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Sound Money

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Sound Money History

It is said the phrase “sound money” comes from the centuries-old, musical, metallic ring gold, silver, or copper coins make when dropped on the surface of metal, wood, stone, or glass. Its roots come from Ancient Rome during a time when small silver coins were used to pay for everyday goods and services. Since ancient times, the various currencies used have been debased to the point where appreciation for gold and silver has all but been removed from the public consciousness. Ask people today about the origins and history of money, and few will be able to express a true understanding.

Gold and silver rose as sound money because they established themselves as a reliable, common media of exchange. The portability, divisibility, durability, scarcity, and consistency of precious metals made them the most marketable commodities, and they have stood the test of time.

To learn more about the context of sound money and Bitcoin’s potential role in monetary history, The Bitcoin Standard by Saifedean Ammous is highly recommended. A good read regardless of your background or interest in cryptocurrency.

“Fiat money” like the dollar, euro, yen, etc. are not backed by anything tangible. The concept of money has long been reduced to just a promise vs. the promise of the bank to exchange it for a certain amount of a real asset like gold or silver.

Unlike precious metals, every fiat currency since the Romans has ended in devaluation and eventual collapse. The economy of the currencies collapsed as well and fiat failures have become even more common in modern times. Each time paper money has been issued, it became overissued and eventually ended up being worthless. The number of paper money currencies no longer in existence is 599, and the median age on average for paper currency is 38 to 39 years.

Money Supply

The money supply of bitcoins is finite due to the rule embedded in the program code. This rule is far harder to alter than rules imposed by central banks, statutes, or governments. Bitcoin price volatility is almost entirely due to fluctuating demand. Normally, currencies keep seasonal or event-driven demand fluctuations from impacting price with an elastic money supply. Gold has long-term money supply elasticity due to mining. When the price of gold rises due to a change in demand, mining is incentivized and the price lowers and stabilizes.

Sound money is hard money as it’s difficult to accumulate. If the price of bitcoin rises due to a change in demand, this also incentivizes mining, but more people mining bitcoin results in the required cryptographic problem being solved faster. This triggers the network code to automatically adjust the difficulty of the problem to return it to an average of 10 minutes. So, there is no adjustment of the money supply curve, the cryptography is simply made stronger. Should demand decrease, the network adjusts the difficulty in the opposite direction.

Bitcoin Challenges

Gold is a unique asset, and Bitcoin shares some similarities. Bitcoin has challenges to overcome before consideration is given to it being the next sound money, but they are not insurmountable. Bitcoin has already achieved some level of popularity and value without the mandate of a government. It appears to be the only currency to gain any adoption voluntarily and spontaneously. Will it be considered as a sound money alternative to the dollar in the future? Only time will tell.

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