The Bitcoin Standard: The Decentralized Alternative to Central Banking by Saifedean Ammous

Chapter 1
Money
Bitcoin is the newest technology to serve the function of money—an
invention leveraging the technological possibilities of the digital age to
solve a problem that has persisted for all of humanity's existence: how to
move economic value across time and space. In order to understand Bitcoin,
one must first understand money, and to understand money, there is no
alternative to the study of the function and history of money.
The simplest way for people to exchange value is to exchange valuable
goods with one another. This process of direct exchange is referred to as
barter, but is only practical in small circles with only a few goods and
services produced. In a hypothetical economy of a dozen people isolated
from the world, there is not much scope for specialization and trade, and it
would be possible for individuals to each engage in the production of the
most basic essentials of survival and exchange them among themselves
directly. Barter has always existed in human society and continues to this
day, but it is highly impractical and remains only in use in exceptional
circumstances, usually involving people with extensive familiarity with one
another.
In a more sophisticated and larger economy, the opportunity arises for
individuals to specialize in the production of more goods and to exchange
them with many more people—people with whom they have no personal
relationships, strangers with whom it is utterly impractical to keep a
running tally of goods, services, and favors. The larger the market, the more
the opportunities for specialization and exchange, but also the bigger the
problem of coincidence of wants—what you want to acquire is produced by
someone who doesn't want what you have to sell. The problem is deeper
than different requirements for different goods, as there are three distinct
dimensions to the problem.
First, there is the lack of coincidence in scales: what you want may not be
equal in value to what you have and dividing one of them into smaller units
may not be practical. Imagine wanting to sell shoes for a house; you cannot

buy the house in small pieces each equivalent in value to a pair of shoes,
nor does the homeowner want to own all the shoes whose value is
equivalent to that of the house. Second, there is the lack of coincidence in
time frames: what you want to sell may be perishable but what you want to
buy is more durable and valuable, making it hard to accumulate enough of
your perishable good to exchange for the durable good at one point in time.
It is not easy to accumulate enough apples to be exchanged for a car at
once, because they will rot before the deal can be completed. Third, there is
the lack of coincidence of locations: you may want to sell a house in one
place to buy a house in another location, and (most) houses aren't
transportable. These three problems make direct exchange highly
impractical and result in people needing to resort to performing more layers
of exchange to satisfy their economic needs.
The only way around this is through indirect exchange: you try to find some
other good that another person would want and find someone who will
exchange it with you for what you want to sell. That intermediary good is a
medium of exchange, and while any good could serve as the medium of
exchange, as the scope and size of the economy grows it becomes
impractical for people to constantly search for different goods that their
counterparty is looking for, carrying out several exchanges for each
exchange they want to conduct. A far more efficient solution will naturally
emerge, if only because those who chance upon it will be far more
productive than those who do not: a single medium of exchange (or at most
a small number of media of exchange) emerges for everyone to trade their
goods for. A good that assumes the role of a widely accepted medium of
exchange is called money.
Being a medium of exchange is the quintessential function that defines
money—in other words, it is a good purchased not to be consumed (a
consumption good), nor to be employed in the production of other goods
(an investment, or capital good), but primarily for the sake of being
exchanged for other goods. While investment is also meant to produce
income to be exchanged for other goods, it is distinct from money in three
respects: first, it offers a return, which money does not offer; second, it
always involves a risk of failure, whereas money is supposed to carry the
least risk; third, investments are less liquid than money, necessitating
significant transaction costs every time they are to be spent. This can help

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