Table of Contents
Whereas The Bitcoin Standard focused on examining bitcoin’s salability across time, this chapter explains how bitcoin compares to fiat and gold in terms of its salability across space. As a present good whose value is not incumbent on credit obligations, bitcoin allows the world to escape from debt monetization and universal indebtedness. Unlike fiat, bitcoin is money without the need for the commands or regulations of any central authority. This allows for a separation of money and state. Bitcoin is, moreover, a neutral global currency that can obsolete the many geopolitical problems that have resulted from one country issuing a global reserve currency.
Salability Across Space
Consumer-facing payments based on any monetary medium can be instantly made between any two accounts with liquidity on the same proprietary network. Instant payments already exist with fiat applications. They could easily be adapted for gold, silver, bitcoin, or even seashells as the underlying asset. But comparing bitcoin to fiat-based money transfer systems is not very informative, and those who harp on such comparisons are likely misunderstanding the difference between consumer payments and final settlement. The correct comparison of salability across space can only be in terms of the final settlement of the asset.
Final settlement in fiat between financial institutions takes days domestically and weeks internationally. The mechanics of this process involve largely opaque shifts between central banks’ nonpublic ledgers. Bitcoin, on the other hand, is currently proven to carry out half a million final settlement transactions every day in a way that is transparent, predictable, and public. Bitcoin offers a settlement whose finality increases every ten minutes and a system that has not reversed a single confirmed transaction once in its first twelve years of operation. This settlement can only be compared to the physical movement of gold, but the lack of material and physical form gives bitcoin a significant leap over gold in its salability across space.
Unlike gold transaction fees, as discussed at length in Chapter 6, bitcoin transaction fees are independent of the distance traveled and the size of the transaction. The implications of this for bitcoin’s competitiveness against other monetary systems are enormous. Consider: sending one satoshi to your next-door neighbor costs exactly as much as sending 100,000 bitcoins, worth billions of dollars, from the U.S. to China. While transaction fees are currently under a dollar, it is probably safe to assume they will rise significantly in the future, but the fee will always be independent of the distance between transacting parties. Physical distance is irrelevant on internet-native money like bitcoin. The digital ownership of bitcoin on-chain is completely divorced from any physical location on earth. As the value of a gold transaction increases, the cost of moving it a certain distance increases. As the distance through which a gold payment needs to move increases, the cost of moving a certain amount of value also increases. Gold’s salability across space declines with transaction value and distance, but bitcoin’s salability is unaffected by these factors.
This can help us understand why bitcoin transactions continue to rise in value over time and will likely continue to do so. Bitcoin transaction fees can be a significant percentage of the value of a small transaction, but they are a very tiny percentage of large transactions. A bitcoin transaction fee of one dollar can be 100% of the price of your coffee, but it would be 0.0000001% of a billion-dollar transaction. Alternatives for buying a coffee are far more likely to be preferable to an on-chain bitcoin transaction than alternatives for the final transfer of $1 billion. This also suggests bitcoin on-chain transactions will likely be used increasingly for international money transfers rather than domestic money transfers. The domestic options for money transfer will likely be cheaper than international options. This is due to the increased costs of conducting transfers across central bank networks. As bitcoin block space becomes scarcer, domestic transactions will be gradually priced out in favor of international transactions whose parties will value the block space more.
As it currently stands, it costs around $3,000 to send a 400-oz good-delivery gold bar, worth around $750,000, across the Atlantic. A similar amount of economic value sent over the bitcoin network currently costs around $1. But as bitcoin continues to grow, you would expect this fee to rise significantly. Still, it has a long way to go before it matches the price of a cross-Atlantic gold transaction. Even a one-hundred-fold appreciation in bitcoin transaction fees would still leave the cost of the bitcoin transaction at around 3% of the cost of transporting the good-delivery gold bar. The comparison becomes even more favorable for bitcoin as the economic value transacted increases. This is because the transaction cost rises with the increasing physical weight of more gold but does not rise for bitcoin.
