Author: michaelantonfischer (Page 2 of 5)

Bitcoin Nation – MEXICAN STANDOFF (Pt.1-Ch.9)

My new book “Bitcoin Nation” was published on the 15th anniversary of the Bitcoin Whitepaper, October 31, 2023. You can read it below, one chapter per week. Or buy it here:

An open blockchain alone does not make good money. It is merely a method for all users to verify that transactions have not been altered afterwards, and no new money was illegitimately put into circulation. A mechanism is needed to ensure that the blockchain is protected from attacks and that the damage from a successful attack can be remedied.

Imagine a wealthy entity investing enough computing power to find a whole series of hashes that fit the target range using this to paralyze the blockchain or flood it with false transactions, or, worst of all, take control of the network.

The solution is as simple as it is ingenious, relying on two pillars. Firstly, the difficulty adjustment. Here, the target range is adjusted by an algorithm every 2016 blocks to maintain an average time of 10 minutes between blocks.

If an entity were to provide enormous computing power, the blockchain would still not grow infinitely fast.

Secondly, this breaking mechanism would give other network participants time to sort out false blocks and increase their computing power to find valid blocks again.

This is where the second pillar comes into play. In addition to validating blocks by each network participant, they must agree on the correct blockchain in case of ambiguity due to an attack or coincidence (two blocks are found simultaneously).

In case of doubt, the longer chain is always taken. Since each new block is cryptographically linked to the previous valid block, a valid chain will always be longer than an attacking chain, as long as 51% of the computers in the network are working on the honest chain.

This mechanism was described in 2008 by Satoshi Nakamoto and is therefore called the “Nakamoto Consensus.”

The unique feature of this consensus is that an attacker must not only achieve 51% of computing power once to attack the blockchain. They must maintain this superiority permanently; otherwise, honest participants could jointly build a new chain from a block before the attack, replacing the attacker’s false chain as the longer one.

In principle, this is a Mexican Standoff between all miners searching for valid hashes to continue the blockchain. If one misbehaves, all others will immediately attack them, and their computing power would be spent in vain.

Miners have the incentive to do this for three reasons:

  1. Block Subsidy
  2. Transaction Fee
  3. Nodes

The Block Subsidy is a fixed amount of new Bitcoin that each miner can pay themselves for finding a valid block. If someone attaches an invalid block, other miners can build a longer chain of valid blocks that exclude this block and thus receive the fee. Of course, it is much more likely that a valid block proposed by a miner to the network will be linked with other valid blocks and thus become the longest chain. To build on a false block, the majority of miners would have to conspire.

In addition, miners collect transaction fees for all transactions they include in their blocks. Miners who frequently produce invalid blocks would quickly receive no more transactions from network participants, as the risk of a chain rollback would be too great.

The last bastion is the nodes, which are all network participants who do not search for blocks themselves but validate them and store a copy of the entire blockchain. Bitcoin was designed, unlike other cryptocurrencies, to grow the blockchain slowly, allowing every Bitcoin user to check all Bitcoin transactions using affordable hardware (a full node can at the time of this writing be set up for under $200).

The nodes alone have real power over Bitcoin. A miner is just a service provider. If they build invalid blocks, nodes can refuse to accept them and freeze the blockchain until a new valid block is attached to the last valid block.

If someone wants to change the rules or the code in the Bitcoin network, they must convince a super-majority of nodes to accept the change.

In the so-called Block Size Wars, the power of nodes became apparent. Almost all major companies in the then young Bitcoin industry and most miners wanted more storage space in Bitcoin blocks to allow more transactions per second. However, a large part of the node operators did not want this, as it would have driven up the costs of operating nodes, possibly leading to centralization.

Such centralization would be a significant threat to Bitcoin. The self-interests of node operators ensure that the money supply can never grow beyond the almost 21 million BTC that Satoshi originally set in the code.

Each node operator can ensure with their node that only the rules and code they have installed are used in the network. If some participants use incompatible code, the network splits. The new network has the same transaction history as Bitcoin, but is no longer Bitcoin.

There have been several such hard forks, including during the Block Size Wars. However, since the majority of nodes stuck to the old code, the alternative Bitcoin copies quickly lost value and support. Miners could not cover their electricity costs and returned to mining valid Bitcoin blocks. One can thus say that the more individual node runners there are, the harder it is for a central entity to change or control Bitcoin.

Bitcoin’s innovation is not just a single line of code, but a combination of technology, network effects, and game theory. Every Bitcoin user can operate their full node, as long as they can afford the hardware and a few watts of power consumption, and by that, ensuring the Bitcoin network remains unmanipulated, and that no one can take away or inflate their Bitcoin.

Bitcoin uniquely links energy and money supply. No matter how much energy is used to mine Bitcoin, there will never be more than 21 million in circulation. More energy expenditure means the network becomes more secure, and each user has an incentive for the network to become even more secure over time.

The further Bitcoin’s adoption progresses, the more nodes and miners there are in the network, the more effort an attacker must put forth even to falsify a single block.

Today, an attack on Bitcoin is no longer possible by any single country. This is also the reason there can never be a second Bitcoin.


My new book “Bitcoin Nation” was published on the 15th anniversary of the Bitcoin Whitepaper, October 31, 2023. You can read it below, one chapter per week. Or buy it here:

Ever since humans have lived in groups, they have collaborated and shared responsibilities. In the family, daily tasks are distributed among generations according to knowledge and abilities. In a village, one family specializes in food production, another in clothing. Without this division of labor, there would be no society, technology, nor prosperity.

But how can everyone be fairly paid for their work?

In the family, everyone usually contributes without compensation, expecting the family to help them in return to the best of their knowledge and abilities. Even in this small circle, unpaid labor often leads to frustration. The mother accuses the father of not taking out the trash, while the father replies that he works hard all day, while she “just” looks after the children. Besides that, the 15-year- old son could do it. The son in turn thinks that he already helps much more with household chores than his younger siblings. And so on…

The cause of these conflicts lies in individual value judgments. Everyone considers their work to be at least as valuable as that of others.

This uncompensated, nonspecific system of reciprocity obviously cannot be applied to an entire city, let alone a nation. Work must be fairly paid.

But what does “fair” even mean?

As we have seen, everyone values their work differently. One might consider payment based on working hours as a solution. Unfortunately, this leads to the question, of whether it is truly fair that a worker who assembles ten machines a day earns the same hourly wage as one who assembles fifteen. What if the assembly of one machine involves dangerous steps, and another does not? What about a farmer who works hard for a year but loses the entire harvest due to drought? Who pays him for his work?

