The Neutral Ruler

You’ll hear two objections in the same breath. Bitcoin is far too volatile to be money, and bitcoin itself makes prices fall.

Both are fair, and they’re linked. The volatility one usually comes first, and the answer to both starts with flipping the unit you measure in. The second one gets the effect right and the cause wrong, which is why it needs the more careful answer.

Those large swings are what the transition looks like. They fall as adoption grows and the market deepens, and the far end looks like prices drifting down steadily in bitcoin. And no, bitcoin’s rules add no downward force to prices. Technology pushes prices down, and bitcoin is the first money nobody can expand to stop that from happening, so measured in bitcoin the falls finally show.¹ Over a cycle or more, about four years, most things have cost fewer bitcoin at the end than at the start, and a house has a fall that goods priced on what they cost to make don’t have. Over multi-year windows that fall has two drivers you have to keep apart, because one arrives once and the other keeps going. The first is a one-time repricing as the world adopts a fixed unit. The second is a gentler fall at the pace we get better at making things.

Too volatile to be money?

The swings have a reason. Bitcoin’s supply follows a fixed schedule that no single party can change, and it stays that way as long as the network stays decentralised and secure.² Pounds can be created, so when more are wanted, more appear. The price of a pound stays “one pound” while its value changes underneath. Nobody can create more coins when more people want them, so there’s no issuer who will print to meet demand. What adjusts instead is the price and how much holders choose to offer, and paper claims written against coins [contracts that promise coins rather than the coins themselves] can absorb some of a shift for a while. On top of that, many holders are new, many bought with borrowed money, and each cycle flushes out people who still think in pounds and sell back into them. Billions of people changing what they use as money is a phase change in human behaviour, and phase changes are turbulent. The big falls also track the old system’s own tides. Credit gets scarce and everything sells off for cash, bitcoin included. The money floods back in. Nothing about bitcoin changes when that happens, so its price is where the extra pounds show up.

The two currencies fail in different ways. Fiat [government money issued by decree and managed by policy] is volatile too, but reliably in one direction. The £80 weekly shop becomes £88 and it doesn’t come back.³ Egypt has cut its currency five times since 2016, the last time by nearly 40% in a single day, from 31 to 50 against the dollar. Nobody calls that volatility, because the number printed on the note stays the same. The pound is stable in name and falling in fact. Bitcoin is violent in both directions around a long-run rise in what it buys. So the question is which kind of instability you want to hold your working life in for the next twenty years.

The objection also shrinks the closer you look. Volatility depends on how big the market is and how easily you can trade in it, and it falls as adoption grows. A small asset repricing the whole world can’t be smooth. As the market deepens and more people hold bitcoin as savings rather than as a trade, the swings won’t vanish soon, but they damp. You can already see bitcoin shifting from trading like a tech stock toward being held as protection against the old system’s risks.

And nobody says bitcoin has to do every job of money today. Money does three jobs.⁴ It’s something you spend, something you save in, and the unit you measure with. Today you bridge. Keep next month’s bills in pounds, save long term in bitcoin, and spend over Lightning [a payment network built on Bitcoin that settles instantly for fractions of a penny] where it makes sense.⁵ The claim was never that bitcoin is finished money this afternoon. The claim is about where the two systems are heading.

For measurement, what makes a good measuring stick over years is that nobody can bend it. The pound is steady from Tuesday to Wednesday and bends year after year by policy. Bitcoin swings from Tuesday to Wednesday and can’t be bent by anyone.⁶ For a unit of account [the unit prices and debts are quoted and compared in], that’s the property you need. The official measure of prices can tell you roughly how much a ruler that changes length stretched, but it can’t show you how far the goods it prices would have fallen under a unit nobody can expand, because it does all its sums in the same stretched pound.

Does bitcoin itself make prices fall?

No, and the distinction matters. Bitcoin is neutral. The deflation belongs to the free market.

When someone finds a way to make the same thing with fewer inputs, they can cut the price and win customers. Where rivals can copy the cheaper way, they have to match that price or lose those customers, so the saving is competed away and prices get pushed down toward the cost of making one more unit. Where nobody can copy the cheaper way, the saving stays with the business. That force never stopped. You don’t see that fall in pounds because nearly all our money is borrowed into existence, and enough new money and credit has been created, so far, to keep the average of consumer prices rising.⁷ A system built on debts fixed in pounds can take a slow fall that comes with better tools. In that fall it’s the cost of making things that drops, and pay drifts down slowly behind it, so the money to meet a fixed payment is still there. What it can’t take is a sudden fall in the prices credit pushed up, houses first, because then the losses spread through the banks. In that fall it’s the lending that has stopped, so incomes and the house fall together and at once, and the fixed payment is hit from both sides in the same year. Houses come first because people buy them with borrowed money. The debt takes a bigger bite of every income, yours, your employer’s, the government’s. And where the loan was written against a house, the house is worth less too, so the bank stands to lose more on that loan.

So every time a sudden fall in the prices credit pushed up threatens, the system is rescued with new money, and the rescues keep getting bigger. In between the rescues, policy targets rising prices of about 2% a year, forever.⁸ Central banks publish why they aim there. They want room to cut interest rates in a downturn, they know wages resist falling, and they say the official measure of prices overstates the rise.⁹ Those are the reasons they give, and the debts aren’t among them. The debts show up in the rescues, not in the everyday 2%. The starting line for that 2% isn’t zero, because technology keeps pushing prices down. So when a central bank targets 2% inflation, it doesn’t need two points of push. It first has to cancel whatever better tools would have taken off prices that year, then add two on top. How big that fall would be is about how fast output per hour of work grows, which is what the productivity figures measure. On the published figures that’s a point or two a year. No statistic records that fall, because it never happened.

