Bitcoin and bimetallism

I wrote a piece on Forbes recently in which I described a bimetallic system of coinage and suggested how such a system might work - or rather, fail to work - for Bitcoin. These are the relevant paragraphs:
In a bimetallic system, there are effectively two currencies which are linked by a fixed exchange rate set by fiat. At the end of the 19th century - the time of Bryan's speech - Britain's copper penny was worth 1/144 of one pound. Other denominations of coin were created by multiplying up the penny: so the silver sixpence was unsurprisingly worth six copper pennies, and the silver shilling was worth twelve pennies, or 1/20 of a pound. All these relationships were fixed by fiat.
So, suppose that instead of using bitcoin as the medium of exchange, we use some other coin - let's call it "satoshi". We decide that this other coin is worth 1/100m of 1 bitcoin. Of course, in the Bitcoin system, there is no government "fiat": the nearest they have to this appears to be decisions made by developers, which are then validated by miners. It is democratic, sort of, though as the number of active miners is diminishing due to ever-rising costs, the claim to democracy is wearing distinctly thin. No matter. Developers can decide that the satoshi, not the bitcoin, shall be the medium of exchange, and set its value by fiat. Mankind shall not be crucified on a cross of Bitcoin.
This sounds like a solution. But it is not. Ultimately, it spells the rise of the satoshi and the demise of bitcoin. This is because Gresham's Law applies: people will spend satoshis and keep bitcoins. As economic activity increases, demand for the satoshi will rise, putting the fixed exchange rate under pressure. The satoshi will inevitably be devalued, probably several times. Eventually, the fixed link to bitcoin will be broken, and the value of bitcoin in satoshi will float.
Cue lots of Bitcoin experts popping up on Twitter to tell me I don't understand Bitcoin. This coin is different, apparently.

Their objections to my argument basically boiled down to three things:
  • satoshi are simply smaller amounts of bitcoin, in the same way that a gram of gold is a smaller amount than a kilogram 
  • a bitcoin is a multiple of satoshi, not the other way round
  • the relationship between bitcoin and satoshi is fixed and immutable
I don't buy any of these.

Firstly, the "it's only a bit of a bitcoin" argument. That would hold if bitcoins, like gold, were made of something intrinsically distinctive. But they are not. They are bits on a computer. It is simple nonsense to say that one set of bits on a computer (which we have called a "satoshi") is "intrinsically" part of a larger set of bits on a computer (which we have called a "bitcoin"), but another set of bits (let's call it "ether") is not part of that larger set of bits. A bit is a bit. There is no intrinsic relationship between one bit and another bit. Whatever relationship there may be between them is created entirely by coding - which is a form of fiat. Anyone who has ever worked in machine code (as I did, very early on in my career) would know this. Sadly, despite dumping meaningful names in favour of long strings of numbers and confusing people by talking in hash-language, some of the geeks who dominate the crypto world don't seem to know how computers work. 

My description of a satoshi as a new coin is every bit as accurate as theirs declaring satoshi to be a subdivision of bitcoin. It is merely a matter of perception.

The second objection says that my argument is wrong because I have valued satoshi in terms of bitcoin, when in fact the relationship is the other way round. Does this matter? No, it doesn't. The value relationship between two coins is the same whichever way round you quote it. In the example I gave in the Forbes post, a copper penny was worth 1/240 of a gold pound, and a silver shilling was worth 1/20 of a gold pound. Equally, a satoshi is 1/100m of a bitcoin. But I could also quote this the other way round: a gold pound was worth 240 copper pennies or 20 silver shillings, and a bitcoin is worth 100m satoshis. It makes no difference.

In 19th century Britain, most people would have valued pounds in terms of pennies or shillings, not the other way round, because the vast majority of transactions were in shillings or pence, not pounds. The pound was simply too valuable. This is also the case for Bitcoin. Transactions are in satoshi because bitcoins are too valuable to be practical, so it makes sense to quote the value of bitcoin in terms of satoshi. But the precedence does not change the relationship.

Alternatively - since my critics used gold as their example - I could say that 1g of gold is 1/1000 of 1kg of gold, or 1kg of gold is 1000 x 1g of gold. It is exactly the same relationship, just expressed differently.

The difference between these two examples concerns the nature of the relationship. There is no intrinsic relationship between gold, silver and copper: they are different metals. The value relationship is therefore set by fiat. In contrast, the relationship between a smaller and a larger quantity of gold is simply a matter of measure. But I have already pointed out that there can be no "intrinsic" relationship of this kind between a satoshi and a bitcoin. If there were, then everything on every computer everywhere in the world could be regarded as bitcoin. So the relationship between satoshi and bitcoin must be set by fiat.