You will surely admit that the value of work cannot be easily determined “fairly.” The best-known method to determine it is through the free market. What works for the price of goods is also an effective means for the value of services, including individual labor. But for this value to be determined “fairly”, the market must not be manipulated by altering the currency in which wages are measured.

Ancient philosophers concluded thousands of years ago that hard money, i.e., one with a constant amount, is the only means to achieve this goal. This insight has been derived and confirmed in previous chapters.

But how to maintain a constant money supply?

For about 5,000 years, the answer to this question has been gold.

Since gold is relatively scarce and difficult to mine, its quantity can only be slightly expanded each

year. Still, even gold can experience inflation. For example, when vast amounts of gold and silver were looted from the New World and imported to Europe, it had the same devastating effect on ordinary citizens as if the nobility had developed Midas’ touch. With advancing mining technology and the development of new rockets, it is only a matter of time before an even worse wave of gold inflation from outer space or the earth’s crust arrives.

Moreover, gold has the previously mentioned disadvantages that lead to the cycle from full reserve to partial reserve to fiat.

Is there a better solution?

Let’s take a look at the alternatives:
Central banks and political control over money are one option. Albeit, one that can never work in the long term. The incentive to manipulate the money supply for one’s own advantage is too great for mortals to resist indefinitely.

At the beginning of the twentieth century, Henry Ford came up with the idea of tying money to

energy. At first glance, the idea is appealing, as energy is the one thing in the universe that can neither be created nor destroyed.

However, there are many practical problems in implementing such a currency. Only the invention of computers and the internet made it possible. But on the internet, everything can be easily copied. How could a currency be created on the internet that could not simply be duplicated, thus expanding the money supply without cost?

The answer is the so-called distributed ledger. In short, if all transactions are made public and every user of a currency can verify all transactions, the money supply cannot be expanded unnoticed.

But who can write in this ledger?

Most email account owners are familiar with the phenomenon of spam. An open ledger could easily be crippled by a hacker flooding the servers with spam, such as in a DDoS attack.

To solve the spam problem, Adam Back invented the concept of Proof of Work (PoW) in 2002.

Before someone could send an email to a user, the sender had to find a hash of the email that fell within a specified range.

A hash is the value that a certain type of algorithm outputs when it receives a sequence of bits and bytes at the input. The interesting thing about hashes is that they cannot be reverse-calculated (as far as mathematically known). Having a hash, I cannot reconstruct the originally input bits and bytes. But conveniently, the same input always produces the same output, so a hash provides an unfalsifiable proof of the input without revealing the input itself.

If I were to publish a hash of this book on the internet, the timestamp of when I uploaded the hash would be proof that I wrote this book and no one else. Yet, the content of the book could not be stolen by copying the hash.

Modern hash functions, like SHA-256, are designed to be very sensitive to the smallest changes in inputs. If I remove just one whitespace from this book, it is impossible for anyone who does not have both unhashed versions of the book to recognize that both hashes belong to the same book.

A hash function can also protect against counterfeiting. A PDF document or even a printed contract can be easily manipulated. In court, thus, your deposition stands solely against that of the counterparty. There is, in the worst case, no reliable way for the court to determine which contract is real and which the forgery. Suppose the parties to the contract have also signed the hash of the original document. In that case, it’s next to impossible to falsify both the contract and the corresponding hash in an undetectable way.

Proof of Work uses these properties to make spam costly. By accepting only a certain range of correct hashes, the sender must add characters to the meta-data of the email to obtain a hash that falls within the specified range. Since the hash cannot be reverse calculated, the sender can only do this by adding random characters and testing various hashes, until they find a hash function with a fitting output. Thus, a certain amount of computational effort is required to contact the recipient. Since computation requires electrical energy, spam becomes expensive and is reduced.

This could create a currency structured in a way that the next entry in a distributed ledger is always made by the person who first constructs a transaction with a hash which falls within a specified range. Then, all users who read the ledger would verify whether this transaction is allowed. That is, if only money was spent that previously existed, and if the owners of the money initiated the transaction.

David Chaum proposed Such a concept in basic terms in 1982 called Blockchain.

But something was still missing for a functioning digital currency.

Bitcoin Nation – THE EMPEROR’S NEW MONEY (Pt.1-Ch.7)

My new book “Bitcoin Nation” was published on the 15th anniversary of the Bitcoin Whitepaper, October 31, 2023. You can read it below, one chapter per week. Or buy it here:

So far, we have used the terms “un-backed” and “backed” money quite loosely in this book. Most often, we spoke of “backed” when the money was deposited one-to-one in gold. However, this term, although frequently used, is misleading and, in my view, incorrect.

We previously clarified how market prices are formed from many individual value judgments, with the “error” of one individual always equally benefiting another person.

To elaborate briefly:
If I pay you 1000 eggs for shoes that have a market price of 750, you gain 250 eggs. If you ask for only 500, I save 250. In both cases, after the transaction, our combined purchasing power remains the same.

But what happens when the money supply expands?

Since it is nearly impossible to study economics empirically due to the many changing parameters that are difficult to measure and control, we must use a thought experiment to answer this question.

Let’s assume that all other individuals in the economy keep their demand and supply constant.

We conduct the shoe transaction with a money supply of 1 million dollars for 1000 dollars. As we shake hands on the deal, the money supply suddenly increases to 2 million dollars. Under the given assumptions, your purchasing power has suddenly been halved. But not only yours, the sum of our combined purchasing powers has also been halved.

Of course, in real life, inflation of the money supply usually does not manifest so directly, as money does not enter the economy evenly. Only in cases of hyperinflation, such as in Venezuela, where the state regularly decides to add or remove zeros from all accounts, can this effect be observed clearly.

In debt-based currencies – like the dollar since the abolition of the gold standard in 1971 – one must look more closely to understand this effect.

As previously discussed, a bank can use a borrower’s collateralized debt to create demand deposits. In a debt-based currency, the central bank does nothing more than grant a loan to commercial banks and, in return, take collateral on their balance sheet. We have already seen the problem with this. Just because collateral covers the debt today does not mean its market value cannot fall, leaving large parts of the debt uncovered.

This is particularly devastating in modern fiat money, as commercial banks create additional demand deposits based on central bank money. If a central bank mistakenly overvalues bank collateral by a factor of 10 and the bank itself leverages its capital by a factor of 10, the coverage shortfall multiplies to 100.

The risk of a deflationary crash is thus significantly higher than in the traditional gold-based fractional reserve system.

To make matters worse, the definition of backing becomes entirely arbitrary. In the gold standard, a fixed exchange rate between gold and certificates is agreed upon. This means the value of money can only fluctuate slightly around that of gold. The fluctuations themselves are primarily due to the difficulty of transporting gold.