The gain from the better tools is real. Part of it reached you as higher pay, late and unevenly.¹⁰ The rest went to whoever got the new money first, through house and share prices. The scale of the effort tells you how strong the underlying force is. Between 2000 and early 2018 the world added roughly 185 trillion dollars of debt to buy about 46 trillion dollars of measured growth, and measured is doing work in that sentence, as you’ll see.¹¹ Bitcoin doesn’t add a downward force to any of this. It removes the upward one. Nobody can create more of it, so productivity has nowhere to hide.

There’s a second reason prices fall in bitcoin during the transition, and it needs stating carefully, because it’s where the two effects get confused. The world is repricing itself into a money with only 21 million units, so bitcoin rises against most things while technology is also making them cheaper, and the two falls compound.¹² Goods getting cheaper and the ruler strengthening are two different kinds of event, and neither one is bitcoin acting on prices. A house that cost around 300 bitcoin fell to about 40 in a few years even though its price in pounds went up, and it has kept falling since. Builders didn’t get seven and a half times more productive. The house’s price in pounds went up over those same years. All of the fall was the ruler strengthening as adoption grew, and then some. The monetisation effect [the world adopting a thing as money, which raises its value] is a change of level, not a rate that keeps going, so it ends when the savings that are going to move have moved, and it can run backwards, because nothing in the rules stops that. The move is spread over decades and arrives in violent steps all the same. The productivity effect keeps going.

The world measured in bitcoin, over years

Once the transition is mostly behind us, prices drift down at roughly the pace we get better at making things. Call it 1% to 5% a year as a baseline, faster as AI and robotics spread. No committee sets that pace. Some years it’s quicker, some slower, and a war or a bad harvest still makes oil or wheat dearer for a while. Hard money [money that can’t be easily debased] doesn’t abolish scarcity. It stops the ruler lying about it.

Different things fall at different speeds. Anything digital races toward free, because one more copy costs almost nothing to make. Where the software is run for you as a service, the price heads toward the small cost of one more user rather than to zero. Physical goods follow as more of their cost becomes software, automation, and cheap energy. Housing is the odd one out, because much of a house’s price is what people pay to store savings in it, a monetary premium, and that part drains out as money holds its value. That’s a fall goods priced on what they cost to make don’t have. It belongs to the one-time repricing, not to the fall that keeps going. What’s left underneath is what the house is worth as a place to live, plus something for real scarcity where land is short. After that, housing gets cheaper at the pace building gets cheaper, which is slower than software. You save for one instead of borrowing for most of your working life.

Under a money that holds its value, what your pay buys rises, because prices fall faster than pay changes. Your pay in bitcoin may drift down or hold steady, and either way the gain comes from the gap between the two. Where pay holds steady, the gain comes without constant renegotiation, because everyday costs trend down underneath it. That’s the exact mirror of today, where your pay rises and buys less.¹³ Savings grow in what they buy just by sitting there. Ordinary people stop being forced to become investors simply to stand still. Once people expect the money to gain value, a project has to beat what the money itself would gain just by sitting there. Borrowing gets dear and rare, because repaying in money that buys more year after year is heavy, so the economy runs more on savings and ownership stakes and less on borrowed money. And GDP looks flat or even shrinking while life visibly improves, because GDP counts paid transactions, and abundance keeps turning valuable things free.

What people say back

“If prices fall, nobody spends.” People buy phones, laptops, and TVs today expecting next year’s model to be better or cheaper.¹⁴ Needing it now beats waiting for a cheaper one. What falling prices trim is the waste, the spending we only do because holding cash is punished.

“Deflation causes depressions.” I don’t dodge that. In a system this loaded with debt, a sudden broad fall really would be a disaster. But that’s an indictment of the debt design, not of cheaper goods. Most people have the 1930s in mind, when falling prices hit a system already loaded with debt.¹⁵ Prices falling because we got better at making things is progress arriving as lower prices.

“You’re cherry-picking the house dates.” On any single example, fair. The claim is about a cycle or more, about four years. Across a cycle, most things have cost fewer bitcoin at the end than at the start, and nothing in the mechanism rules out a shorter stretch of several years where they don’t. And inside a single year two more things move the number, how much people want that particular good and how much cash people want right now, and those two can swamp both drivers, which is why the split between the drivers can’t be read off one window. Over months the number can run the other way, because in a cash crunch bitcoin falls with everything in fiat terms and goods briefly get dearer in bitcoin.¹⁶

The one condition

One caveat is better said plainly now than discovered later. Everything above holds only if Bitcoin stays decentralised and secure. Those are two things, not one, and together they’re the only long-term variable that matters. Security has a bill. The new coins that pay most of it today are cut in half on a fixed schedule, so over decades the fees people pay to use the chain have to carry it.¹⁷ Those fees go to the miners [the people whose computers add new transactions to the chain].¹⁸ Paying the miners is what makes it worth burning the energy the work takes, and that spent energy is what makes the record costly to rewrite.¹⁹ That’s what keeps the chain secure as the new coins shrink. I can’t put a number or a date on it. If most coins end up pooled inside a few firms holding coins for other people and wrapped in paper claims, the signal can be muted and the old system rebuilt with new branding. That’s why self-custody [holding your own keys rather than leaving your coins with a firm] and real usage matter more than the price does. Coins that only ever sit still leave the spending on the old rails, and the old rails are where the control is.

Flip the question the price chart asks you. “What’s bitcoin worth in pounds” measures the pound. “What does the house cost in bitcoin” measures the free market, and across cycles that number falls. Ask the second one, and you can watch the free market finally doing what it always wanted to do, which is hand the gains back to you as lower prices.