Bitcoin Standard Ch. 8 & 9

 Chapter 8 Bitcoin as Digital Cash

Paying in cash is handy, because it is instantaneous, requires no third party or regulate or guarantee against double spending (you can swipe your card with no money in the bank, but you can't pay with cash the you don't have), there are no transaction fees, cash can't be hacked, and the government can't track or control cash payments. Digital payments are handy because you don't need to actually carry around all your money, do math, worry about having the right change, etc. Bitcoin has most of the best of both of these worlds, although you do pay small fees-it it typically less than the fees you currently pay with sending fiat money, especially if you are sending large amounts over large distances, like to family in other countries. More on this later. 

At this point the author explains proof of work, the process by which Bitcoin transactions are recorded on the blockchain. In simplest terms, (the only ones I'm capable of using to explain or understand this) computers compete to solve math problems. These problems are difficult to solve, but easy to verify. The first computer to solve it is rewarded in sats. The people running these computers are called miners, because they slowly increase the supply of bitcoin, as miners slowly increase the supply of gold. This really confused me at first. There will never be more than 21 million Bitcoin. So the miners will either no longer have incentive to mine, leaving no one to validate transactions, or they will need to be paid in fees, which will lessen Bitcoin's usefulness, especially for small transactions. This requires what they call "second layer solutions" which don't get thoroughly explained until later. When I asked about it in a FB cryptocurrency group, one guy said, "It's hard to even conceive of what type of second layer solutions we'll have by then". Indeed, the schedule of mining and halving places the fully 21 million being realized sometime after I'll be dead, so maybe I just shouldn't worry about it. But the author outlines one possibility later and, spoiler alert, I'm not really worried about it anymore. 

Supply, Value, and Transactions

Roughly every four years (it's measured exactly by the number of blocks recorded, which happens about every ten minutes) a "halving" occurs, which means that the number of sats that a miner computer earns by being the first to solve the proof of work (PoW) is cut in half. This is because as Bitcoin rises in value, a smaller reward is needed to compensate the electrical output of miners, and because bigger rewards were needed earlier on when few knew about Bitcoin and the promise of its success was less sure. This means the growth rate of Bitcoin will decrease slowly until it reaches its 21 million maximum supply. Its growth rate is set to drop below that of gold by 2025. If you remember, gold's stock to flow ratio is what made it such a good monetary unit for so long. This makes Bitcoin an excellent store of value, because you know more or less exactly what the stock to flow ratio will be, and eventually there will be no more increases in stock at all. In other words, Bitcoin has excellent salability over time. Worldwide digital transfer means salability over space. 21 million Bitcoin that can be broken down into 100,000,000 sats each means salability in scale. 

Some people are turned off by Bitcoin's volatility. It's possible for the price to  change drastically very quickly. But if you understand why that happens, and the long term trajectory of the price, it doesn't seem scary after all. If any other good experiences a rise in demand, the price will rise. People will then be incentivized to increase supply. However, Bitcoin's supply is increased in a steady way that cannot be manipulated to meet increase in demand. Inversely, a decrease in demand cannot trigger a decrease in production, so prices drop. But as we just discussed, Bitcoins stock to flow ratio is changing. Smaller and smaller amounts are being added. As more people accept and adopt Bitcoin as a currency and/or store of value, and as the supply increases at ever smaller rates, the price of Bitcoin will stabilize. Of course, it's always possible that the price will stabilize at zero as people give up on Bitcoin, but I don't see that happening. Tomorrow El Salvador becomes the first country to recognize Bitcoin as official legal tender. Brazil also has a law going into effect tomorrow that will spur Bitcoin adoption, although I'm not sure what exactly. 

Ch. 9 What is Bitcoin Good For?

Store of Value

"The belief that resources are scarce and limited is a misunderstanding of the nature of scarcity, which is the key concept behind economics. The absolute quantity of every raw material present in earth is too large for us as human beings to even measure or comprehend, and in no way constitutes a real limit to what we as humans can produce of it." These are the introductory sentences of this chapter, and it's a radically different view to the one we are taught to have. We talk about renewable resources like wind and solar power, but the assertion here is that all resources are very nearly limitless in that they far exceed what we can really conceive of, access, or use. The only truly limited resource in this view (before Bitcoin, which is strictly limited), is time. If we had infinite time, we could conceivably access more resources. One example discussed is that of oil, which is often spoken of as though we could run out any day now. On the contrary, the amount of oil reserves that have been found or proven to exist has grown even faster than we have consumed oil, even though that in itself is increasing. The only thing limiting our access to it and our access to all other resources is that it takes time and time is the most valuable resource. "There is no better evidence for this than the fact that the rarest metal in teh crust of the earth, gold, has been mined for thousands of years and continues to be mined in increasing quantities as technology advances over time."

Some people who have a scarcity mindset are concerned about over population. This view, that time is the only limited resource, is not worried about that. As population rises, we have more human hours- the only truly limited resource is increased. More people means more time to devote to accessing the resources that allow us to thrive. It also means more technological advances that are non-excludable. Non-excludable means that once it has been discovered, everyone can benefit from it. The example given was that of the wheel. Once invented, everyone could copy it and everyone's life improved. "Ingenious ideas are rare, and only a small minority of people can come up with them. Larger populations will thus produce more technologies and ideas than smaller populations, and because the benefit accrues to everyone, it is better to live in a world with a larger population. The more humans exist on earth, the more technologies and productive ideas are thought of, and the more humans can benefit from these ideas and copy them from one another, leading to higher productivity of human time and improving standards of living."  

Individual Sovereignty 

If you follow Bitcoin twitter, which I do, at least a little, you will have heard people call Bitcoin, "freedom money". Basically this means two things. First, that government can't control Bitcoin. It is inherently and unchangingly decentralized. No one person or entity can change or control Bitcoin, since any changes can only happen with majority support. And the majority will never agree to anything that will compromise or devalue Bitcoin, because it is against their interest. Second, because Bitcoin's supply cannot be inflated, any government using Bitcoin would be held to an actual, balanced budget. (I mean, can you even imagine?) "If Bitcoin continues to grow to capture a larger share of the global wealth, it may force governments to become more and more a form of voluntary organization, which can only acquire its "taxes" voluntarily by offering its subjects services they would be willing to pay for."

Global Unit of Account

If Bitcoin is adopted as a global reserve currency, similar to the way international banking used to rely on the gold standard, it would eliminate the hassle and competition of fluctuating exchange rates. It would streamline international trade and make it considerably cheaper, which would enrich everyone and encourage more peaceful international relations. 

Chapter 10 is the last chapter of the book. It consists of common questions or concerns about Bitcoin and how the author addresses those concerns. Then I'm done! 

I mentioned that tomorrow Bitcoin becomes legal tender in El Salvador. Bitcoin Twitter is talking about everyone buying $30 of Bitcoin to raise the price to show support for El Salvador, making their legal tender more valuable. I'm interested to see how that plays out. I'll probably buy $30 too, just for fun!