The Bitcoin Standard: What, When and How
Published on 08/24/2021 12:19 AM
Saifedean Ammous and Peter St Onge are in the author’s opinion the thought leaders on the Macro economic effects that adopting the Bitcoin Standard would have on the world economy. The Austrian school of economics tends to shy away from making specific predictions and rather focuses on theory and grand outcomes. Mainstream fiat economists, who do tend to make these predictions(which are consistently inaccurate), don’t understand Bitcoin or its value proposition and thus only produce cringe-inducing views such as this.
This leaves a gap of confusion and uncertainty about how, when and what will happen as the world transitions from using fiat currency to adopting Bitcoin as the foremost currency used to transact in the global economy.
This article will try to fill that gap and sketch a picture to the reader of what is possible and what is probable for our economic future on earth. Now let’s get going!
The author is not of the opinion that there is a major depression looming or that the world economy will at some point “collapse”, but rather envisions a long period of transition or realignment. There already exists a parallel economy of people living and transacting only in Bitcoin. This Bitcoin economy will grow while the “fiat economy”(for lack of a better term) will gradually become smaller as time passes and people transition.
Bitcoin adoption will be brought about not by the public choosing to pay with Bitcoin but rather by producers and sellers preferring to be paid in BTC and thus incentivising customers to use it. Expect to see discounts for paying in BTC and sellers accepting only BTC.
This is not to say that there will not be turmoil. The fiat system has injected(2008) and re-injected(2020) the world economy with cheap money, causing malinvestment. At some point there will be a large correction or corrections. Call it a “market crash” if you want. When this will happen is impossible to predict. According to Austrian Business Cycle Theory, the longer it takes for the correction to occur, the more capital is malinvested and the more drastic the correction will be.
This will not jerk a large part of the economy into BTC immediately. The BTC price might even initially fall as everyone panic sells everything. Banks, central banks and governments will not simply roll over and submit defeat. There will be more money printing, stricter laws, higher tax rates etc.
Hyperinflation will occur in some areas, but remember that BTC is right there to be used as a medium of exchange, store of value and unit of account. Weimar Germany and Zimbabwe did not have that luxury. They had to go back to a barter system and this is what decimated their economy as everything came to a standstill. Venezuela kind of half-assed into BTC and things there seem to have gone better than originally anticipated. They also didn’t have a functioning Bitcoin Lightning network, which we already have today.
Some jurisdictions will choose to “ban” or outlaw or heavily tax BTC, making it harder but not impossible for people in such a jurisdiction to transact in it. Productive people will slowly cipher from those areas to the areas that freely accept or embrace BTC, these areas will flourish. Eventually, the areas that chose to go against BTC adoption will either have to start accepting it, or be turned into an unproductive wasteland as they are outperformed by the rest of the world. Imagine something similar to the USSR eventually having to submit to a form of capitalism.
As has been happening for the last 10 years, whoever chooses to adopt the Bitcoin standard earlier, will be wealthier compared to later adopters. This will become more evident as time passes. There will be individuals and institutions who refuse adoption for decades, eventually living in non-Bitcoin enclaves.
The transfer of wealth will be significant, but not as spectacular as many Bitcoin maximalists imagine. Wealth is kept in assets. Property, machinery, knowledge, goods, resources. Bitcoin adoption will not destroy this wealth, the prices of these will simply be denominated in BTC instead of fiat. This includes stocks.
Companies and industries that produce real-world value will flourish. Mining, manufacturing, technology, distribution, retail, etc. Their share prices will take a hit when the correction(s) happens, but this has nothing to do with BTC. At this stage markets are overvalued when compared to historical data and prices should readjust in the future.
One sector that will go through a massive transformation: Banking. It is worth taking a closer look at what could happen in this space under the Bitcoin standard.
It would be fair to argue that banking will be reduced to what it was under the gold standard. Banking is simply a dignified form of money lending, the banker having the advantage that the money which he lends is not his own but other people’s. It has been deposited with him for the sake of interest that he pays on it. The banker’s business is to lend this money out again at higher rates of interest than he pays for it, pocketing the difference as a reward for his trouble.
Banks perform an important and significant role in society. It is through their agency that capital is transferred from those who cannot or will not employ it in industry to those who can. In this way, a banker increases not the total amount of capital in existence, but the total amount available for production. This is an important service for which a bank deserves to be paid.
Under the Bitcoin standard, the income and value of banks will be largely reduced to whatever the market will be willing to pay for the above-mentioned service. Note that under the gold standard, the public had paid a fee to the bank for the “safekeeping” of their capital. Because it is safer for an individual to secure her BTC herself rather than entrust it to a third party, banks or whoever will perform the capital distribution function will have to incentivise depositors in order to obtain their BTC.