The market value of gold in the gold standard arises from the individual value judgments of market participants.

When we trade the shoes in gold, only our subjective evaluations are relevant. To you, an ounce of gold is worth more than the shoes, while to me, the footwear is worth more than the yellow metal.

In an economy where gold is used as the only form of money, this means that the value of all transactions must be represented by the total circulating supply of gold.

Along with the realization that the market price of each individual good is formed solely by the efficiency of its production – when the supply-demand ratio remains constant – it can be concluded that the velocity of circulation is a self-regulating parameter.

In this artificial scenario, it responds to economic growth by increasing and to recession by decreasing. The value of gold is thus a reflection of the individual market values of all other goods. If the price of a good measured in gold decreases, it means that the good is now being produced more efficiently; if the price increases, the good must be more difficult to produce, for example, due to natural disasters.

Although in the real economy, demand for each good is not constant, this statement can be made about all market prices in total. After all, people can only act. Inaction is logically impossible. All market participants continuously express their value judgments, which through gold are transformed into a function of demand, supply, and production efficiency, which is expressed in the price of all goods.

If an economy solely uses gold as money, then the sum value of all ounces of gold must be precisely the sum of all individual goods times their market price.

In this case, gold is not backed by the number of gold atoms in each coin but by the individual decisions of all market participants. The purchase contract gives gold its backing. The physical gold atoms are merely a means to an end, to keep the money supply constant.

This would change abruptly, if someone had Midas’ ability to turn objects into gold by touch.

If all existing gold is in circulation, each market participant can only obtain gold by offering another participant a good or service worth at least as much as the gold. The voluntary purchase contract determines and backs the value of gold.

However, Midas can easily and effortlessly obtain gold. He can outbid any market participant without hesitation. The value of the gold that Midas brings into circulation is determined entirely differently than that of all the gold already in circulation. Its value is formed solely by King Midas’s judgment.

Since Midas can easily obtain abundant gold, he will drive up the price of all the goods he desires by outbidding competing offers. This leads to suppliers of these goods receiving disproportionately large amounts of gold, allowing them to pay more to satisfy their needs in turn.

Thus, the price increase caused by inflation gradually spreads from the source of money into the economy. Those who receive the new gold first gain unearned purchasing power, while those further away from the source of inflation lose purchasing power. The apparent winners are Midas and his court suppliers; the losers are those to whom the money trickles down to last. This is called the Cantillon effect.

Ultimately, however, everyone loses due to this inflation. The distortion of money prevents it from serving as a unit of account. The market price increasingly loses its meaningfulness, making it difficult for companies to calculate their economic performance and thus to allocate their resources efficiently. The economy becomes less and less performant over time.

Thus, while Midas and his courtiers get a larger piece of the pie, the capital stock erodes, and the pie becomes smaller and moldier with every new ounce of gold put into circulation.

A constant money supply is therefore in the interest of all market participants. But how can this be ensured?

Bitcoin Nation – ANATOMY OF A GREAT DEPRESSION (Pt.1-Ch.6)

My new book “Bitcoin Nation” was published on the 15th anniversary of the Bitcoin Whitepaper, October 31, 2023. You can read it below, one chapter per week. Or buy it here:

Black Friday, October 25, 1929. The news of the great stock market crash in the USA shocked the world, and a long, deep recession begins. Historians today refer to it as the Great Depression. An economic shock from which the US economy would not recover until the outbreak of World War II. An event of such magnitude that economists still regularly warn against it almost 100 years later. Some even argue that risking a second Weimar hyperinflation is better than another 1929.

The seemingly logical conclusion that central banks and politicians draw from this is that some inflation is necessary. After all, every child knows that 1929 was a “deflationary crash” caused by the inflexible money supply of the gold dollar.

Well, every child also knows that Santa Claus exists. In fact, Santa can probably be better historically substantiated than the connection between hard money and the crash.

A deflationary crash cannot occur in hard money, i.e., one with an almost constant money supply. As we discussed in the previous chapter, price competition between different producers of all goods would have to arise, forcing them to lower their prices to the point of bankruptcy.

Producers would only engage in such price competition in a free market if they could afford it. That is, if one market participant produces more efficiently or believes they can produce more efficiently and make up for losses if they only force enough competitors out of the market.

The likelihood of such competition suddenly developing across all product categories is extremely low. And if it should develop, a large part of the suppliers would go bankrupt after a short time, leaving only the innovative ones to survive. A gain for the consumer.

A deflationary crash requires a fractional reserve system. It is the Wall Street equivalent of a bank run. If stock prices are manipulated upwards with bets on margin and other methods, a hype can arise that even the average person eventually jumps on. Prices soar, more and more people gamble on the stock market instead of working. Companies are incentivized to shift their focus from production and innovation to their stock price. Instead of building reserves and investing, they buy back their own shares.

This leads to stock prices increasingly decoupling from reality until the frenzy eventually fades. The trigger for this sobering realization can be a crisis or just an uncomfortable newspaper report at the wrong time. Suddenly, major investors realize that their portfolio’s nominal value is backed by a tiny real value. They sell, and the price falls. This triggers panic among those investors who only joined to participate in the hype. Like in the game of musical chairs, when the music stops, all investors try to sell their shares quickly, but there are far fewer willing buyers than sellers.

As a result, prices usually crash significantly below the market value justified by productivity, and companies that have borrowed heavily on their shares or depend on liquidity from credit are eliminated.

Such deflationary disasters are typically short-lived. Like the hangover after a night of heavy drinking, there is a brief painful period, and then the economy continues as before. Often even much better than before, as primarily the strongest and most efficient companies have survived the crisis.

A deep, persistent crisis like the Great Depression requires another layer of madness that goes far beyond the price hype frenzy.
At its core, it is a combination of a bank run and a stock market crash.

Leveraged loans, or fractional reserves, allow banks to lend more money than they can cover with their deposits. To not appear over-indebted on the balance sheet, a bank requires collateral from its borrowers.

For example, if you buy a house that costs one million dollars, the bank will lend you a maximum of one million dollars. At the same time, it will demand that the same one million dollars plus interest be registered as the bank’s claim in the land registry. If you can no longer service the loan, your house will be foreclosed, and the bank will receive the portion of your debt plus interest and compound interest from the proceeds. As long as the house can be sold at a sufficiently high price, there is no problem. However, if this is not possible, the bank incurs a loss. The bank cannot reclaim the money you once paid for the house from the previous owner. It circulates in the economy and will perform its function as money many more times. Only the collateral behind it has disappeared.