In terms of time, the gold transaction needs at least an entire day to be shipped to and from the two airports, fly over the Atlantic, and clear customs. The bitcoin transaction’s clearance will take a few hours, depending on the number of confirmations the recipient wants. But perhaps the most important aspect of salability in which bitcoin improves over gold is in the ease of verification of transactions. Running a bitcoin full node costs around $100–$700 as a one-time setup cost. It can then verify the validity of all bitcoin payments at a marginal cost per transaction that is almost negligible, as it has a small daily running cost in terms of electricity, bandwidth, and hardware depreciation. By contrast, verifying the honesty of a gold transaction is significantly more expensive. Spectrometers exist that cost several thousand dollars and can verify the content of coins and bars. But for good-delivery 400-ounce bars, the thickness of the bar means that the only way to be 100% sure of the content is to melt the bar and make a new one. When the Bundesbank repatriated gold from the U.S. Federal Reserve in 2020, it melted them all into new bars to verify the purity.
The current global system of gold trading has at its base layer the London Bullion Market Association good-delivery bars. These are all marked and serialized. They must remain held by participating custodians and can only move between them. Should an owner of one of these bars choose to take physical delivery of it, the bar will no longer be part of the LBMA’s network of bars. The owner will have a large brick that is expensive to send anywhere in the world, and expensive to break into smaller pieces.
Looking closely at how the gold market works is another useful way to understand the rise of fiat. Even gold trading is effectively done by fiat, with all participants having to trust a central organization to assay and guarantee gold bars that nobody else can verify and tamper with. With costly verification and difficulty of conversion into other monetary unit sizes, these LBMA bars become like digital tokens in an independent payment platform. This is not vastly different from bitcoin or fiat. The fact that the operation of this network depends on the authority of the LBMA makes it far more like fiat in its nature. The hardness of gold becomes less consequential to its operation when it increasingly resembles a fiat token on a proprietary payment network. It is precisely the absence of a cheap reliable free-market option for gold clearance that made its monetary role untenable in the twentieth century.
The higher the salability of a money across space, the more it can travel without needing third parties, the lower the cost of redeeming it out of a banking system, and the harder it is for the rail operators to tamper with the supply. The more expensive the cost of redeeming and verifying the underlying tokens, the more leeway the rail operators have with compromising the hardness of the money under their command. On a gold standard, the prohibitive costs of trading across significant distances reduce it to the equivalent of trading on a centralized scorecard managed by the operators of the rails. The premium gained from having a money placed with a centralized custodian declines the more salable the money is. The easier it is for a bank’s clients to redeem their liabilities and spend them internationally, the harder it is for banks to increase their liabilities beyond their assets.
While bitcoin-based financial intermediaries are likely to be developed, the asset’s superior salability across space means we can have many thousands, or maybe even millions of banks perform cross-border final settlement on-chain daily. The equivalent in a gold standard was a few dozen central banks. Under fiat, it is under two hundred central banks in name, but in practice, there is only one full node able to validate and reject transactions. The larger the number of entities able to perform final settlement and validate the rules of the network, the more decentralized the network, and the less likely it is to be corrupted to benefit one party at the expense of the rest.
Separation of Money and Debt
Money is a present good that can be exchanged for other present goods in a final transaction which leaves the seller not reliant on the purchaser performing any future obligations. Credit, on the other hand, is a promise to deliver money in the future. Credit can be exchanged for a present good, but the seller of the good requires the buyer to make future payments to complete the purchase. This means credit can only be exchanged for a present good at a discount, reflecting the probability the recipient assigns to getting paid back from the purchaser. An exchange of a present good for credit can only happen among people who have some familial or institutional bond, where they expect future repeated interaction between one another, which would strongly encourage the borrower not to renege on their future payments.
Throughout the twentieth century, trade became more globalized, and as this process unfolded, governments strengthened their grips on gold-backed payment rails and centralized all banking through monopolies they controlled. The best way to understand the gold standard, and its failure, is that the basic monetary asset on which it is built is not just the physical gold, but also the payment infrastructure used by the banks and central banks. As gold banks became indispensable for gold performing its monetary role, their gold was only as good as their credit, making their credit as good as gold. The limited spatial salability of gold meant the monetization of debt issued by custodians and payment rail operators.
