Layered Money

The subtitle is From Gold and Dollars to Bitcoin and Central Bank Digital Currencies and the author is Nik Bhatia (2021).

And further down the bitcoin rabbit hole we go.  This one was a short and easy read that looks at the history of money and how bitcoin can/does represent what gold used to be.  In particular, the author thinks about money in terms of layers.  The first layer, which is the primary asset without counterparty risk, used to be gold (as an example).  And each layer removed (gold certificates being next) carries slightly more risk, as it represents someone else's liability.  When we moved past the gold standard period, and into the era of dollar dominance, the first layer has been US Treasuries (even though they are actually liabilities of the US government), from which the Fed issues reserves to private banks as a second layer, who then make loans to retail customers as a third layer.

While less explicit in taking an Austrian view of things, the author definitely believes that the Fed has gone off the rails with its dollar creation (particularly since 2007), and that the world is primed for a new reserve currency asset -- of which bitcoin is a clear and obvious choice.  No one controls it, it is government-free, and also universally accessible with a computer.  Also, as compared to M. Ammous, he notes that the evolution of the Lightning Network has created greater efficiencies for bitcoin to be used in retail transactions.

And we learn a little more...

The Bitcoin Standard

The subtitle is The Decentralized Alternative to Central Banking and the author is Saifedean Ammous (2018).

When I looked around for a book that makes the investment case for bitcoin, this title kept coming up.  The author is an economist who subscribes to the Austrian school in his thinking.  You could expand that to say, substitute bitcoin with gold and you might have heard this story before.

The prevailing argument in favor of owning bitcoin is that it represents a hard currency that removes the need for any third party intermediary or trust between counterparties.  In a world of credit cards and wire transfers, coupled with endless bureaucratic overreach that invades your privacy, bitcoin is a currency that is peer-to-peer without any bank or other entity in the middle.  It only requires processing power to verify transactions amongst a network of nodes around the world that are totally decentralized.  Moreover, bitcoin's protocols ensure that there will never be more than 21 million coins created -- removing the ability for any government or centralized body to print it and inflate it away -- and so it goes that it represents a store of value, in the same vein as a precious metal with a high stock-to-flow ratio.  To put more of a fine point on it, as bitcoin's value rises, there is a difficulty adjustment that leads to even more processing power being required to commit transactions to the network, which is what leads to the creation of new bitcoin.

Much of this book is spent making the case for free markets without central planning and government intervention.  The author does a perfectly fine job of making that argument, but it's not the reason to read this book.  Notwithstanding that, he does draw an interesting connection between unsound money and war -- in particular, unsound money adds complexity to trade flows, due to the multiple currencies untethered to any standard involved, which creates animus; the ability to print money means that governments can continue fighting endlessly, where they used to be limited by the tax dollars that could be raised to fund such excursions; and sound money leads people to have a lower time preference, which generally leads to more cooperation.

The other interesting takeaway is how the author dismisses the notion that blockchain technology has so many important uses outside of a digital cash system.  To his mind, the technology is not a particularly efficient, cheap, or fast way to transact online.  It was created to operate as a sound, digital money, without any form of intermediation in the middle, and to promote individual sovereignty.  And in that endeavor, it has succeeded.