Keith Irwin

The Bitcoin Standard

You've heard the argument by fans of the gold standard that fiat currency isn't backed by anything; it's just paper that they can print arbitrarily. Better base your paper on a mineral. That stuff is real.

What makes fiat more than just pieces of paper is the belief that it will have value in the future. The fact is, it doesn't have to be backed by anything except this belief. Gold actually works the same way. Sure it can be used for jewelry and industry, but so can diamonds and copper. What makes gold money and copper a metal? It's gold's millennia-long history of use as money, which induces the belief that it will continue to be valued as money into the future.

Gold vs Dollars

Since both gold and fiat are belief-based monies, is one better than the other? Let's compare gold, the metal, with unbacked paper dollars.

The primary disadvantage of gold is that it's hard to spend. It's a heavy rock that can't be easily carried around or broken up for small transactions.

The primary advantage of gold is that you can't just print more of it. Printing fiat lowers the spending value of individual notes and causes inflation, for a time. Those in charge of the mints have undue power over our economy. But gold is not perfect in this sense, because it can be mined just the same. The California gold rush of the 1840s had a notable inflationary effect on U.S. dollars, which were gold-backed.

So do we want our money's value to fluctuate based on stochastic geological processes? Or do we want it to fluctuate based on the whims of a central bank or treasury? Neither system is inflation-proof.

The purpose of money

There are three main uses of money:

Since the third is arguably a subset of the first, I will only consider the first two for now.

What makes gold a good store of value is that it can't be easily printed by central banks or treasuries. What makes currency a good medium of exchange is that it is lightweight and easy to spend. Gold is a bad medium of exchange and fiat (more readily subject to inflation) is a bad store of value. Backing currency with gold was one decent solution, but still subject to the aforementioned Gold Rush problem.

I want to believe

Other problems with fiat, gold-backed or not, were well summarized by Satoshi Nakamoto, Bitcoin's pseudonymous creator, in his/her/its/their introductory post on the subject in 2009:

The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.

(For simplicity I will hereafter use the he/him pronouns when referring to Satoshi)

Since Bitcoin's creation, there have been many other cryptocurrencies, and to be fair, most of them have been scams. But by being the first blockchain ecurrency, and the most famous one, it's the most likely to be worth something in the future. Despite its youth, Bitcoin is poised to be as believable a money as gold and dollars are.

Satoshi left two "proofs" that his invention was not a scam by demonstrating that he was not motivated by fame or fortune:

(There has been a bit of media coverage that some of Satoshi's fortune has been cashed out, but this has been debunked.)

Several people, most famously Craig Wright, have claimed to be Satoshi, but none have been able to withdraw any of his early 1 million BTC or even sign a cryptographic proof with the private key (which would prove ownership without revealing the key or moving the coins). The only conclusion is that Satoshi's motivation was to make the world a better place, and nothing else.

The message he signed in the first block (the genesis block) explains why he thought Bitcoin needed to exist, while also proving that it hadn't been created earlier.

The Times 03/Jan/2009 Chancellor on brink of second bailout for banks

CBDCs are here, soon, probably

Central Bank Digital Currencies (CBDCs) are cryptocurrencies created and endorsed by national central banks and treasuries. It seems as though governments are starting to realize that their current un-backed system of money is in danger, and so is the racket currently run by payment processors. Thus, China has created a digital yuan and the U.S. federal reserve is considering implementation of a digital dollar.

I have talked to investors who think this will be the end of Bitcoin and other free cryptocurrencies. ("free" as in freedom.) The argument goes that once the feds issue a cryptocurrency backed by the limitless faith in the U.S. government, people will stop believing in bitcoin and other cryptos that aren't endorsed by the state.

I strongly disagree with this notion, and point to the fact that fiat currency has not made gold obsolete. Not by a long shot: gold is still bought and sold at a value much higher than what it should be based on its use in industry. Gold is still traded as a belief-based money, and so will Bitcoin, after CBDCs are created and adopted.

Bitcoin is the original, non-scammy, most believed-in cryptocurrency, and is an excellent store of value even if it's not a good medium of exchange. If we live in a free society, the government's CBDC will be backed by bitcoin, and not by belief in the government. This has all the advantages of the gold standard with none of the disadvantages:

Backing a CBDC with Bitcoin also solves the problems that make Bitcoin a poor medium of exchange. Since the Bitcoin are held (HODL'd) in storage instead of being transferred around, there are very few transactions occurring on the Bitcoin blockchain. As a result, Bitcoin's throughput would not be an issue. Nor would Bitcoin be such a threat to the environment, as few transactions mean little mining.

^ 2022/11

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