An economist or engineer who lived in the nineteenth century would view gold as the monetary asset and the payment infrastructure around it as a secondary layer independent of the gold. A good economist or engineer would view a 100% gold-backed payment system as the desirable and rational way to organize a gold monetary system. But after everything we learned in the twentieth century, the economist or engineer of the twenty-first century is better off understanding the payment infrastructure as part of the monetary system. A party that has monopoly control of the payment system will inevitably end up using this control to further its interests. It does so by issuing more liabilities than the gold it holds.
If you expect the fallible humans of banks, governments, and central banks to act according to what is in the interest of the larger population relying on them, then you think the monetary asset is gold. But if you expect these fallible humans to act based on what their monopoly position allows them to do, you will understand the control of the payment rails itself as a monetary asset, along with the gold. There is no difference between having an ounce of gold in your bank or having a promise from your bank to pay you the ounce of gold. The bank can equally renege on both promises.
The conflation of money and credit has become so entrenched that most modern fiat academics insist that the two things are the same, ignoring the very real differences between the two.
Bitcoin is the live lesson that will eradicate this confusion one block at a time. Every block mined establishes consensus on the present ownership of all coins on the network and establishes who is able to spend how many satoshis in the next block. All satoshis are present goods, ready for final settlement with the next block. Ownership of bitcoin is control of the private keys corresponding to a particular address at a certain block height. There can be no ambiguity about this, and no conflation between future promises of bitcoin with bitcoin. If you have the private keys, you have bitcoin. If you do not have the private keys corresponding to an address, you have a promise from someone else to deliver your bitcoin at a future block height. That promise cannot be used on the bitcoin network, and so it has lower salability than the present ownership of bitcoin and will inevitably be discounted to it. Bitcoin’s superior salability across space also means it is relatively cheap for bitcoiners to liquidate bitcoin deposits to discover if they are actually held on demand, or if they are being rehypothecated. The distinction between future satoshis and present satoshis is very clear and made clearer every ten minutes a block clears, making it harder to issue unbacked liabilities. This enables a clear distinction between present and future goods, and between money and credit.
In the fiat standard, customers have no choice but to deal with their local central bank for banking and settlement of international payments. Thus, central banks can mismatch the maturity of their obligations and give customers fiduciary media instead of money. The monopoly command over the international transfer of wealth protects central banks’ fiduciary media from facing the kind of market test possible with bitcoin-based institutions.
Bitcoin is the zero-maturity asset against which all liabilities and obligations can be placed and measured. With banks no longer able to pass off their maturity-mismatched debt as money, the control of the banking system is no longer a license to print money. Banking returns to being a normal business offering services to customers, rather than a monopoly money-printing operation. Control of banking will no longer offer governments carte blanche to erase all their debts and foist them on their citizens through inflation.
A sizable part of the demand for debt creation in the fiat system comes from the large demand for holding debt assets, such as bonds or other credit instruments, as a store of value. As fiat money itself cannot meet this demand, and as lending also creates new money, there is a strong financial incentive to create debt. Bitcoin is the astonishingly neat technological solution to this problem. It monetizes a hard asset and offers everyone a chance to hold an asset as a store of value that does not have liabilities attached to it. You no longer need others to be indebted for you to have savings. You can hold a hard asset as your savings, and the work that went into it would already have been performed in bitcoin’s proof-of-work calculations. It does not require future production and repayment from the borrower to have market value.
Bitcoin is a global debt jubilee of sorts. This is because its continued growth will likely undermine the demand for the creation of more debt. It could reverse the enormous growth in debt over the past decades of fiat.
Fiat money gives government the ability to spend without limit until the currency collapses. By constantly devaluing the existing money supply with the creation of credit, governments are constantly robbing their citizens’ futures to finance their present-day spending. As long as citizens have any savings, governments can continue to devalue them in an attempt to finance their spending and jackhammer reality into the shape they like.
By demonetizing government credit, bitcoin defangs government fiat. It reinstates reason to a world wrecked with the insanity of reality by fiat. Without the government monetizing its credit, most horrors described in the second section of this book would be impossible. Without the ability to hand out trillions in subsidies and artificially cheap credit to manipulate markets, economic reality will return to shape humans’ incentives, actions, and world.