And indeed it is - powerfully. Here is Bitcoin Wiki explaining how the satoshi came into being:
The value of a bitcoin in satoshi was decided by Satoshi Nakamoto to be 100 million no later than November 2008.
On November 15, 2010, ribuck proposed that the one hundredth of a bitcoin (0.01 BTC) be called a Satoshi. Four months later he instead suggested that the one hundred millionth unit be called an austrian or a satoshi. The name satoshi caught on, and was widely adopted thereafter.
(For those who don't trust Wiki links, even Bitcoin ones, Satoshi's original code can be read here.)

So a trusted guru sets the value of one coin in terms of another. This guru then disappears and becomes an object of worship for his followers. Satoshi himself did not call the smaller coin "satoshi" - that name was established later in his honour. Surely a coin whose value is set by a god-like (but human) figure is the ultimate fiat currency? No wonder Bitcoin aficionados insist that the value of a satoshi in bitcoin terms (or vice versa) is fixed and immutable. It was set by the Lord Satoshi himself. Sometimes I think Bitcoin is more like a religion than a currency.

But a relationship that is set by fiat is not immutable. It can be extraordinarily difficult to change, of course: just try suggesting to a staunchly Hindu community that they could kill and eat a few of the sacred cows that are roaming their streets. They would rather starve. But this has nothing to do with logic or sense, and everything to do with ideology - or faith, if you prefer. So the Bitcoin community doesn't like the hard fork that would be necessary to change the relationship of satoshi to bitcoin. That doesn't mean it is impossible, any more than it was impossible to change the relationship of pennies to pounds. In 1970, the British government did exactly that. It "decimalised" the currency. The penny became 1/100 of a pound, and the shilling was eliminated along with other subdivisions of the old pound, such as the sixpence, the threepence and the half-crown. To this day, there remain a small minority of people who want "old money" back.

Someone told me that the software that runs Bitcoin could not cope with a change of relationship. This is nonsense too. It would need to be substantially amended, of course, but it is only code.  Don't let anyone ever tell you code is immutable. Code can always be changed.

Another genius had the nerve to say to me that the satoshi is the "atomic level" of bitcoin - which implies that there can be no further subdivision. This is more nonsense. Satoshis are sets of bits. Therefore they can be subdivided. Indeed, there have already been discussions about subdividing the satoshi, and the Lightning network could provide a means of doing so without a hard fork.

If a satoshi can be subdivided, it can be revalued. Indeed, we could say that if a subdivision becomes necessary, the satoshi will by definition be revalued, and will gradually go out of use just as bitcoin will. This is because of the deflationary nature of Bitcoin.

In an inflationary currency, it tends to be the smaller coins that go out of use, because they become impractical: the halfpenny was withdrawn from British coinage some time ago, and the penny and fivepenny coins are on their way out. Along with this goes debasement of the intrinsic nature of the coinage, because when the face value of the coins slips below the price of the metal needed to make them, the issuer loses money (seigniorage). So you won't find any actual gold, silver or copper in British coinage today. Those who want to store value tend to exchange coins for other assets, such as bars of gold, artwork, fine wines and property - and future claims on other people's assets, of course.

But in a deflationary currency, Gresham's Law applies - and the ultimate end of Gresham's Law is that "good" currency disappears from circulation, because it is hoarded to the point of complete illiquidity. Once you can't sell an asset, it becomes worthless. And like it or not, bits on a computer simply do not have the cross-cultural and historical value of gold. Bitcoin is a fiat currency. And as Bitcoin aficionados like to remind us, all fiat currencies eventually fail.

Related reading:

Ethereum and the "Old Catholics" - Forbes
Pilate's Game

Image of old British coins from Dreamtime


  1. Remember The Fall Of The Rupee.

  2. Amusing. People are always looking for a magic guarantee of value, but they never find it... setting themselves up for con men to sell them a fake panacea.

  3. Your bimetallism argument would have been better understood by bitcoiners if you had used altcoin Vs bitcoin as a metaphor rather than using different human-facing representation of a single currency (inside the software, eg if you look at transactions at the binary data level, bitcoins and satoshis are not distinguishable, like Z pounds in your bank account cannot be thought as a unique combination of X tenners + Y fivers).

  4. In the Forbes article you say miners don't want liquidity because it reduces mining profit. Ignoring the block reward for a moment, miners' income is average tx fee * number of tx. A low avg fee can be more than compensated by having lots of transactions and more transactions are more or less free to miners (validating bigger blocks does NOT require more mining power).

    Why are many miners then apparently opposed to capacity increases? Because they think of transaction volume as a universe constant. (Yes most miners are dumb.)

    Also Satoshi stated reason for the 1MB limit is not some grand monetary plan but just a temporary hack to ensure max resource usage so that ordinary punters can run a node on a home PC (which is the original model: 1 wallet = 1 node). That most people now end up using trusted bank-like intermediairies to access bitcoins is a major fail.