Let’s now look at the case of leveraged shares: Suppose the fictional company X has a share value of 100 dollars and one million shares in circulation. It borrows 100 million dollars from the bank. The bank adds the 100 million dollars as collateral to the balance sheet and credits X’s account with a balance of 100 million dollars.

This so-called creation of demand deposits is seemingly 100% covered, so it appears to be a full reserve.

What happens when a stock market crash reduces X’s market value to 1 dollar?
Suddenly, the bank has a fractional reserve of a factor of 100. The bank’s balance sheet liabilities of 100 million dollars are now only covered by 1 million dollars in assets.

If this crash occurs in a gold certificate-based currency, it will easily trigger a bank run, as informed investors recognize the bottleneck and quickly exchange their certificates for gold.

If this happens en masse while banks are highly leveraged, the financial system collapses. Banks can no longer redeem the certificates, people lose confidence and hoard gold. This erodes confidence in the demand deposits recorded in the banks’ books even further. A vicious cycle begins.

By hoarding gold, the velocity of money is reduced while the money supply simultaneously shrinks. Considering the Fisher equation, either the number of transactions – i.e., the economy – must shrink, or prices must fall. Usually, both happen.

A crisis becomes particularly severe and prolonged when a central bank or government tries to intervene through regulatory measures, such as distributing subsidies. These interventions prevent creative destruction. Strong companies have to draw on their financial reserves for longer than without intervention, while unprofitable ones are kept alive. Sometimes, innovative and efficient companies are even killed to keep zombie companies going.

This further undermines confidence in the money, driving smart investors even more into gold and tangible assets, leaving the economy with even less covered money. At this point in the cycle, states typically react by banning private ownership of gold, which only exacerbates the problem.

In the case of the United States, the gold ban was enacted in 1933 – four years after the collapse – and lasted until 1974 – three years longer than the gold standard itself.

Strictly speaking, the United States has not overcome the crisis of 1929 to this day, despite the massive war profits from World War II. The gold ban did not help and could only be “lifted” after the petrodollar was established, effectively making the use of any money apart from the uncovered dollar in international trade a capital offense.

Before we go into more detail about the petrodollar, we need to delve deeper into the topic of gold backing, we thus reserve this topic for another book.


My new book “Bitcoin Nation” was published on the 15th anniversary of the Bitcoin Whitepaper, October 31, 2023. You can read it below, one chapter per week. Or buy it here:

Without a central bank, chaos would reign. The economy would collapse, the value of money would fluctuate wildly, and the population would become impoverished. Only a state central bank can guarantee price stability.

Arguments against free banking frequently sound something like the above. Hardly any economist dares to contradict these statements. But just because something is generally accepted knowledge does not mean it is true. On the contrary, it is a well-known psychological phenomenon that we believe false information if we simply hear it often enough. Sometimes, even when we consciously recognize the information as false, it gradually becomes ingrained subconsciously.

One such piece of information is the myth of price stability. In most economic fairy tales, it consists of two components:

1. A growing economy needs more monetary units.

2. Falling prices lead to an economic collapse.

The first part should appear obviously false to you with the knowledge you’ve already gained, but since it is such a popular fallacy, I still want to test your patience and briefly address it here.

The thinking behind it is based on the voucher concept. In our beer tent example, tokens were destroyed after being redeemed, so a maximum circulation speed of one could be achieved. In such an economy, a new voucher would indeed have to be issued for each new good or service. Luckily, hardly any monetary system works this way. Instead of destroying money when paying for an existing good and creating it again when a new good is produced, we simply pass money on. I can pay you 1000 units of money for my shoes, and you can use the same 1000 units to satisfy your suppliers, who in turn use it to buy something for themselves, and so on.

The circulation speed in money systems can thus be significantly higher than one. In the example just mentioned, 1000 units of money would already have been used for a transaction volume of 3000 money units once your suppliers spent it. These 1000 units can represent any number of transactions. The only limiting factor is that individual transactions can have a maximum amount of 1000 money units. However, if these 1000 units are infinitely divisible, for example into micro-money, nano-money, etc., they could easily represent today’s world economy.

At the time of this writing, the dollar money supply, including derivatives, is estimated at over 1 quadrillion, a number with 15 zeros. With a world population of 8 billion – 9 zeros – depending on the chosen estimate of the money supply, there is a 6- to 7-digit amount of dollars per person. Far more than necessary, especially since the dollar is already divided into 100 cents and can be digitally divided further. Thus, even the largest transactions and transaction volumes can be conveniently represented in dollars.

So, why does the money supply continue to grow steadily?
The pretext for this is reason number two. A constant money supply would inevitably lead to an economic collapse like the Great Depression of 1929 in the USA and the subsequent economic crisis.

But is that true?

The argument put forth for this is based on a similar fallacy as the first point. While the first point neglected the fact that the circulation speed is not constant and not limited upwards, the other side of the Fisher equation is neglected here.

It is assumed that the price level must logically fall with an increasing supply of goods and a constant money supply. However, here too, the circulation speed can react in a regulatory manner. It doesn’t matter whether one shoemaker offers a pair of shoes for 1000 units of money or 1000 shoemakers offer 1000 pairs of shoes for 1000 units of money each. If the economy grows to the extent that one person who can afford and wants shoes becomes 1000 persons who can afford and want shoes, the price of shoes remains the same since the production costs have not changed. If shoemakers find enough buyers to avoid stronger price competition, why should they lower their prices?

The real reason for the price decline, which goes hand in hand with economic growth, is technical deflation. Due to innovation and automation, the costs of producing most products decrease over time. This also lowers prices, as innovative companies secure more market share by lowering their prices below the competition’s costs, pushing them out of the market. So if prices fall due to technical deflation, it is not deflation in the monetary sense. Market participants are simply adjusting to the new equilibrium price that has shifted downward due to increased efficiency. When discussing price stability, falling prices due to technical deflation are stable prices from an economic perspective.

It is this process of technical deflation that has fueled the enormous increase in prosperity during the Industrial Revolution. The more efficient the economy, the more goods a worker can buy for their wages, and the more goods a worker can produce in their working hours, which in turn allows for higher wages.

Demanding price stability here – defined as constant prices without excluding technical deflation – is in truth a forced redistribution. The increased efficiency should not benefit workers and consumers, but shareholders and financiers of companies. A truly cynical demand, as it usually comes from those who claim to fight for the workers and the masses.

But that’s not enough. Since not all goods and services are subject to technical deflation to the same extent, price stability, as defined by central banks today, is a contradiction in itself.

We already discussed how, based on personal preferences, a person may not perceive a price increase while it can be a massive price increase

for another. If a central entity defines a basket of goods to measure price stability, it pretends that these are the products that all citizens must consume and accepts that all citizens who consume products not included in the basket must pay higher prices to keep the prices in the basket constant.

