of our dollars. With Bitcoin, they can't do this. No one can.

Money started as bartering in small social circles where people trusted one another. Barter still exists today; only it's impractical on a grand scale. It requires people to trust one another, so a sophisticated society is bound to run into issues. There is also an issue called the problem of coinciding wants. This means what you want to acquire is made by someone who does not want what you have to give, which makes it impossible to acquire what you want. 

Bartering doesn't work anymore for 3 main reasons. First, if a shoe is worth $100 and you cut it into 3 pieces, each piece won't be $33.33; it will be $0 now. Money needs to be able to be split up, and bartering objects can't all perform this function.

Second, the time frames of goods don't always align. 100 apples today in perfect ripeness are not worth the same as they will be if they are left to decay over 1 month. So trading apples for something that never expires causes the time frames to be misaligned for both goods.

Third, your house is valuable to people around you in your physical location. But it's not valuable to someone who doesn't live in your location and doesn't want to. In fact, it's worth $0 to them, and only houses in their area are worth their proper amounts. 

Money needs to be easily divisible, portable, and have a time preference that never allows it to expire or decrease in value. Investments do not count because they have the risk of failure, and sound money should not have any risk. Investments are also less liquid than sound money because society is very uncertain. So you can't be 100% confident that you can instantly take all your money out at any moment. With sound money, you should be 100% confident.

Throughout history, humans have used various forms of money, such as gold, silver, copper, seashells, stones, salt, cattle, alcohol, and cigarettes. We now most popularly use pieces of paper within our society (aka "fiat," which comes from the Latin word "let it be done"). They are literally pieces of paper.

Carl Menger, the father of the Austrian School of Economics, says the key property for money is salability. Salability is the ease that a good can be sold on the market with the least loss in price. Sound money must have salability across scales, space and time. 

To be salable across scales means that it can be easily divided up (divisible). Being salable across space means it can be easily transported (portable). To be salable across time means it's sound money (never decreases in value). 

To achieve salability across time, its value can never be manipulated. Seashells, salt and cattle were technically salable across time but only to the people within the small society, only for a short timeframe, and they did not know about other production methods. When an increase in efficiency for the production methods occurred, the supply of the "sound money" was easily inflated, thus making it unsound money. This process happens to our paper money because of the government (inflation). 

Inflation de-incentivizes progression within our society. Humans have evolved from fishing with their bare hands to using boats for fishing thousands of fish simultaneously in the deep sea due to sound money. But the sound money is becoming unsound, and no one wants to work for it anymore. 

What are our other options? 

Before we look at the other options, let's look at the options our ancestors of the past chose, why those failed, and where to go from there.