Bitcoinist Book Club: “The Bitcoin Standard” (Ch. 9, Part 2, Instant Settlement)

It’s time for The Bitcoin Standard to speculate. How might bitcoin’s status as a store of value and even as an international reserve currency develop in the future? As the asset and network prove their worth as a new alternative to traditional finance, the world will look at bitcoin in a new light. How will older players react when they understand the new kid on the block superiority?

To conclude the ninth chapter, Dr. Saifedean Ammous explores bitcoin’s possible role in international settlement and as a global unit of account.

Remember that The Bitcoin Standard was published in 2018. Most of what you are about to read are predictions that came true. But first…

About the coolest book club on earth

Bitcoinist Book Club has two different use cases:

1.- For the superstar-executive-investor on the run, we will summarize the must-read books for cryptocurrency enthusiasts. One after another. Chapter by chapter. We read them so you don’t have to, and just give you the meaty bits.

2.- For the meditative bookworm who is here for the research, we will provide liner notes to accompany the reading. After our book club finishes the book, you can always come back to refresh the concepts and find important quotes.

Everyone wins.

So far we have covered:

• Prologue and Chapter 1
• Primitive money (Chapter 2)
• Why gold? (chapter 3Part 1)
• History (chapter 3part 2)
• Gold standard (Chapter 4Part 1)
• Government money (Chapter 4part 2)
• Money and hyperinflation (Chapter 4part 3)
• Time preference (Chapter 5Part 1)
• Capital accumulation (Chapter 5part 2)
• Price (Chapter 6Part 1)
• Unhealthy money (Chapter 6part 2)
• Economic thought (Chapter 7, part 1)
• Inflation (Chapter 7, part 2)
• Digital money (Chapter 8, part 1)
• Proof-of-Work (Chapter 8, part 2)
• Buy the future (Chapter 9, part 1)

And now, let’s return to The Bitcoin Standard: “Chapter 9, Part 2: Instant Settlement”

The section begins by framing the bitcoin network as “a new independent alternative mechanism for international settlement that does not rely on any intermediary and can operate completely separate from the existing financial infrastructure.” And by establishing one of bitcoin as the asset’s most important characteristic: “It is far easier to move around a Bitcoin private key than a stash of gold, and far easier to send it around the world without risking it being stolen or confiscated. “

Then it’s time for the first prediction. This has not been fulfilled:

“Bitcoin can be seen as the new emerging reserve currency for online transactions, where the online equivalent of banking will issue Bitcoin-backed tokens to users while keeping their Bitcoins in cold storage, where each individual can audit in real-time the balance of the intermediary, and with electronic verification – and reputation systems capable of verifying that no inflation is taking place.”

Also, no other token seems to be needed. Bitcoin itself is divisible enough. However, projects such as fedimint propose Bitcoin-backed tokens, so perhaps Ammous is a little too ahead of the curve.

The Bitcoin standard for instant settlement

The book recognizes one of bitcoin’s main advantages, it offers instant final settlement. And do it for large payments, “over long distances and national borders.” As a medium for settlement payments, bitcoin not only competes with central banks and traditional financial institutions, “it compares favorably with them due to its verifiable record, cryptographic security and imperviousness to third-party security holes.”

Next, The Bitcoin Standard predicts The Lightning Network:

“The number of transactions in a Bitcoin economy may still be as large as it is today, but the settlement of those transactions will not occur on Bitcoin’s ledger, whose immutability and trustlessness are far too valuable for individual consumer payments.”

BTC price chart for 09/12/2022 on Bitstamp | Source: BTC/USD on TradingView.com

Could Bitcoin Become a Global Unit of Account?

This section starts by describing a problem. When the world abandoned the gold standard, it “destroyed people’s ability to carry out indirect exchange using a single medium of exchange.” In turn, that leads to “the growth of a massive currency industry” that is worth billions but produces nothing of value.

The market seems ripe for bitcoin adoption, but there is a small problem:

“Continued volatility in bitcoin’s value will prevent it from playing the role of a unit of account, at least until it has grown to many multiples of its current value and in the percentage of people worldwide who have and accept it.”

While we used gold, the world had a monetary standard that was “independent of the control of any single government or authority.” And bitcoin promises a return to the ideal state. However, “for this possibility to be realized, Bitcoin must be adopted by an extremely large number of people in the world, most likely indirectly, through its use as a reserve currency.”

For a moment there it seemed we were close to that time, but it was a mirage. We are far away. We are so early.

The Bitcoin standard anticipates the need for something stable

The book predicts that bitcoin will one day be “stable in value, as daily transactions in it will be marginal compared to the amounts held.” However, it is nowhere near guaranteed because “monetary status is a spontaneously emergent product of human action, not a rational product of human design.” However, it’s not as bad as it sounds:

“What may look like better technology for money in theory may not necessarily succeed in practice. Bitcoin’s volatility may lead monetary theorists to reject it as a monetary medium, but monetary theories cannot override the spontaneous order that emerges in the market as a result of human actions.”

As bitcoin adoption increases and money enters the system, “the level of demand for it will become far more predictable and stable, leading to a stabilization in the value of the currency.” If that happens, The Bitcoin Standard paints the possibilities as endless:

“Should it achieve some kind of stability in value, Bitcoin would be superior to using national currencies for global payment settlements, as is the case today, because national currencies fluctuate in value based on the conditions of each nation and government, and their widespread use as a global reserve currency resulting in an ‘exorbitant privilege’ for the issuing nation.”

What the Bitcoin Standard is trying to say is that when all is said and done, bitcoin can be the neutral currency of global settlement that the world so desperately needs. It may even be the only option with the necessary qualities to fulfill the role. If needed, bitcoin will be there. Validates block by block by block.

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