George Gilder sent me a pre-publication draft of The Bitcoin Standard by Saifedean Ammous. We exchanged many emails on the topic of Bitcoin and cryptocurrency. This is Part II of my reply to George after reviewing The Bitcoin Standard.
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I have been vaguely hinting about possibilities, but let me give a bit more detail. I know that we see things similarly and are on the same page.
Here are definitions.
Deflation – an increase in value from a monetary standard.
Inflation – a decrease in value from a monetary standard.
Inflation and Deflation, therefore, have the same definition – a decline of the monetary standard.
Monetary Standard – an optimum monetary reference that eliminates inflation or deflation. Debtors and creditors are in equilibrium when an optimum reference is maintained. The exchange of goods, services, and trade are most efficient when the monetary standard remains fixed.
Historically, mankind has determined that gold is the monetary standard. It’s not perfect, nor scientific, but is the only monetary reference that can reliably act as a standard. Gold has done this job wonderfully for centuries.
Bitcoin offers the Rothbardian (independent of Austrian) dream. Its supply is both free from government control and limited. This parallels the desire of Rothbardians to have only gold act as money. Nathan Lewis details all the problems with this in his excellent piece, Response to Rothbardians. Nathan wrote this in 2002 when he worked for Jude Wanniski at Polyconomics.
Bitcoin’s fixed supply design is by definition problematic.
- It is deflationary, so it is a decline in the monetary standard.
- Because it has a predictable and determinate deflationary increase in value, there is no incentive for it to act as a transactional currency. Any use as a medium of exchange today means you are giving up a predictable and determinate increase in value in the future.
- Infinite divisibility does not solve this problem.
I consider the problem of Bitcoin and the promise of the blockchain and cryptocurrency and wonder, what is possible? Can the limiting problems of Bitcoin and its effect on the blockchain be overcome?
Since gold is the only monetary standard of reference, for a cryptocurrency to act as a standard of reference, it will have to either mimic gold or be linked to gold. There is no other possibility. There is nothing other than gold to compare with or to use as a reference in the monetary realm. If gold is ignored, you are attempting to reinvent the monetary wheel while discounting monetary history. You are regressing.
What makes gold a monetary standard (beyond its properties which there is no need to address) is its lack of a capital component which combined with its preciousness results in a constant annual supply. It is gold’s massive stock compared with its minimum flow that makes its value stable.
Cryptocurrency offers the same properties as gold in addition to infinite divisibility. The solution requires . . .
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The rest of my reply discusses a solution for Bitcoin, cryptocurrency, and the blockchain. Imagine that in the early days of the internet, the promise of multiple computers communicating on a single network existed, but a programmed design flaw prevented the network from expanding beyond limited use. There would be monetary speculation in that promise, but the incentive to create the infrastructure and apps that turned a network invention into today’s massive, disruptive World Wide Web would have never been realized.
That is where cryptocurrency is today in terms of marketplace transactions. The promise is there, but the infrastructure will not get built unless cryptocurrency can act as a reliable currency. With a reliable cryptocurrency, a decentralized blockchain follows with even greater potential for disruption and positive change. This is the subject of Gilder’s new book, Life After Google.
The crypto community needs to decide whether it wants a crypto plaything with speculative returns offset by a short shelf-life. Or do they want to realize the promise of cryptocurrency and the blockchain and create a decentralized stable currency beyond the control of government and elites that unleashes the next wave of human potential?
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I closed my reply with this:
Why is this necessary since Bitcoin is already accepted despite its faults? Because gold’s earthly supply will someday be reached, and mankind will still require an unchanging monetary reference. Virtuous human progress demands an unchanging monetary reference. There is no way around it. The blockchain offers a technological solution. I believe it is the natural evolution.