There are already other options available with DeFi and the like. Who knows what novel capital distribution methods the free market will come up with when innovators are allowed to innovate in this space.
Whatever happens, in the long run banking stocks will inevitably lose value in real terms as the space they are practising in with their regulation given oligarchies shrivels into oblivion. Some banks may innovate and thrive, the free market might even allow for some form of fractional reserve Bitcoin banking if the risk appetite exists, but under the Bitcoin standard there will not be free money being handed out to the connected few.
Value, Interest rates, inflation and deflation
Disclaimer: I adhere to the Misesian view which follows that inflation is the increase in total money supply in the economy. Deflation would be the decrease in money supply. If the total money supply in an economy is suddenly reduced from previous levels, I wholly agree that this could and probably always will have devastating effects. This phenomenon should not be confused with a monetary unit’s increase in value when compared to economic goods, which is also termed “deflation”, but will have many positive effects on the economy and on society.
Let’s assume for a second it is the year 2035 and Bitcoin is the world’s most widely used currency. What could we expect inflation and interest rates to be?
Total value or market cap of Bitcoin: I have zero doubt that BTC will eventually reach $10m per coin. The problem is that at that stage a coffee will probably cost $5000 as the value of the USD will be close to zero in today’s terms. Thus, calculating the value of Bitcoin in terms of future USD prices is a futile exercise. Yes, when measured in USD, Bitcoin’s potential value really is ∞/21m.
Predicting what the purchasing power of BTC against goods and services would be, and expressing that as a number in terms of USD value today, that is a far more complex and debatable topic. One on which you will break your brain many times over while trying to contemplate. I will attempt to discuss this in a future article.
Once the price of BTC stabilises and is widely used as the world’s premier unit of account, a period of semi-permanent deflation(in Bitcoin terms)will set in. That is, the value of your currency will appreciate when compared to goods and services. This will happen not because the total amount of currency is reduced but because the total amount of purchasable goods will increase compared to the total amount of currency in existence and also because of technological advances that cause goods to become more affordable. It is important to note that this is and was the natural state of the world before governments and banks started to fuck with your money.
Interest rates will be determined by the free market. Whatever rate a lender and borrower agree upon will be the rate paid.
Interest rates can be viewed as the cost of capital. On the free market, this has historically been between 3% and 6% per year. How does this all fit in with the deflation though? Let’s assume an entrepreneur in the future wants to borrow BTC for a new project. He will find a willing lender(probably through DeFi or some form of a bank) and borrow the BTC at an agreed upon interest rate. Let’s say its 4%. If the entrepreneur expects that deflation will take place during the period of the loan, he will simply add the expected deflation to his cost of capital calculation.
Interest rate: 4%
Expected Deflation: 2%
Total cost of capital per annum: 6%
This will not decentivise the economy from growing or entrepreneurs from borrowing. Under the fiat standard, we have seen interest rates go up to 15% or much higher in some places, even when deducting the rate of inflation.
What will be drastically reduced is the fee that the middle man takes for arranging the loan(as discussed before). What we know today as the difference between the repo and prime rates. On a free market, whoever offers the lowest “fee” for arranging the transaction will outcompete the others, and with modern technology, this fee should be negligible.
Under the Bitcoin standard and with modern innovation, the distribution of capital would be much more efficient, as someone in Africa for example, would be able to borrow from someone in Europe or the USA at the same rate as others. This will cause world wide competition for capital and whoever is most efficient in allocating that capital will thrive.
This brings me to what I consider the single most beneficial aspect that the Bitcoin standard brings to the world. Enabling free trade between those who choose to use it. The very fact that two parties choose to trade with each other willingly, implies that both parties benefit from the transaction. The more such trades happen, the better off everyone involved is. Being able to pay easily, instantly and cheaply anyone around the globe, will enable more trade to take place, especially on the ground level for people who were previously unbanked.
I hope that reading this has opened your mind to the possibility of a prosperous and peaceful transition to the Bitcoin standard. Economics is the science of human life, values, and action. The longevity of our civilisation rests on our economic understanding. In the long run, the natural laws of society will play out. What is effective for prosperity and what is not will become more and more evident.
May the best currency win.
Thank you for reading. I am open to engagement with anyone if you have questions or want to debate, share your views or just chat, hit me up on twitter. Seriously, don’t be shy. Also, if you found value in this article, please share it with your friends. At this stage I am a free agent so if you want to publish, use or reference my work I would be happy to give permission.
Check out some of my other writings here:
Or, if you are into fiction and satire:
Bitcoin and Deflation
A Life in (Fiat) Recovery
Bitcoin is pristine, homogenous collateral
Bitcoin is just math.
A layman's guide to understanding money supply.
Episodes of hyperinflation.
Warning: This might change your life
Bitcoin is the best treasury reserve asset.
The great currency debasement of the Roman Empire