This is not only a terrible paternalism but also a targeted redistribution from the bottom to the top.

One could argue that this is the necessary price to pay for a functioning economy, as without the 2% inflation target of central banks, the world economy would certainly collapse.

So we need to ask once again: 
Is that true?


My new book “Bitcoin Nation” was published on the 15th anniversary of the Bitcoin Whitepaper, October 31, 2023. You can read it below, one chapter per week. Or buy it here.

The death of a currency usually occurs through a so-called hyperinflation. There are various definitions, but today it generally means a price increase of over 50% per month. At the peak of hyperinflation, as in Germany in 1923, the devaluation of money even led to a doubling of prices every 24 hours.

Depending on the definition, over 50 hyperinflations have been documented in recent history. This raises the question, whether they are inevitable, or if people are simply crazy and keep making the same mistakes.

As is often the case, the answer to this question lies far beyond black versus white.

Hyperinflation could be easily avoided if there were a currency with a strictly limited money supply. However, the technical and social introduction of such a currency is not trivial.

In previous chapters, we discussed why a gold or precious metal standard are so susceptible to manipulation of the money supply. But why does this remain undetected and seemingly without consequences for decades or even centuries? And why do people keep playing this fatal game?

To understand this, we must look at how new monetary units enter the economy.

Once a central authority, usually a state central bank, has forcibly and gradually established itself as the sole ruler over the currency of a monetary area, it can theoretically create money at will. In practice, however, the average citizen initially stands in the way. As limited as the general understanding of money may be, people are hesitant to accept something unfamiliar. Gold works, but paper money is new, and there is a vague collective memory that unbacked money has failed multiple times in history.

A central banker or politician who openly calls for the abandonment of the gold standard will quickly find themselves out of office, and sometimes even in danger of losing their life.

That’s why they must initially act in secret. In a coin-based system, copper is secretly mixed in, or taxes must be paid in new coins, while state expenditures are made in old, worn-out coins. In the case of certificate money, a so-called fractional reserve is employed.

The bank issues certificates that certify more value than is actually available in the vault. This practice has historically worked quite well as long as the reserve is above 50%. Even with 30% precious metal to certificate ratio, a bank is still relatively stable. With each percentage point fewer reserves, the risk of a bank run increases exponentially.

A bank run occurs when many people try to exchange their certificates for deposits at the same time. If the bank has covered less than 10% of its certificates and every fifth depositor wants their gold, the bank becomes insolvent.

A bank run can be triggered by many factors, often simply by competition between banks. One bank senses the weakness of another and demands all its deposits from the weak bank, while simultaneously leaking the liquidity problems to the local press.

Central banks have also historically used this tactic to assert their authority. If citizens don’t accept the central authority over money, attempts are made to target popular private certificates or note-issuing banks with bank runs, forcing them to their knees. This then gives the state a double opportunity to present itself as the rescuer, and create trust in its own currency. At the same time, it promotes acceptance of strict laws against the evil private banks that have deceived their poor depositors.

Subsequently, the central bank plays the same game as the private banks did before.

Central banks will fractional reserve with ever-increasing leverage, just as many commercial banks do. The sole difference is that in case the liquidity runs out, states can simply ban the right to exchange the certificates to gold. Thus, the central bank doesn’t have to admit its bankruptcy during the national equivalent of a bank run. Instead, it can pay off uncovered debts, by printing money, ultimately culminating in hyperinflation.

One could, of course, attribute ill will to both private and central banks and spin wild conspiracy theories about why they manipulate money and impoverish people. The sad truth is probably much simpler and at the same time more concerning.

Everyone sees themselves as the good person. Even mass murderers find an excuse to justify their killings. So, it’s not surprising that self-interest and a lofty goal are usually the cause of the fatal expansion of the money supply. A central bank might, for example, claim that the money printing is necessary to prevent economic collapse. But how is it possible that many politicians and central bankers convince the general population that a fiat currency is a good idea and that inflation is acceptable, even necessary?

: Bitcoin Nation – PATHOLOGY OF HYPERINFLATION (Pt.1-Ch.4)

Bitcoin Nation – THE SINS OF THE CENTRAL BANK (Pt.1-Ch.3)

My new book “Bitcoin Nation” was published on the 15th anniversary of the Bitcoin Whitepaper, October 31, 2023. You can read it below, one chapter per week. Or buy it here.

For many people, the existence of fiat money and the central banks that control it is almost a natural law. They are often surprised to learn that less than 150 years ago, there was a time of free banking, where no central authority existed to control money. Even more surprising to many is the fact that the era of free banking was the time of the greatest and fastest increase in prosperity in human history. In the United States, the central bank was not established until 1913 and only since 1971 has it had complete control over the creation of base money.

So, how did we come to use central bank money in almost every country in the world today?

The causes lie in the physical properties of gold. As I mentioned earlier, gold was the best commodity to use as money for the longest time in human history.

Gold allowed for the exchange of great value across continents. Once gold coins were minted, they were – except for deliberate destruction – indefinitely durable.

That is why gold prevailed over barter or other currencies, such as voucher currencies, in most parts of the world early on. The latter were not so dissimilar to our beer vouchers from the previous example and while they worked well regionally, they had massive difficulties in international trade.

A voucher denominated in grain, issued by the largest trader in Mesopotamia, would be accepted within a day’s travel radius, as everyone knows the trader and he is liable for the voucher’s coverage with his reputation, wealth, and even his life if necessary. However, the voucher would hardly convince a trader who delivers goods from distant China. He does not know the issuer and would have to travel for months to redeem the voucher. Direct barter would be much more convenient.

But grain is a bad currency. It spoils easily and is so widely available that it requires whole shiploads to handle even relatively small transactions.

Over time, gold became the currency of choice because it combines the six aforementioned properties better than any other commodity. Of course, gold is not perfect. Its divisibility, for example, is limited. A coin with only a few micrograms is impractical in everyday life, but would be needed for buying bread. Most economies solved this problem by using silver –the second-best material for money – for small transactions.

Large and international transactions, on the other hand, have always been and still are the Achilles heel of gold. Due to its weight, it is very cumbersome to transport gold from one place to another, and the risk of robbery is enormous.

As a solution, history once again turned to the proven technique of vouchers. The Order of the Knights Templar, for example, used gold certificates nearly a millennium ago. They solved the problem of voucher acceptance by using an international association as a backer of the coupon. A Templar who deposited his money with the Order before leaving Europe received a certificate for his deposit. Later, upon arrival in the Holy Land, he could have the local branch of the Order pay him back in gold and silver.

