The Bitcoin Standard

Question 1

who invented bitcoin?

Answer 1

a guy that goes by the pseudonym Satoshi Nakamoto

Question 2

In October 2009, an internet exchange sold _____. How was the price calculated? Why was this moment so important?

Answer 2

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.

Question 3

On May 22, 2010, someone else paid ____ bitcoins to buy 2 pizza pies worth ___.

Answer 3

10,000; $25. This is the first time Bitcoin was used as a medium of exchange

Question 4

While Bitcoin is a new invention of the digital age, the problems it purports to solve - namely

Answer 4

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.

Question 5

What is money?

Answer 5

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

Question 6

What is the difference between money and investment?

Answer 6

1. 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.

Question 7

characteristics that make money good money

Answer 7

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)

Question 8

Discuss more about time

Answer 8

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.

Question 9

Who is Carl Menger?

Answer 9

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

Question 10

what is salability

Answer 10

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

Question 11

what is the difference of hard money and easy money?

Answer 11

hard money is money whose supply is hard to increase; easy money is money whose supply is amenable to large increases

Question 12

what are the two distinct quantities related to the supply of a good?

Answer 12

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

Question 13

what is the easy money trap?

Answer 13

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

Question 14

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

Answer 14

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.

Question 15

as human technical capacity for the production of goods became more sophisticated, what happened? What were its problems?

Answer 15

money shifted to commodities. They were easier to transport, they were more durable. Supply is hard (gold/silver is rare).

1. fluctuations in value (esp silver)
2. governments and counterfeits could cause their value to decline by reducing the precious metal content in these coins.

Question 16

for anything to function as a good store of value, it has to beat this trap:

Answer 16

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.

Question 17

What is the commodity that has been used as a store of value the longest? and why?

Answer 17

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%

Question 18

Why won’t silver work as a medium of exchange or store of value?

Answer 18

1. Silver corrodes (and is used in industrial processes); 2; silver growth rate has been 5-10%, sometimes 20%.

Question 19

Two overlapping categories before bitcoin was present;

Answer 19

1. 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).
2. 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

Question 20

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

Answer 20

.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.

Question 21

Until the invention of bitcoin, scarcity was always

Answer 21

relative, not absolute

Question 22

The belief that resources are scarce and limited is a misunderstanding of the nature of scarcity, which is the key concept behind

Answer 22

economics

Question 23

In his masterful book, the Ultimate Resource, the late economist Julian Simon explains how the only limited resource is

Answer 23

human time. Most of any good can always be produced if human time goes toward it.

Question 24

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

Answer 24

our technological advancements allow us to produce them at a lower cost in terms of our time

Question 25

Give an example.

Answer 25

Oil. Even as consumption and production continue to increase year on year, the proven reserves increase at an even faster rate.

Question 26

Even gold which has been mined for thousand of years and is continued to be mined in increasing quantities as technology advances over time

Answer 26

If annual production of the rarest metal in the earth’s crust goes up every year, then it makes no sense to talk of any natural element as being limited in its quantity in any practical sense.

Question 27

The more humans exist, the more production of all these raw materials takes place.

Answer 27

technology is by nature both a non excludable good (meaning that once one person invents something, all others can copy it and benefit from it)

and a non rival good (meaning that a person benefiting from an invention does not reduce the utility that accrues to others who use it.

as such, it is better to live in a world with a larger population. The more humans exist on earth, the more technologies and production ideas are thought of, and the more humans can benefit from these ideas and copy them from one another, leading to higher productivity of human time and improving standards of living.

Question 28

the main problem is that whatever objects human chooses as a store of value, its value would rise, and because more of the object can always be made, others would produce more of the object to acquire the value stored in it.

Answer 28

:O

Question 29

Where does bitcoin come in?

Answer 29

Supply of 21 million coins is strictly limited despite how many people use the network, how much its value rises, and how advanced the equipment used to produce it. Should more people demand to hold Bitcoin, the only way to meet the demand is through appreciation of the existing supply.

Because each bitcoin is divisible into 100 million satoshis, there is plenty of room for the growth of bitcoin through the use of ever small units of it as the value appreciates.

Question 30

Traditionally, gold was the medium of settlement of payments and store of value worldwide. The As the scope of comm. and travel grew larger in the 19th century, requiring financial transactions over longer distances, gold moved out of people’s hands and into the vaults of banks, and eventually, central banks.

Answer 30

Under a gold standard, people held paper receipts in gold or wrote checks for it that cleared without physical gold having to be physically moved, vastly improving the speed and efficiency of global trade.

Question 31

As Bitcoin continues to evolve in the direction of having a higher market value with higher transaction fees,

Answer 31

it starts to look more and more like a reserve currency than a currency for everyday trading and transactions

Question 32

Anyone who joins the Bitcoin network generates a public address and a private key.

Answer 32

These are analogous to an email address and its password: people can send you bitcoins to your public address while you use your private key to send bitcoins from your balance

Question 33

There is a system of voting. Can hackers create a lot of nodes to vote to validate their fraudulent transactions?

Answer 33

Honest nodes that are part of the network would have no incentive to do so, because it would undermine the integrity of Bitcoin and devaluate the rewards they are receiving, wasting the electricity and resources they have expended on it.

Question 34

The verification of transactions and the solving of the PoW problems has moved from being conducted by personal computers to specialized processers built specifically to be optimally efficient at running the Bitcoin software.

Answer 34

These application specific integrated circuits (ASICs) were first introduced in 2012, and their depoyment has made adding processing power to the bitcoin network more efficient, because no electricity is wasted on any irrelevant computing processes that would be present in any other non bitcoin specific computing unit.

Question 35

To attempt to attack or destroy bitcoin in any of the ways mentioned earlier is highly unlikely to succeed because

Answer 35

it conflicts with the economic incentives that drive the use of Bitcoin.