No government dietary guidelines existed in the U.S., U.K., and likely in most of the world before World War I. Neither did governments attempt to impose the choice of fuels on individuals. The U.S. and U.K. had no public funding for science before World War I. This was the period in which these countries led the world’s industrialization and technological development. The engine, the telephone, the car, the airplane, and countless of the most important technologies of the modern world were invented in the eighteenth and nineteenth centuries. They mostly came about by individual inventors, financed by their savings or the savings of others, and not from government departments. There was no war on drugs in the nineteenth century. The notion of government micromanaging individuals’ lives and choices was quaint before fiat. Fiat’s unlimited spending power makes all these ideas possible by separating the lunatics who pursue them from the costs and consequences.
Neutral global currency
The importance of bitcoin for the world’s poor lies in its ability to obsolete the horrific political and economic arrangements discussed in Chapter 11. Those who think citizens of poor countries need a cheap mass payment network in order to thrive are missing the forest for the trees. What they really need is a politically neutral international monetary system that will finally permit economic development. If bitcoin succeeds as a base global settlement network, the benefits would be of far greater significance than a cheaper payment network.
Economic growth does not happen according to some secret, complicated, or elusive formula. It is a remarkably straightforward process that happens when people accumulate capital, trade, and adopt productive innovations. These are the three drivers of economic growth at any time and place, and today’s poor countries are no different. They have had little capital accumulation in the past and little to no integration into sophisticated global markets, and they have failed to innovate or adopt the innovations of others.
The correct question, then, is not “How can poor countries grow?” but rather “What is stopping these countries from accumulating capital, integrating into world markets, and utilizing advanced technologies?” The answers are as obvious as they are impossible to ever find among the thousands of unintelligible reports published yearly by various development agencies.
Government policies and monopoly control over the currency and banking system have severely punished capital accumulation. Government spending, prompted by the all-powerful International Financial Institutions (IFIs), shackles the population with debt that lasts generations and requires endless taxes to repay. This reduces their ability to accumulate savings from their income. When these debts are used to finance government central planning, most of the population’s productive capital is put in the hands of central planners. Meanwhile, government control of the balance of payment accounts and trade flows scares away a lot of potential foreign investment, free trade, and technological imports.
On a national level, the division of labor and the natural workings of a market economy are sabotaged through the central planning that IFIs impose on developing countries. This destroys the price mechanism and leads to misallocated resources. On a global level, mercantilist bureaucrats hamper free trade and fail to see how critical it is for people’s lives. For them, free trade is a threat to the international cash balance that allows them to continue extracting seigniorage. To cap it all off, IFIs and puppet-master foreign governments impose trade restrictions and prevent technological transfer under the name of “free trade agreements” and patent protection.
The three IFIs are inherently set up to destroy the only three mechanisms for economic growth and prosperity. The World Bank’s central planning destroys the division of labor. The IMF’s monetary stipulations destroy the chance of having sound and hard money and thus accumulated capital. Finally, the WTO prevents technological advancement of poor countries through patents and trade restriction masquerading as free trade agreements.
Bitcoin promises to undo the twentieth century’s uninvention of global money. Bitcoin could then save the world’s poor from those who have been catastrophically “saving them” for decades. There was no World Bank, IMF, United Nations, or WTO under the gold standard, and that is likely to be the case in a bitcoin standard. Without governments’ national currencies, protectionist policies, and capital controls, the movement of talent, technology, and capital around the world would be far freer. Had the IMF never existed as an enabler of the worst inflationist impulses of the world’s governments, one can only imagine what sort of prosperous world we would live in today. Will there be corrupt governments under hard money? Of course, but they will face the consequences of their corruption far faster, as they run out of money and can no longer afford to pay the henchmen that prop them up.
Poverty cannot be ended in absolute terms any more than ill health can be ended. This is because it is a consequence of individual actions, voluntary and otherwise, that cannot be ended. Humans who choose to spend more than they regularly earn will eventually be left destitute, just like those who consume junk food will be left unhealthy. Bitcoin cannot end poverty and it cannot save those who cannot save themselves. But what it does offer is far more valuable than anything fiat can buy: the economic freedom allowing those who can save themselves to do so. A world financial system built around bitcoin would replace IFIs with the normal workings of the free market. There can be no global lender of last resort in that world. There can be no global bureaucracy to centrally plan the world’s economies’ trade and capital movement.