tl;dr • Understanding money is the first step to understand why Bitcoin thrives as a store of value • Read The Bitcoin Standard by @saifedean • Get started with Bitcoin by buying some
I've been looking into Bitcoin for a few years now. Some of Andreas Antonopolous's early videos got me quite excited about it in the past, but I confess that until recently my belief in Bitcoin had been purely speculative, and my latest buying spree started for nothing but FOMO. It took a single book to completely change my perspective, a book I wish a had read years back when it was first released. This book is The Bitcoin Standard by Saifedean Ammous.
It may sound somewhat surprising that the first two thirds of what I regard as the most relevant material on why Bitcoin matters barely mentions Bitcoin at all. Instead, Ammous first ensures the reader properly understands key concepts about money and economics – things I wish children were taught in school – and only then proceeds to connect the dots and show how Bitcoin satisfies the requirements of sound money better than anything else.
What is money, anyway?
"Money is an information system that records and updates who has done work that is valued by others" – Allen Farrington, Bitcoin is Venice
Money is any attempt to preserve the fruits of our labor available for future consumption. In its essence, money is anything that is held not with the intent of consumption, but as a store of value to be used in exchange for something else in the future.
Its three essential roles are: store of value, medium of exchange, and unit of account.
Money’s vicious cycle
Whenever something is stored as a form of money its value appreciates, incentivizing people to pursue making more of it.
Excess production, however, reduces its utility as a store of value: As supply increases, wealth is drained from money.
This is why, historically, the things that have been used as money are usually things that are hard to make, e.g. gold, cattle, cigarettes in prison.
Why gold became widely adopted as money in the world?
Multiple societies throughout history independently ended up adopting gold as a store of value.
Gold is very hard to produce and doesn't ruin. Gold’s monetary role emerged due to its high stock-to-flow ratio – the annual production is substantially smaller than existing stockpiles, going up at around 1.5% per year – which makes for its low susceptibility to inflation, hence a great medium to store value through time. Gold, however, is very costly to store and transport.
Why Bitcoin thrives as money?
Anything chosen as a store of value thus far has been vulnerable to having its supply increased in response, thus causing a loss of the value stored. Bitcoin's supply is still growing, yet this growth slows down at a predictable rate until it finally flattens out and stops at around 21 million Bitcoins. It's the first type of money we have that is completely non-responsive to demand. For being the hardest money ever discovered or invented, Bitcoin is excellent as a store of value. Bitcoin is also substantially cheaper to store and transport than gold.
Bitcoin’s virtuous cycle
Demand for Bitcoin as a store of value causes its price to rise and mining to become a more profitable and attractive activity.
With more miners joining the network, the algorithm adjusts itself to raise the processing power needed for mining.
This makes the network harder to attack, completing the virtuous cycle by causing demand for Bitcoin as a store of value to increase.
Ammous sees this difficulty adjustment mechanism as the most amazing technology in Bitcoin. Whereas people compete to make more and therefore inflate other moneys, with Bitcoin people compete to secure it, solving the inflation problem in a very elegant way.
The book explores subjects like how Bitcoin acts as a decentralized free market alternative to central banking, how it fuels low time preference (future focused) behavior, plus a lot more, including a very informative FAQ on Bitcoin’s potential vulnerabilities.
Regardless of if you are just starting to look into Bitcoin, you invest in it speculatively, you are already convinced of its propositions of value, or even if you are a Bitcoin skeptic, for that matter, do yourself a favor and read Saifedean Ammous's The Bitcoin Standard.
When one starts to grasp the underlying value of Bitcoin, it’s quite common for he or she to get excited about buying some. Coinbase and Gemini are great starting points.
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This is not financial advice. I am not a certified financial planner or advisor, just an ordinary guy trying to sort out his own finances, sharing his perspective with no guarantees. Use the information provided at your own discretion. You are highly encouraged to do your own research before making any personal finance decision.