Unit 3 Lecture Notes

One of the common questions people have asked me recently pertains to how one can think of the move toward a global Bitcoin standard. While bitcoin is used in a growing part of the world economy today, its use as a primary money is almost non-existent. If Bitcoin is to become a global monetary standard, it needs to have many orders of magnitude increases in transaction value over time, until it captures a significant portion of the global demand for cash balances. At that point, Bitcoin's market value would be far less volatile, as discussed in the paper I published at the Journal for Structured Finance, which I've attached to the end of this bulletin. As bitcoin holds no more than 0.5% of global demand for cash balances, it has huge potential upside, which in turn invites a lot of short-term speculation on its price. This speculation means it can appreciate significantly. Should bitcoin capture a large amount of demand for long term cash balances, the possibility of it appreciating in value significantly (e.g. the recent increases of 10x per year) becomes less and less likely, and thus less speculative capital will flow into it. Consequently, the demand for bitcoin will primarily tend toward its demand as a long-term store of value, and it'll function more as a monetary asset reflecting time preference only. In a hypothetical end-state in which bitcoin is the only currency used worldwide, variations in its value would precisely reflect variations in the collective demand for a store of value, which in turn is a measure of time preference.

Austrians economists understood that time preference is the prime determinant of interest rates. It is the lowering of time-preference that delays consumption and thus frees up resources for use in progressively longer processes of economic production. The lower a society's time preference, the more saved up capital is available, which means lower interest rates (i.e. a lower price of money). The growing stability of the price of bitcoin brought about by the declining volatility in its demand, combined with its entirely predictable supply, would likely result in the development of a mature lending market that provides a price for future bitcoin in terms of present bitcoin - an interest rate.

Austrian economist Eugen Bohm-Bawerk called the interest rate a measure of a nation's morality. In a world of hard money, the only way to bring capital about is through saving. A society in which people have good moral character is a society in which people save a lot, bringing interest rates downward. This is no longer accurate today in a world in which interest rates are centrally determined by a government monopoly, and so capital can effectively be borrowed into existence at the expense of the future, without people having to sacrifice consumption in the present. Low interest rates in this environment don't involve a sacrifice for the sake of the future, as Bohm-Bawerk would like, but on the contrary, they exist at the expense of the future, through the debasement of currency.

It is important here to stop and stress that I am by no means telling you these outcomes are certain or predictable. The world continues to be far more complex than we would like it to be, and I am not interested in making prognostications. I present this as a vision of how bitcoin could develop into a monetary standard, but of course whether that happens is a completely separate question. And how this happens is yet another completely separate question. I will briefly discuss here one commonly-believed scenario before moving on to outline two less commonly discussed scenarios.

Source: Saylor Academy, Bitcoin monetization scenarios and financial crises
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