    1. "Why are many miners then apparently opposed to capacity increases? "

      The argument is/was not over whether to increase or not but how big that increase should be. Increasing the block size increases the difficulty in hashing the blocks. This makes mining more difficult and less profitable for smaller players. The majority thus favour a smaller increment. Increase the block size and yes you speed things up and reduce transaction fees but then leave the whole network in the hands of the large commercial mining operations (China)... that could have implications on the chains voracity.

      So it is not just about not money, it's more about the distribution of money or as I prefer to call it ideology.

  5. Oh dear where to start Frances, where to start.

    Would I be flattering myself by thinking that this post is in response to my reply to your reply in the crypto tulips post that you didn’t publish? Oh and did you notice segwit seems to have plugged the hole, the Bitcoin bubble’s not burst.. so much for the I spy book of graphs that look similar but bear no temporal, spatial or environmental similarities whatsoever. On the bright side the failure of that prediction has created an opportunity for another ‘the bubble’s gonna burst’ post for November eh ;-)

    Every virtual cloud has a bimetallic lining eh?

    Now either you or I have got the wrong end of the stick on side chains.

    Not quite sure why you chose LSD for your example but you could have as easily used the Euro, 50c, 20c and the 5c for your examples and not left millennials scratching their heads over imperial divisions.... but that wouldn’t change that you haven’t grasped what side chains are.

    You analogy would have worked better if you had instead chosen British (Bank of England) notes and compared them to the Jersey, Guernsey or Gibraltar pounds since these have distinct treasuries but (in theory at least try changing some) all have the same value as the BoE £.. They are separate currencies, unlike your farthings, shillings and ha'penny example..

    When is your prediction for those three legged manx notes to take over the world or at least sterling?

    That said it wouldn’t change that your understanding of side chains is flawed.

    Side chains are not or shouldn’t be a separate currencies from the main chain. The side chain is a chit against a store of Bitcoin and it is used to permit micro payments that would otherwise be dwarfed by the fees.
    The Bitcoin in this instance should be in a virtual vault and anyone who wants to cash their side coins in can . They will end up with bitcoins that have expensive transaction fees.

    In this way a sidechain is to the main coin what paper notes once were for gold (so not pennies for pounds). A means to get rid of the weight where weight in crypto is analogous with energy consumption.

    Your statement “My description of a satoshi as a new coin is every bit as accurate as theirs declaring satoshi to be a subdivision of bitcoin. It is merely a matter of perception.”

    Wrong : it’s a matter of design.

    If the satoshi is linked to a fixed number of bitcoins that are vaulted then its value can only ever be reflected in the value of the bitcoins held in the vault.

    If it’s not backed by a vaulted store of Bitcoin then its independent of the main coin and you are right it is just another shitcoin.

    Your whole division argument is erroneous too (probable on both sides) a Bitcoin is just a number. A piece of code could move the decimal point and increase or decrease that number by a factor of ten. That wouldn’t though change the market cap only the value of a single coin. You could go the whole hog and wind that decimal point up so that there was only one Bitcoin.. it would still be worth 50 billion and my mediocre holding would still have the same $ value it has today.. it would just be expressed as a fraction of the great bitcoin (perhaps we could turn it into a ligum?) .. but you do seem to get the proverbial in a bit of twist on this.. that said I’m not interested in the technical feasibility of that code change..

    "Bitcoin is a fiat currency"... not yet it isn’t.

    As I pointed out in the reply you never published The value of a fiat currency is or rather should be a reflection of the the value of the goods and services traded in it ( GDP).. there is no way $50 billion worth of goods is being traded on Bitcoin. I doubt there is a Billion and in truth would not be surprised if $100 million worth of goods was ambitious. So bitcoin isn't like fiat.. if it was it would have a market cap to reflect that.

    1. Indeed, you flatter yourself a great deal too much. This post is in response to several interesting discussions on twitter.

      I have not seen any post from you. I do not moderate comments on posts within 2 weeks of their posting date, so if your comment did not post, it was not my doing. It is possible that it was caught by my spam filter. I will check, and if I find it I will post it.

      The Bitcoin community remains as divided as ever over scaling. Today, there was a Bitcoin hard fork over exactly this issue, because a group of miners decided that they would rather have a large block size increase than implement Segwit. Bitcoin's price has fallen today. The new coin is stealing some of its value. It may recover, of course - it depends on the fate of the new coin. There will be high volatility for some time to come, while people decide which solution to the scaling problem they wish to adopt, since they have now for the first time been presented with a real choice. This is, of course, democracy in action - finally. Up till now, Bitcoin has been an oligarchy.