This provided several advantages:
If a Saracen stole the gold certificate, they could do little with it, unlike a treasure chest. No Templar would believe that they were the European noble mentioned in the certificate. If the certificate holder died or the paper was destroyed, a relative of the unfortunate could go to the Order and request a new one.

However, the other disadvantages of vouchers still existed in the certificates. For example, a knight who had the misfortune of depositing money with the Templars when they were disbanded by the Catholic Church lost everything. The counterparty risk persisted.

This counterparty risk, and the methods developed throughout history to minimize it, explain why the last 5,000 years of monetary history have been an endless cycle of the same four stages. A gold standard, accompanied by an increase in prosperity, is followed by a creeping devaluation of money, leading to fiat money without backing, and eventually a collapse, starting a new cycle.

With variations, this cycle has always followed a nearly identical pattern. Usually, gold coins were introduced first, minted by a powerful merchant or state, enabling people to quickly verify the authenticity of a monetary unit. Standardization and centralization of coin minting were necessary compromises, as gold can be tested for authenticity with some effort, but an effort too high for everyday use.

This opened up an attack vector. A mint is a trusted party; all users of coin money must rely on the coins containing the stamped precious metal content.

Throughout history, however, this content has been successfully manipulated. The Roman Empire, for example, used various techniques to reduce the precious metal content of its coins from over 90% to almost 0% over several centuries. This allowed for the financing of wars and palaces that the population would hardly have been willing to finance through more transparent taxation.

Since coins, like certificates, carry counterparty risk, and certificates are also easier to transport and can be provided with a certain degree of theft protection, the latter gradually gained ground over coins.

Usually, it was either private banks or states that standardized and issued these certificates.

Sadly, like the clever innkeeper’s son from earlier, the certificate issuers quickly realized that they did not necessarily have to hold 100% of the certified precious metal amount.

Some certificates get lost, while others are not redeemed for a long time, either because they are used for saving or as a convenient substitute for gold in transactions.

Over time, more and more customer deposits were taken for personal gain, until one day all historical certificate currencies had as much precious metal backing as the late Roman Sesterce before them. Zero.

Once a currency is no longer backed by a scarce asset, it becomes fiat money. The issuer of the money is the one who controls the scarcity of the units and can simply create more with their command “Let it be done!”.

The incentive for the creator of the money is obvious. Why work hard to earn money when it can be created much more easily?

But why don’t the other market participants resist?

Bitcoin Nation – VALUE AND PRICE (Pt.1-Ch.2)

My new book “Bitcoin Nation” was published on the 15th anniversary of the Bitcoin Whitepaper, October 31, 2023. You can read it below, one chapter per week. Or buy it here.

“I have a very valuable watch.”

What comes to mind when you hear this statement?

Depending on your personal experiences with timepieces, an image will likely appear in your mind that falls into one of the following two categories:

  1. An expensive watch.
  2. An emotionally significant watch.

The first category creates an image, such as a man wearing a suit with a gold Rolex on his wrist.

The second one evokes a picture of a boy receiving his great-grandfather’s watch, which was bought with his first salary after the war.

How can this one word “value” have such different meanings? How can something be valuable in terms of market price but completely worthless to you, and vice versa?

To understand this, we must recognize the difference between subjective and objective value.

We have already considered subjective valuation at the beginning of this book. It is characterized by its relationality, temporal volatility, and the impossibility of quantification, which is called “ordinality”.

Objective valuation arises from subjective valuation through the price discovery process of the free market. Whenever two individuals voluntarily exchange goods and services, two subjective valuations meet.

If we trade 1000 eggs for a pair of boots, we only do so because at that moment, I value the boots more than 1000 eggs, while you, conversely, want the eggs more urgently than the boots.

The objectively observable action does not reveal how we each value the goods, since I might have also paid you 2000 eggs, or you might have accepted 500 if one side had negotiated more persistently. We cannot verify this objectively. It is evident however that the intersection of our respective priorities is precisely at 1000:1.

If we make this observation across an entire economic space, it turns out that there is an equilibrium price for every good. This is also called the market-clearing price, as at this price, theoretically, all demanders can receive a good and all suppliers can receive money.

In short, when many individual transactions are made, misjudgments converge to zero on average. It should be emphasized that the “error” of judgement here is not necessarily an error from the perspective of the acting individuals, but merely that the person who paid more than the equilibrium price was not maximally economical with their resources. They could have apparently obtained the good from another trading partner at a better price.

There are many valid reasons why people pay “too much” for a good, such as the cheaper dealer being significantly further away.

People act to reduce their dissatisfaction. In doing so, it is natural for them to try to minimize their dissatisfaction using the means available to them.

This implies that although individuals subjectively perceive what reduces their dissatisfaction, it is universally true that people do what they think contributes most efficiently to their satisfaction.

If a pair of shoes costs 1000 eggs here and 500 eggs 100 km away, it is my subjective decision whether the expenses and travel time are worth saving those 500 eggs. However, if two dealers at the same location offer equivalent shoes at such different prices, I will always choose the cheaper option as a logical thinker.

The market price of a good thus contains concentrated information about the value judgments of all market participants. This information cannot be reverse-calculated to quantify individual subjective value judgments. Nevertheless, this information is important.

Just as the hash function in cryptography cannot be reverse-calculated but still carries essential information, such as proof of possession of Bitcoin private keys, the market price indicates how scarce and in demand a good is.

This is of course only true if the money in which this market price is expressed has not been manipulated beforehand.

But how do you know whether money is manipulated or not manipulated?

Bitcoin Nation – WHY DO WE USE MONEY? (Pt.1-Ch.1)

My new book “Bitcoin Nation” was published on the 15th anniversary of the Bitcoin Whitepaper, October 31, 2023. You can read it below, one chapter per week. Or buy it here.

Throughout the millennia, a lot has been written and talked about money. Unfortunately, the understanding of what money actually is remains regrettably low. Today, money is widely assumed to be bad, shady, or even dangerous.

One could rightly blame the church and the state as the originators of this miserable reputation. Both institutions controlled education for many centuries and had a vested interest in ensuring that the masses did not understand money. This allowed those in power to covertly increase taxes through inflation without finding citizens armed with torches and pitchforks at their doorstep. The Catholic Church, in particular, has often unfairly maligned money while hoarding gold themselves.

Nevertheless, the 20th century clearly demonstrated that most citizens have a broad disinterest in how money works and thus share the blame for their ignorance.

As early as 1921, Alfred Lansburgh, writing under the pseudonym “Argentarius”, warned of an impending financial disaster, which Germany would indeed later experience in the form of hyperinflation in 1923. He noted the population’s lack of interest in his warning along the following lines:

As long as money works well enough, people don’t want to think about it.

