Understanding Bitcoin (& Sound Money)

Using Bitcoins is as simple as getting a Bitcoin address and telling people the address. Any Bitcoins sent to that address are now yours—it is really as simple as sending a text message!

Bitcoin owners today still must convert their coins back to traditional currency in order to buy certain items, pay bills and purchase things at their favorite shops. However, the tide is shifting and the conversion necessity is falling. As the value of bitcoins increase there will be more value to spread around, and more people willing to spend bitcoins. With willing spenders, more business will accept bitcoins and the conversion necessity will fall further– eventually it will fall to zero, or at least get pretty close.

Bitcoin just became a two billion-dollar market. 

The total value of all outstanding bitcoins—its market capitalization, if you will—has now topped $2 billion. That’s quite a milestone, considering bitcoin isn’t backed by any real asset or faith in any government. A big reason for its success is the principle of sound money–which we will attempt to explain. You see, written right in to the open-source code of this crypto-currency is a hard limit of 21 million bitcoins which will be reached during the year 2140. Because this establish limit is known, it creates value in the currency. This is what is known as sound money.

And what is “sound money” you ask?

It is money that maintains its purchasing power, so that a dollar can buy a dollar’s worth of crap today, and a dollar can buy the same load of crap in the future because prices did not change. Theoretically, increased productivity means that prices will go down, which would give everybody a higher standard of living, but without sound money the whole promise of “productivity” becomes meaningless.

Instead, we have an “unsound” currency that continually goes down in purchasing power thanks to the filthy Federal Reserve constantly creating new money and credit so that the federal government could borrow it. And it is all this new money that makes prices go up and causes everyone to suffer a constantly falling standard of living.

Here is the good news: there is a determined grassroots movement in the United States seeking the restoration of sound money. There are many different groups comprising this movement, but all share the same aim. It is to restore gold and silver to its rightful role as the money of the United States, as mandated by the Constitution. Without Constitutional money, how can we claim to have a Constitution government? They simple fact is we can not.

“It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of right.”

So wrote Ludwig von Mises in The Theory of Money and Credit in 1912. And further: “(…) the sound-money principle has two aspects. It is affirmative in approving the market’s choice of a commonly used medium of exchange. It is negative in obstructing the government’s propensity to meddle with the currency system.” The principle of sound money is the very foundation of honest government. Simply stated, if you want honest government, you must demand honest money.

Government controlled fiat money systems have no inherent limit to money and credit expansion. In fact, quite the opposite holds true: Central banks, the monopolistic suppliers of governments’ money, have actually been deliberately designed to be able to change money and credit supply by actually any amount at any time. Obviously, severe problems in a paper money system can result if and when there is no clear-cut limit to money and credit expansion.

The intellectual conviction of the economic mainstream, which is dominated by Keynesian Economics, is that by lowering interest rates the central bank can stimulate growth and employment.  Conversely, the Austrian School of Economics’ maintains that it is monetary expansion which is at the heart of the economies’ boom and bust cycles. Overly generous supply of money and credit induces what is usually called an “economic upswing”. It is wake, economic growth increases and employment rises.

Sooner or later, the artificial money and credit supply-fuelled expansion is unsustainable and turns into a recession. In ignorance and/or in failing to identify the very forces responsible for the economic malaise, namely excessive money and credit creation in the past, falling output and rising unemployment provoke public calls for an even easier monetary policy.

Central banks are not in a position to withstand such demands if they do not have any “anchoring” — that is a (fixed) rule which restrains the increase in money and credit supply in day-to-day operations. In the absence of such a limit, central banks, confronted with a severe economic crisis, are most likely to be forced to trade off the growth and employment objective against the preserving the value of money — thereby compromising a crucial pillar of the free society.

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Is Bitcoin the Digital Version of Sound Money? 


Skeptics argue that although an interesting concept, bitcoin requires currency by which the units are valued. Gold and silver can be used as direct commodity barter money without the aid of electronic systems, but a string of alpha-numeric code can not. That is true, but can you image a future without the Internet? I can’t. While it is true that gold and silver are natural physical elements which best serve the role of tangible money in commerce, what we are talking about here is applying the same principle to cyberspace. In the virtue world, where most commerce is transacted these days, bitcoin is a good as gold. So to answer the question, yes, bitcoin is sound money–sound money for the web. 

