The Bitcoin Standard Flashcards
(35 cards)
who invented bitcoin?
a guy that goes by the pseudonym Satoshi Nakamoto
In October 2009, an internet exchange sold _____. How was the price calculated? Why was this moment so important?
5,050 bitcoins for $5.02. The price was calculated by measuring the value of the electricity needed to produce a bitcoin. This moment was important given that bitcoin was no longer just a digital gain, but rather it had now become a market good with a price.
On May 22, 2010, someone else paid ____ bitcoins to buy 2 pizza pies worth ___.
10,000; $25. This is the first time Bitcoin was used as a medium of exchange
While Bitcoin is a new invention of the digital age, the problems it purports to solve - namely
providing a form of money that is under the full command of its owner and likely to hold its value in the long run - are as old as human society itself.
What is money?
A good that assumes the role of a widely accepted medium of exchange. It is a good purchase not to be consumed (not a consumption good), nor to be employed in the production of other goods (an investment or capital goods), but primarily for the sake of being exchanged for other goods
What is the difference between money and investment?
- Investment offers a return while money does not; second, investment always involves a risk of failure, whereas money is supposed to carry the least risk. Third, investments are less liquid than money.
characteristics that make money good money
scale (can be divided into smaller units or grouped into larger units), space (ease of transporting the good), and time (Durable; supply does not increase too drastically)
Discuss more about time
Physical integrity is a necessary but insufficient condition for salability across time as it is possible for a good to lose its value significantly even if its physical condition remains unchanged. For the good to maintain its value, it is also necessary that the supply of the good not increase too drastically during the period during which the holder owns it.
Who is Carl Menger?
the Father of the Austrian school of economics and the founder of marginal analysis in economics. He came up with a key property that leads to a good being adopted as money and that is salability
what is salability
salability is the ease with which a good can be sold on the market whenever its holder desires with the least loss in its price
what is the difference of hard money and easy money?
hard money is money whose supply is hard to increase; easy money is money whose supply is amenable to large increases
what are the two distinct quantities related to the supply of a good?
stock - this is existing supply, consisting of everyone that has been produced minus everything that has been destroyed; and flow which is the extra production that will be created in the time period.
A good that has low ratio of stock to flow is one whose existing supply can be increased drastically if people start using it as a store of value
what is the easy money trap?
anything used as a store of value will have its supply increased, and anything whose supply can be easily increased will destroy the wealth of those who used it as a store of value
of all the historical forms of money i have come across, the one that most resembles the operation of Bitcoin is the ancient system based on
Rai stones on Yap Island.
These rai stones were not native to the Yap. They were taken in from Guam. They were beautiful and rare. Transporting is very difficult.. Once it was transported, they were placed in a prominent location where everybody could see them. The owner of the stone could use it as a payment method without it having to move. all that would happen is that the owner would announce to all townsfolk that the stone’s ownership has now moved to the recipient.
as human technical capacity for the production of goods became more sophisticated, what happened? What were its problems?
money shifted to commodities. They were easier to transport, they were more durable. Supply is hard (gold/silver is rare).
- fluctuations in value (esp silver)
- governments and counterfeits could cause their value to decline by reducing the precious metal content in these coins.
for anything to function as a good store of value, it has to beat this trap:
it has to appreciate when people demand it as a store of value, but its producers have to be constrained from inflating the supply significantly enough to bring the price down.
What is the commodity that has been used as a store of value the longest? and why?
Gold - 1. It cannot be destroyed. 2. It is impossible to synthesize from other materials and can only be extracted from its unrefined ore. Annual stockpile growth of gold has always been around 1.5%, never exceeding 2%
Why won’t silver work as a medium of exchange or store of value?
- Silver corrodes (and is used in industrial processes); 2; silver growth rate has been 5-10%, sometimes 20%.
Two overlapping categories before bitcoin was present;
- Cash payments (no need trust, no delay, no third party. Disadvantage is that both parties needed to be physically present in the same place at the same time).
- Intermediated payments (required a trusted third party. Paypal). Main drawback is the trust that is required in execution of the transactions, the risk of the third party being compromised
Bitcoin is the hardest money ever invented: growth in its value cannot possibly increase its supply; it can only make the network more secure and immune to attack
.whereas the rise in value of any money leads to more resources dedicated to its production and thus an increase in its supply, as bitcoin’s value rises, more effort to produce bitcoins does not lead to the production of more bitcoins. instead, it just leads to an increase in the processing power necessary to commit valid transactions to the Bitcoin network.
Until the invention of bitcoin, scarcity was always
relative, not absolute
The belief that resources are scarce and limited is a misunderstanding of the nature of scarcity, which is the key concept behind
economics
In his masterful book, the Ultimate Resource, the late economist Julian Simon explains how the only limited resource is
human time. Most of any good can always be produced if human time goes toward it.
In all human history, we have never run out of any single raw material or resource, and the price of virtually all resources is lower today than it was in past points in history because
our technological advancements allow us to produce them at a lower cost in terms of our time