According to Argentarius, a major monetary crisis hits a country about every 100 years, or whenever those who experienced the last one have died.

Another aspect is that money is such a fundamental building block of our society that a single discipline is not enough to explain it. To fully understand money, one must be a universal genius, well-versed in all sciences. Therefore, I do not presume to provide a comprehensive explanation of all aspects and social implications of money in this book. Luckily, that is not necessary, as a basic understanding of money will suffice for most people. The aim of this and the following chapters is to make the aspects of money that are important to you in your daily life understandable. In doing so, I hope to give you a competitive advantage over all those who lack this understanding.

So, what is money?
Before we can understand that, we must first ask: What does money do?

A core function of money is to be a medium of exchange. This means we do not use money directly but indirectly. Most goods are either consumed directly or indirectly by using them to produce other goods. In contrast, we do not consume money; we exchange it.

Such an exchange is necessary, as a pure barter economy is extremely cumbersome and impractical in a highly developed, specialized economy.

Let’s assume I am a farmer and you are a shoemaker. If I want to buy shoes from you, I could pay you the price in eggs all at once. However, 1000 eggs, with their limited shelf life, would hardly be an acceptable payment for you. So, you would either arrange installment payments with me or use the eggs as a medium of exchange and pay your suppliers with them.

In the latter case, the eggs obviously serve a money function for you, as you exchange them instead of consuming them. But even in the first case, the eggs serve a money function, albeit indirectly. Because if we agree on installment payments,one of us has to grant the other credit. Either I deliver the eggs to you first without receiving the shoes, or you deliver the shoes first without receiving the full number of eggs.

So, if you deliver the shoes first and then receive a daily breakfast egg for years, you have effectively granted me credit denominated in eggs.

We will delve deeper into the topic of credit later. At this point, we want to summarize the two functions of money we have identified so far.

Money is a medium of exchange. A medium of exchange is needed to trade with people who do not have a good that I need or do not want a good that I have to offer.

Money is a unit of account. If an exchange cannot be completed immediately, one side must grant credit, which is quantified in the thing used as money.

These two functions can be summarized by the fact that they enable a direct exchange in person, place, and time to be postponed.

Instead of exchanging eggs and shoes directly, we can agree that payment will not be made immediately (postponement in place and/or time). Alternatively, you can accept the eggs directly even though you don’t need them and exchange them further yourself (postponement in person). A combination of both is also possible. For example, if I pay you first, then you exchange the eggs for raw materials and deliver the shoes later.

Since, as we have seen, any good can function as money, Hayek also argues that money should be an adjective. So one should rather discuss how much “moneyness” a good has instead of money and non-money goods.

How high the moneyness of a good is at any given time depends on numerous factors. First, there are the physical properties of the good used as money. Six properties are usually mentioned:

1. Divisibility
2. Durability
3. Verifiability
4. Transportability 
5. Fungibility
6. Scarcity

Eggs are bad money because they are not divisible without destruction and have a very short shelf life. Moreover, eggs usually have a low market value due to their generally low scarcity.

Thus, larger transactions are difficult on an egg standard.

In contrast, gold has been the preferred money for millennia, as it is almost infinitely durable, reasonably divisible, verifiable, and fairly transportable. Above all, it is quite scarce.

Why, then, is gold no longer the world reserve currency?

Is there better money now?

Until 2009, the answer to this question would have been a clear no.

Since at least 1971, no major world currency has been backed by gold or anything else of value. Today’s state-issued fiat money (from the Latin “fiat”, meaning “let it be done”) is not scarce. States, central banks, and commercial banks can create it in virtually unlimited quantities at will.

Of the six properties mentioned above, scarcity is the essential one for a sustainable money function because only scarcity can allow money to preserve value.

Here we have discovered the third function of money: money serves as a store of value. As mentioned above, we need a method to shift transactions over time in our daily interactions. Let’s assume we have agreed that I will deliver one egg to you daily for 1000 days. Only after that will you deliver the shoes to me.

As a good merchant, you make the shoes one day before I make the final payment, avoiding storage costs. However, it turns out that the cost of raw materials, measured in eggs, has risen significantly. Your suppliers now demand 2000 eggs, which means you effectively make a loss on the sale of the shoes. In this example, the eggs have failed in their monetary function. The value was not transported over time, so it would have been economically better for you to demand 1000 eggs immediately.

As absurd as this example with eggs may sound, it has happened in reality many times. Argentarius describes in his works how entrepreneurs in the Weimar Republic fell into this trap shortly before hyperinflation. They agreed on a price in Reichsmarks for a future delivery. However, by the delivery date, the Mark had lost so much value that either production could no longer take place, leading to bankruptcy, or the inventory could not be restocked with the paper profit made after the transaction. Some companies went under, even though their balance sheet showed a significant profit.

But how does such a loss of value occur?

So far, I have simply stated that this has to do with the scarcity of a good.

This can be proven in two ways. I will briefly explain both, as understanding them is essential for understanding other monetary phenomena.

The first approach comes from praxeology, the science concerned with the logic of human action, developed by Ludwig von Mises and other representatives of the Austrian School.

Let’s first ask ourselves why people act. No matter what we consciously do, even if we decide to do nothing, it is always an action. “Man acts” is a universally valid axiom. We always choose the action that is best suited to satisfy our most urgent needs.

When we see a burning house with cries coming from inside, we can decide to either run in or simply watch the house burn down. Which of the two actions we pick depends on our preferences.

What is more important to us? The life of the person in the house or our own life, which we would risk?

You are probably more willing to run into the house for your child than for a stranger. In short, your child’s life is more important to you than your own, while a stranger’s life is less important.

However, you likely wouldn’t just give your life for your child for fun, but only because the situation requires it. How you prioritize your actions depends on both your preferences and the circumstances.

If you have a ladder at hand, you will likely save the unknown person you can see through the window, even if you are not willing to risk your life. This is because, in this case, while there is still a risk for you, you consider it so small that the indirect guilt of the person’s death seems more pressing than the slight risk of dying.

The interesting thing is that this assessment occurs without a unit of measurement. You won’t create a formula to weigh how many strangers your life is worth, and then compare it to the amount of guilt you would feel if the person dies.

Your preference hierarchy is purely subjective, temporally variable, and relational, so it is not absolutely quantifiable. That’s why it also eludes mathematics.

Your life is probably one of the things high up in your preference hierarchy. Therefore, one could assume that everything that sustains your life also ranks high and is valuable to you.