Because the monetary base of bitcoins cannot be expanded, the virtual currency may be subject to severe deflation if it becomes widely used. Keynesian economists argue that deflation is bad for an economy because it incentivises individuals and businesses to save money rather than invest in businesses and create jobs. The Austrian school of thought counters this criticism, claiming that as deflation occurs in all stages of production, entrepreneurs who invest benefit from it. As a result, profit ratios tend to stay the same and only their magnitudes change. In other words, in a deflationary environment, goods and services decrease in price, but at the same time the cost for the production of these goods and services tend to decrease proportionally, effectively not affecting profits. Price deflation encourages an increase in hoarding — hence savings — which in turn tends to lower interest rates and increase the incentive for entrepreneurs to invest in projects of longer term.

Think of Bitcoin as the API for Money

For those who insist that REAL money is ONLY gold and silver–it may help to think of bitcoin as an accounting system. You might even call it the API for money (real or otherwise). This Application Programming Interface will work for anyone who can send or receive email–and that’s a lot of people! At the most basic level, Bitcoin a technology that allows computers to move wealth around in a more efficient manner. It allows business contracts to be upheld with programming rather then the fear of legal action. Bitcoin has the potential to change society as much as the Internet itself.

Take a look around and think about how many institutions exists, how many people are employed, energy spent, how much space is devoted to the simple act of moving wealth around, to guarantee money will exchange hands and go to the right person: all of those can be made more efficient and sometimes completely redundant with bitcoins.

Banks aren’t the only institutions that exists solely to regulate transfer of money: so are insurance companies. An insurance is nothing more than a reverse lottery, where everyone pays every month and if something happens you get back a prize. A small group of developers could develop an insurance company that could be much more efficient than regular companies: the whole part of handling money, collecting it, figuring out who paid and who didn’t, the covered conditions could be programmed in the system from the start. All that is needed is a way to check if the subscriber needs to be paid or not: but that’s now an engineering problem, not an administrative one. (source)

Most people think that bitcoin is just trying to be a better PayPal, but, just like the web started as a better way to store electronic documents, bitcoins can be a lot more than that. Indeed, it could become a tool for the decentralizing much more than banks and insurance companies. Many unused features are built into the bitcoin code and are waiting dormit for future development once the virtual currency gains wide acceptance. Mike Hearn discusses “The future of Bitcoin: new applications and rebuilding the banking system” at the London Bitcoin Conference 2012.

Historically, governments inevitably debased their own currencies to finance expensive foreign wars and/or a run away welfare state (in our case both). Naturally, these governments force the people to only use the so-called “money” that they declare to be legal tender. So we find that through out time, legal tender laws are always put in place where ever there is a fiat currency. Before bitcoin it was precious metal that provided the “anchoring” for fiat currencies and held inflation in check. Now the same principle of sound money that used gold and silver to chain down the mischief of governments is the fundamental operating principle employed in the bitcoin code. Simply stated, bitcoin is electronic cash that is not subject to the false authority of government (the anarcho-capitalist inside of me loves that) and therefore, like pure gold or silver, it will NEVER loose it’s value due to inflation. 

…even though bitcoins are most widely known for their attributes as a currency, its important to recognize the value of bitcoin as payment network, public ledger, secure and liquid store of value. How valuable is something so unique and innovative? Ultimately the free market will decide and since bitcoins are 100% decentralized and open source, they remain free from political influence or centralized control. Never before in history has anything existed with these 4 attributes while remaining secure and able to send around the world in minutes with little or no fees… source

It has been said, “Bitcoin could be the greatest invention in human history.”   …but the real value of Bitcoin lies in economies that don’t yet existsource.

What really attracted me to bitcoins is the principle of sound money. What makes me enthusiastic about bitcoin is the fact this virtual currency is decentralized. That means, because of the bitcoin code, a future world is being created where people do their banking without the need for banks. This is the real value of bitcoin, not what it happens to be trading for per coin–that is just a side show. It’s the code itself, and not the price that a coin fetches, that gives bitcoin its real value.

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