The Bitcoin Standard

“How can we create a money system that truly protects its value over time and resists manipulation? The answer may lie in a technology as revolutionary as Bitcoin.”

1. Barter Systems Highlighted the Need for Money

Bartering allowed early societies to trade goods and services directly but failed when preferences didn't match. This inspired the creation of money as an intermediary.

Money solved the problem of “coincidence of wants”—where each trader needed exactly what the other offered. Instead of trading pigs for a cow, ancient civilizations sought universal mediums like shells, grains, or stones. These trade items could be used universally and were desired by everyone.

The inhabitants of Yap Island used massive Rai stones as currency. Though practical on a small scale, the stones lost value when Captain David O’Keefe introduced modern technology to import them in large quantities. This flooding of supply showed that salability over time is vital for sustainable money systems.

Examples

• Bartering limitations forced societies to discover mediums of exchange.
• Rai stones in Yap demonstrated the need for salability over time.
• Overproduction of Rai stones by Captain O’Keefe ruined their monetary function.

2. Gold Emerged as the First "Sound" Money

Gold became the global currency standard due to its unique traits: durability, scarcity, and predictable supply made it a reliable store of value.

Metallurgy allowed civilizations to create standardized coins. Gold’s inherent scarcity prevented oversupply and inflation. Mining required significant effort, ensuring that the availability of gold grew steadily over time without abrupt increases.

King Croesus of Greece minted the first gold coins 2,500 years ago. In the 18th and 19th centuries, gold-backed currencies underpinned economic stability, as nations tied paper money to the gold reserves in their vaults. Britain, in 1717, formally adopted the “gold standard,” followed by 50 nations by 1900.

Examples

• Gold cannot be synthesized, keeping its supply limited.
• Gold coins were used as far back as ancient Greece.
• Britain led the way with the gold standard in 1717, influencing other nations.

3. Governments Manipulated Currencies During Wars

Governments abandoned gold-backed money during wars, printing paper money instead, which caused inflation and economic instability.

During the Roman Empire, rulers reduced the gold content in coins (known as "coin clipping") to fund state expenses. While this temporarily increased their spending power, it also spurred inflation, weakening their economic systems.

In World War I, major European powers suspended the gold standard to fund military campaigns. By printing paper currency not backed by gold reserves, they weakened their economies. For instance, the Austro-Hungarian krone lost nearly 69% of its value against the Swiss franc, which remained tied to gold.

Examples

• Romans "clipped" coins for financial gain, reducing currency value.
• European governments printed unbacked money during WWI for war needs.
• The Austrian krone’s value plummeted against stable, gold-backed currencies.

4. Fiat Money Became the New Norm Post-WWI

After WWI, countries introduced fiat money—currency backed by government decree rather than gold—to avoid revaluing their diminished paper currency.

The shift to fiat money marked a departure from sound money principles. Bretton Woods temporarily anchored currencies to the US dollar and gold, but inflationary practices and economic pressures eventually severed even that connection.

In 1971, President Nixon officially ended the convertibility of US dollars to gold. From that point onwards, currencies were free-floating, with their values determined by market forces alone. This era of fiat money led to chronic inflation and unstable financial systems.

Examples

• Post-WWI governments adopted fiat money to avoid admitting devalued money.
• Bretton Woods tied global currencies to the US dollar until inflation broke the system.
• Nixon’s 1971 decision fully abandoned dollar-gold convertibility.

5. Sound Money Promotes Savings and Economic Stability

Sound money encourages individuals to focus on the future, save, and invest, enabling long-term economic growth.

Under gold-backed systems, people knew their savings wouldn’t lose value, motivating caution and prudent investments. This led to the accumulation of capital goods—resources used to produce other goods—essential for sustainable economic development.

When governments manipulate money supplies, prices get distorted, making it harder for businesses and individuals to make informed investment choices. The result is wasted resources and economic inefficiencies.

Examples

• Gold-backed systems fostered savings, spurring long-term growth.
• Capital goods investments thrived in the 19th century’s sound-money era.
• Government interference today creates wasteful “boom and bust” cycles.

6. Unsound Money Leads to Debt and Recessions

Fiat money has led to cycles of economic expansion and collapse, as well as massive national and personal debts.

Government intervention with fiat systems often involves manipulating interest rates or printing new money. This creates false economic signals, convincing investors to take on more debt than they can repay. Eventually, these bubbles burst, causing recessions.

The Great Depression popularized economist John Maynard Keynes’s theory that governments should spend more during recessions. The result? Ever-growing debts, as nations borrow heavily to pump money into their economies during downturns.

Examples

• Fiat systems caused repeated "booms and busts."
• Debt rose dramatically with Keynesian policies during the Great Depression.
• Inflated money gives false signals to investors, destabilizing economies.

7. Bitcoin’s Fixed Supply Makes It Scarce and Valuable

Bitcoin mirrors gold’s monetary principles. Its supply is capped at 21 million coins, ensuring it cannot be diluted or manipulated.

Like mining gold, Bitcoin mining is computationally intensive and designed to be progressively harder. Additionally, coins are released at a declining rate, becoming scarcer over the years. Beyond 2140, no new bitcoins will be issued, cementing its fixed supply.

Unlike oil or other commodities, no amount of technological innovation can “produce” more Bitcoin. This absolute scarcity gives Bitcoin its unique appeal as a reliable store of value.

Examples

• Bitcoin's 21-million-coin cap is a built-in mechanism preventing overproduction.
• Mining difficulty adjusts as demand increases, similar to gold extraction.
• Bitcoin issuance decreases over time, designed to end completely by 2140.

8. Blockchain Protects Bitcoin from Fraud

Bitcoin is secure due to its blockchain, a decentralized ledger that records every transaction, making fraud virtually impossible.

Blockchain technology means all network users share access to a public record of transactions. Changes to the ledger need majority approval, effectively requiring consensus for validity. Fraudulent transactions must overcome huge computational challenges, deterring potential cheats.

Even if a hacker compromises the network, it would crash Bitcoin's value, making the effort worthless. These mechanisms ensure Bitcoin’s security and give users confidence in its reliability.

Examples

• Blockchain requires multiple approvals for every transaction.
• Fraud needs overwhelming computational power, which is inefficient.
• Hacking Bitcoin would harm its value, disincentivizing attackers.

9. Bitcoin Faces Challenges Before Becoming the Standard

For Bitcoin to succeed as sound money, it must overcome volatility and scalability obstacles.

Bitcoin has experienced extreme price swings, undermining its reliability as a store of value. While rising demand contributes to these fluctuations, a maturing market could stabilize prices over time. Bitcoin must also address its scalability; the network can only process a finite number of daily transactions, limiting its adoption on a global scale.

One proposed solution involves creating centralized systems to manage transactions outside the blockchain—specifically, institutions that trade currencies backed by Bitcoin. However, this might compromise its decentralized principles.

Examples

• Bitcoin jumped from $0.000994 in 2010 to $4,200 in 2017.
• Transaction limits of 500,000 per day create scalability issues.
• Off-chain exchanges tied to Bitcoin might support growth but centralize control.

Takeaways

1. Start educating yourself about Bitcoin’s underlying blockchain technology to understand its potential advantages and risks.
2. Consider Bitcoin as a long-term investment based on its scarcity-driven value but prepare for volatility along the way.
3. Stay updated on regulatory changes and scalability solutions to gauge Bitcoin’s readiness as a mainstream currency.