Unit 7 Lecture Notes

As discussed briefly in The Bitcoin Standard, the government policy that would likely be the most destructive to bitcoin would be implementing a gold standard similar to that of the end of the nineteenth century. All government restrictions on bitcoin are restrictions on financial freedom, and these are exactly what create demand for bitcoin, creating more incentives for people to use and hold bitcoin. Given that the technical requirements for operating bitcoin are increasingly simpler to attain, the government activities that aim to restrict bitcoin will inevitably result in more incentives for people to overcome these restrictions.

Contrary to the statist instinct to want to ban anything that sounds objectionable, the more effective path for governments to undermine bitcoin would be to undermine the economic incentive for people to use it, which would mean increasing the financial and monetary freedoms that individuals have. The monetary system that would allow governments to maintain some form of monetary control while allowing the largest margin for free market in money would be the adoption of the gold standard. While theoretically a government could introduce a hard money standard with its own currency, and commit to not increasing the supply beyond a specific per cent, such a commitment will never be as credible as using gold as money and thus tying government's hands. A government commitment to low inflation and relative financial freedom would likely prevent mass adoption, but actually returning to a gold standard could have more serious ramifications for bitcoin.

A world with a gold standard would look very different from today's world, particularly in terms of the role of government and the extent to which it would intervene in its citizens' lives. If one thinks of the main drivers of bitcoin adoption, none of these existed under the gold standard.

Under the gold standard, there were no examples of hyperinflation or high inflation as we witness across the world today, driving significant demand for bitcoin. Governments were highly unlikely to impose high taxes that would provide a very large incentive for storing wealth in moneys outside the reach of the state. The notion of a war on drugs or chemicals was an absurd idea at that time, as governments could not finance such ridiculously unproductive nanny policing and the heavy cost it inflicts on society. Arguably, as discussed in Chapter 8 of The Bitcoin Standard, it is the absence of a politically-neutral market-chosen medium of exchange, that is at the root of financial markets becoming highly volatile markets for short-term gambling rather than a mechanism for the long-term allocation of capital, as it was in the gold standard era. I would argue that a move back to hard money would even seriously curb the gambling instinct that has driven much of the demand for bitcoin. In a society with hard money, people are likely to be far more discerning with allocating their hard money and as a result, the demand for experimental highly volatile digital cash is likely to be lower.

A move to a gold standard would undermine all of these drivers of bitcoin adoption, and it remains an open question whether in such a world demand for bitcoin would be enough to prevent attacks and secure the network.

While many bitcoiners are dismissive of the monetary role of gold as being an analog heavy inefficient version of bitcoin, I would urge them to be more cautious, as gold has been written off many times before, and yet it has been playing a monetary role for thousands of years, and there are good reasons to still believe its days are not over yet.

Gold currently has a far larger liquidity pool than bitcoin. The value of all the mined gold stored and held is in the range of around $8 Trillion, more than 100 times larger than the value that is stored in all the bitcoins currently in circulation. This very large pool of liquidity means gold currently has far more salability than bitcoin. In other words, for someone looking to buy or sell something, the probability that they will find a counterparty for that trade willing to pay or accept gold is far larger than the chance of finding someone willing to pay or accept bitcoin. A move to gold would be far more palatable for the majority of the world's population, since they either own gold or currencies backed by gold. Gold also has a 6,000 year first mover advantage over bitcoin, it is easier and more intuitive for people to understand trade in gold coins or gold-backed assets. Handling private keys securely is not exactly very easy, and is arguably outside the scope of technical competence of many, if not a majority of, people alive today. Such objections have been leveled at every new technology, of course, but in many cases people have learned to use difficult new technologies like cars, computers, and phones because it was very useful. Bitcoin might well turn out the same, over time, but there is one factor that makes this more tricky because competence in the use of bitcoin is related to competence in programming, a highly specialized field in which the highest levels of competence are concentrated in a very small number of people. The hierarchical nature of this knowledge means the vast majority of people will always be at a strategic disadvantage compared to a small number of people with much better technical skills. Even though the code is open source and people can verify it before they run it, the ability to understand and operate with the code will never be equally distributed. It might just be the case that this kind of asymmetry in knowledge and competence will lead to the constant proliferation of scams, thefts, and hacks that prevent the widespread adoption of bitcoin and keeps it on the fringes. The sounder the government-offered monetary alternative, the less likely such burdens are to be overcome. A return to the gold standard offers the best chance for a government-controlled monetary system to survive the threat of bitcoin.

A gold standard would curtail the ability of government to intervene in the banking system and protect incumbents from outsiders, which would likely unleash innovation and experimentation in financial systems. With free market competition and innovation, it is not difficult to imagine the development of highly convenient payment technologies backed by gold. There is no reason that any of the modern payment innovations developed over fiat money and digital currencies cannot be implemented on top of gold, with 100% reserve backing.

How realistic is this threat to bitcoin? For starters, even if this were to all come to pass, it might just delay the adoption of bitcoin, but not change the long-term reality that would arguably be dictated by the higher stock-to-flow ratio of bitcoin. Even if new adoption of bitcoin slows down considerably, and there are significant crashes in the price, the slow increase in the supply will still make bitcoin likely to recover and appreciate in the long run and hold value better than more inflationary alternatives.

Is there a possibility of a return to the gold standard? Politically, democratically and intellectually, no. Modern political institutions, academia, media, and public opinion are largely shaped by Keynesians and statists. The monetary role of gold is viewed with scorn and disdain among the vast majority of the educated and influential members of society. There are simply too many Kenneth Rogoffs, Paul Krugmans, and David Graebers selling people the delusion that government control of money and banking is an improvement over having the free market select the hardest money. Those people will never believe in gold, and will continue to shape public opinion and political power toward centralization and political control and monopolies over money. The corporate interests that benefit from easy money are far too strong to imagine any kind of monetary reform emerging from the political process.