Since you would die within a few minutes without oxygen, one might expect that you would be willing to pay many units of money for oxygen. Surprisingly, oxygen is available for free almost everywhere on this planet. You would probably even be outraged if you suddenly found a bill for breathed air in your mailbox.

However, things are different in the example where you want to save your child from a burning house. Breathable air is hard to come by within the inferno. A bottle of compressed air would be very useful there and would significantly improve both your and your offspring’s chances of survival.

How many units of money would you pay to be able to enter the building with a compressed air bottle? Ten units? One hundred? Even a million? You would probably give away everything you carry with you, and in doubt, you might even promise a multiple of your wealth if you could only take this precious air inside.

As you can see, the price you are willing to pay for a good or service depends not only on how much you want or need it, but also on how scarce the good is at the particular location where you want to acquire it.

Mises explains this with the diminishing marginal utility of a good as its availability increases.

You urgently need air, but it is usually abundant. Therefore, you can satisfy your need to breathe air without taking it from someone else. Having more air than you need has no value for you, as you can’t store it and have no use for it.

If air is scarce in a situation, it will quickly rise to the top of your priorities, and you will take any action to get air.

If you are deeply interested in this topic, I recommend the book “Human Action” by Ludwig von Mises.

Another way to reach the same conclusion is the so-called quantity theory. It is often criticized or even ridiculed by modern economists, but in my view, it has its value.

Irving Fisher formulated the quantity theory using the following equation:

M·V = P·Q

M stands for “money supply,” which refers to the circulating amount of money in the economic area under consideration.

V is the “velocity,” the speed at which money circulates.

P represents the “price,” describing the general price level.

Q for “quantity,” expresses the number of transactions.

Since this equation is difficult to understand at first glance and is frequently misrepresented or misinterpreted, we need to resort to examples again.

As a native Bavarian, I have been familiar with the interior of a beer tent since I was a child. The economically interesting thing about a beer fest

is that a separate currency is usually used there. Beer and chicken are typically unavailable for the legal tender, but for tokens.

You can obtain these tokens either by purchasing them, exchanging the country’s fiat currency for them, or by earning them. Sometimes, of course, friends also gift them to you.

If you help the innkeeper set up tables, you will quickly be given a handful of beer tokens as compensation.

Let’s take a closer look at this small festival economy.

Say the innkeeper orders 1,000 liters of beer, and one token corresponds to one liter. Thus, the innkeeper can distribute 1,000 tokens. Since the tokens are invalidated after use, each can only be used once, resulting in a maximum possible circulation speed of one.

Ideally, 1,000 tokens (M) circulate once (V) and allow exactly 1,000 liters of transaction volume (Q) at a price of one token per liter (P).

As you can see, the equation works perfectly in this case.

Unfortunately, the world is not perfect. Suppose the conductor of the brass band had one too many drinks, and a roll of 100 tokens falls out of his pocket and is lost forever.

In this case, the innkeeper has several options. He can give away the remaining 100 liters of beer, consume it himself, or generously reprint a roll of tokens and hand it to the conductor.

What happens if the innkeeper chooses the latter option, and the lost roll suddenly reappears? In this case, some festival-goers will inevitably miss out despite having legitimately acquired tokens.

Now the resourceful innkeeper comes up with the idea to balance this discrepancy elegantly. He simply promises his supplier that they and their employees will receive an extra 200 tokens next year for the quick delivery of an additional 100-liter barrel this year.

He has successfully postponed the problem until next year, and since he wanted to retire anyway, his son will take care of the matter.

The son, equipped with his father’s cunning, continues the game the following year. Since tokens are bound to be lost one day, he simply promises everyone who missed out this time two tokens in the following year.

This works well for several years. Unfortunately, the young innkeeper eventually succumbs to gambling. All the tokens are quickly gone, and he has nothing left to pay the suppliers. Therefore, he prints more and more tokens every day until, one day, a high multiple of the available beer’s nominal value is circulating in tokens. Knowing that his guests will hardly be satisfied with the promise of future beers this time, he escapes abroad. A scandal that shakes the honest village population to the core.

To resolve the drama as fairly as possible, the mayor determines how many tokens are in circulation. It turns out that 100 tokens correspond to a liter of beer. Therefore, the mayor decides that instead of laboriously collecting tokens and issuing new ones, a liter of beer will simply cost 100 tokens this year.

As you can see, also in this example, the quantity equation could not be violated. If the money supply increased, either the circulation speed had to fall proportionally (not all tokens could be redeemed), the quantity of goods had to be increased, or the price had to be raised.

When we switch from the festival to the national economy, the quantity equation becomes difficult to apply.

This is partly due to the question: What is the general price level P?

To stay with our example:
If one token buys one liter of beer, but five tokens buy a roasted chicken, today. And next year it’s still one token for a liter of beer but now ten tokens per chicken. Has the price level stayed the same or risen?

This question can only be answered individually. For the vegetarian, purchasing power has not changed. For the non-drinking alcoholic who enjoys eating grilled poultry, it has been halved.

So, when a central bank claims its goal is “price stability,” you should ask:

For whom?

Of course, this does not mean that the quantity equation is useless. Just because it is difficult to measure the price level of all products and derive individual purchasing power from the general price level, the mathematical consideration still has an essential application.

It allows us to estimate the possible effects of monetary changes and what cannot be affected. In addition, we can understand through Fisher’s equation under which conditions money can successfully fulfill its function as a store of value, that is, the postponement of a transaction into the future.

But what is this “value” that a saver seeks to store in money?

Bitcoin Nation – Introduction

My new book “Bitcoin Nation” was published on the 15th anniversary of the Bitcoin Whitepaper, October 31, 2023. You can read it below, one chapter per week. Or buy it here.


Regardless which of our society’s problems, you mention, Bitcoin maximalists respond with: “Bitcoin fixes this.”

This statement is often ridiculed by so-called “pre-coiners” (people who are not yet convinced by Bitcoin), and every so often Bitcoin enthusiasts are dismissed as crackpots, or Bitcoin is referred to as a “religion.”

For several years now, I have considered myself part of the circle of Bitcoin maximalists (people who see Bitcoin as more than just a cryptocurrency). In this book, I want to defend the thesis “Bitcoin fixes this.” with solid arguments.

More precisely, I will attempt to show that there are only two categories for the pressing problems of our time:

Bitcoin fixes this.
Only through Bitcoin can one begin to fix this.

This book is aimed at people with little or no economic background. The first part focuses on didactic aspects, while the scientific character takes a back seat. In the second part of this book, after having established a solid foundation, I want to provide even other Bitcoin maximalists with some food for thought.

Without giving too much away, in the latter half of this work we will discuss how a state built on Bitcoin could look like and whether such a “state” truly still deserves to be called a state.

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