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While Bitcoin is an invention of the digital age, the problem it purports to solve is as old as human society itself: transferring value across time and space. Author Saifedean Ammous takes the reader on an engaging journey through the history of technologies performing the functions of money, from primitive systems of trading limestones and seashells, to metals, coins, the gold standard, and modern government debt. Exploring what gave these technologies their monetary role, and how most lost it, provides the reader with a good idea of what makes for sound money, and sets the stage for an economic discussion of its consequences for individual and societal future-orientation, capital accumulation, trade, peace, culture, and art. Compellingly, Ammous shows that it is no coincidence that the loftiest achievements of humanity have come in societies enjoying the benefits of sound monetary regimes, nor is it coincidental that monetary collapse has usually accompanied civilizational collapse.

Boyapati presents the theory of money, the anatomy of Bitcoin, the reasons it is superior to the gold and fiat standards that came before it, and the promise that it offers to human civilization. He describes path dependence and the trajectory of a newly monetizing asset in terms the layman can understand, and he addresses the concerns that most commonly arise as newcomers struggle to comprehend the essence and significance of this first digital monetary network.

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While bitcoin is a new invention of the digital age, the problem it purports to solve is as old as human society itself: transferring value across time and space. Ammous takes the listener on an engaging journey through the history of technologies performing the functions of money, from primitive systems of trading limestones and seashells, to metals, coins, the gold standard, and modern government debt. Exploring what gave these technologies their monetary role, and how most lost it, provides the listener with a good idea of what makes for sound money, and sets the stage for an economic discussion of its consequences for individual and societal future-orientation, capital accumulation, trade, peace, culture, and art. Compellingly, Ammous shows that it is no coincidence that the loftiest achievements of humanity have come in societies enjoying the benefits of sound monetary regimes, nor is it coincidental that monetary collapse has usually accompanied the collapse of a civilization.

The most important for me is the fixed supply, which makes Bitcoin the first truly scarce liquid asset. We can always make more of anything else on earth if we dedicate more resources to it, but we will never have more than 21 million bitcoin.

In such an environment, it is always with some trepidation that I read a new book on bitcoin. Is this going to be a fanatical screed or a thoughtful study that tries to advance our knowledge? Happily, Professor Ammous of the Lebanese American University has written a book that falls squarely in the latter category. Treating bitcoin from the point of view of Austrian economics, Ammous not only discusses it in terms of monetary theory but also relates it to the theory of the market economy as a whole. His assessment of bitcoin is conservative but still optimistic. Bitcoin is not necessarily an alternative to gold, he argues, but it can function as a global reserve currency and disrupt the role of central banks.

The Bitcoin Standard goes over all the basics of money, investment, and production, the role of time preference, the importance of sound money, and the history of money before he introduces bitcoin. Although this may seem roundabout, there is a clear and reasonable method to this approach: we must know what money is and how society functions before we can understand what possible function bitcoin could have in the modern economy.

This does not mean that bitcoin is useless, or perhaps just a speculative bubble fed by easy money and ideological fervor. Ammous has pinpointed exactly what the function of bitcoin is in the present context: just as owning money in general is a hedge against uncertainty, so too is owning bitcoin a hedge against a specific kind of uncertainty. Owning bitcoin is a way to get around capital controls and embargoes, and other obstacles governments place in the way of free exchange. In short, owning bitcoin is a hedge against what Robert Higgs called regime uncertainty (Higgs 1997). As such, it will regrettably prove very useful for many people in the foreseeable future.

It would work exactly the same way except bitcoin cannot be created by central banks, so it would operate only with intermediation of deposits (this is why understanding central bank reserves is not important for answering your question).

Even though the number of bitcoins is fixed, if you would deposit your bitcoins into some bank account (bank might provide better protection from some hackers getting into your wallet etc), bank would be then able to take portion of the bitcoins on your account and lend it. This is always possible because all people do not need all of their money at all time so bank does not need to keep 1BTC reserve for every 1BTC you deposited into your bank account. So if you deposit 100BTC they could just again keep 10BTC as some sort of reserve and lend rest of the bitcoins you deposited.

This would literally expand money supply even though the number of bitcoins that can be mined is fixed. Even under fiat standard there is a monetary base that is created by government not private banks (we call this often high powered money (see Brunner 2016) - since this is money that can create more money). Under bitcoin the only difference is that the high powered money is not created by governments (central banks etc) but by miners, and also that under fiat there is no maximum cap on amount of high powered money, whereas when it comes to bitcoin there is maximum cap on high powered BTC that can be created.

I already explained how it would work with bitcoin, but I assumed price level would stay constant there. Assuming there is deflation does not change the story much but deflation would affect interest rate so I want to cover that here.

Hence if bitcoin would be undergoing large deflation this would lower interest rates (perhaps even make them negative). For example, if real interest rate is $5\%$ and there is $10\%$ deflation in the economy the nominal interest rate would be:

Yes indeed in our current monetary system bank loans do create money. Sadly many descriptions of our monetary system omit to mention that the repayment of loans destroys money. (Here's a good explanation of the monetary system) So if the rate at which new loans were being taken out were constant (and when I say "rate", I mean dollars borrowed per day, not the "interest rate") then the money supply would not grow at all. So the problem of how does anyone get the money to pay interest exists both within our current system as well as in any potential bitcoin-based full reserve banking system. The answer is that interest is indeed repayable even with a fixed money supply.

After the First World War, financial deficits forced European powers to drop the gold standard. They introduced fiat money, which was backed by decree instead of gold. This switch led to an age of unsound money where governments could intervene in the economy to stabilize the value of their currencies.

Unsound money causes a myriad of problems, like recessions and debt. Interventions of governments distort markets and cause boom and bust cycles. The only solution would be establishing a new gold standard. This is where Bitcoin comes in.

We know it is incredibly promising, but of course, there are challenges. One of these is price volatility. From 2010 to 2017, an individual bitcoin has jumped from $0.000994 to $4,200, a 422,520,000 per cent increase! But in just 2017 alone, bitcoin went from $750 to $20,000.

All of this requires higher transaction fees and more processing power. This might make a compelling case for establishing a currency backed by bitcoin, essentially a new gold standard. However, a centralized institution would have to oversee this.

In 2008, the dollar's global reach enabled an American financial crisis to spread to the entire world, causing a deep recession and long-lasting malaise. Ever since, there has been a deep longing for a more stable international financial system, one that didn't depend on debt, wasn't dominated by the US and was immune to political whims. Some have called for a new Bretton Woods, or even for the return of the classical gold standard.

New generations of Europeans came to the world with no accumulated wealth passed on from their elders, and the absence of a widely accepted sound monetary standard severely restricted the scope for trade, closing societies off from one another and enhancing parochialism as once-prosperous and civilized trading societies fell into the Dark Ages of serfdom, diseases, closed-mindedness, and religious persecution.

As World War I started, the centralization of these reserves allowed these governments to expand the money supply beyond their gold reserves, reducing the value of their currency. Yet central banks continued to confiscate and accumulate more gold until the 1960s, where the move toward a U.S. dollar global standard began to shape up,

Had European nations remained on the gold standard, or had the people of Europe held their own gold in their own hands, forcing government to resort to taxation instead of inflation, history might have been different. It is likely that World War I would have been settled militarily within a few months of conflict, as one of the allied factions started running out of financing and faced difficulties in extracting wealth from a population that was not willing to part with its wealth to defend their regime's survival. But with the suspension of the gold standard, running out of financing was not enough to end the war; a sovereign had to run out of its people's accumulated wealth expropriated through inflation. 17dc91bb1f