      I would have thought it was obvious why I chose the LSD example. The 19th century British coins were genuinely copper, silver and gold. 21st century Euro coins are not. This is important, since I was discussing the difference between "intrinsic" value (coins are made of substances which have value independently of the face value of the coin) versus fiat value (the substance of the coin is irrelevant and all that matters is the face value).

      The rest of your comment merely demonstrates how little you know about code. Code is never immutable. A currency which exists only because of code is therefore not immutable. Bitcoin's relationship with the satoshi can be changed, if enough people want it to be changed. Coding is simply a form of fiat, and fiat can be challenged, as indeed it just has been: the Bitcoin hard fork is a challenge to the developers who made a "fiat" decision that the way forward was Segwit.

    2. I have now looked for the post you said you made, and I'm afraid I can't find it in my spam folder. I don't know why it didn't post. You are welcome to re-post.

    3. i'd look again cos the email that arrived in my inbox at 17:23:34 said you just posted it... ;-)

    4. I found it in my folder of comments awaiting moderation, and posted it. You obviously made your comment after the two-week cut-off for moderation. I am notified about posts awaiting moderation, but as I receive well over 100 emails per day, some inevitably get missed.

  6. The split? It hasn't happened.. not yet anyway.

    There has been a near complete adoption of Segwit.. how can you interpret that as divided????

    and bitcoin has NOT fallen now 1 XBT =2,060.44GBP that's not falling..

    Just because there have been a few chancers trading on futures for bitcoin cash doesn't mean a new coin has been created.. it means a few chancers are trying to spin a buck. What you are looking at is the placenta and bitcoin reborn not a twin. Just because it's still warm doesn't mean it isn't already dead. It will die because it won't have the voracity needed to sustain itself. No one wants it.

    "I would have thought it was obvious why I chose the LSD example. The 19th century British coins were genuinely copper, silver and gold. 21st century Euro coins are not.”

    so what.. my 1970's decimal coin collection was also made of copper (so you could have used that) and as the copper is now worth more than the nominal value of the coin.. does that mean copper has done a satoshi take over of sterling? of cos not..

    So in the 19th century copper and gold markets were at fixed exchanges were they?? News to me I was under the impression that they were not even traded on the same floor...

    Similarly I thought you were talking about fiat currencies? they (like bitcoin) don't have intrinsic values .. I can see what you are trying to get at but it doesn't work as the base metal is totally irrelevant with respect to fiat currencies and crypto

    "The rest of your comment merely demonstrates how little you know about code."

    perhaps I should make it clear I don't code and have no coding skills whatsoever (something we perhaps have in common Frances ;-) ).. but that's irrelevant anyway.

    Not sure why you want to argue over immutability with me... Clearly somit close to your heart. Quite the code isn't immutable because we have just had segwit and last year we had ethereums ' hard farce over the DOA fork'

    The immutability comes from the fact that you need a very large majority to agree to that change or you get a fork. As a term tt's probably overused (not by me.. this is I believe the first time I ever posted with respect to it) but it refers to the immutability of transactions. Once made they cannot be reversed. Thus the immutability refers to the voracity of the ledger.. rather than the underlying code.

    When Ethereum hard forked over the DAO last year they did so to reverse a transaction.. Ordinarily that wouldn't be possible but as the DAO investors and miners are largely one and the same it was. they forked to reverse a transaction in their own favour and in doing so put a lot of noses out.. hence the the birth of Classic ..

    Segwit is not the same thing... don't confuse these two and think you are seeing a replay

    1. Reuters seem to be bearing me out

    2. Dear oh dear. The Bitcoin hard fork happened this afternoon. The new coin undoubtedly exists: it is currently trading at $383.61. Bitcoin is down 0.22% on the day - not a huge amount, I agree, but it has not recovered its early loss. So yes, I can say that Bitcoin is currently divided. It may not remain so, but that is the current situation. Take your head out of the sand.

      You haven't understood my point about bimetallism at all. Nor have you understood the significance of the decimalisation of the British currency. I can only suggest you take your blinkers off and re-read my post more thoughtfully. Others get the point.

      Your allegation that I can't code is laughable. I earned my living coding for a good many years. If you can't code, then you have no basis whatsoever on which to critique my discussion of coding. I know what I'm talking about.

      Needing a very large majority to agree to a change is not the same as immutability. You also seem unclear on the nature of immutability. Of course transactions on a blockchain *can* be reversed, technically speaking. Indeed, a consultancy has produced a prototype of an editable blockchain.
      If Bitcoin's blockchain can't be edited, that is a matter of convention (fiat). It is not an intrinsic limitation.

      Oh, and it is "veracity". Voracity is raging hunger.

      I am very familiar with the story of the Ethereum hard fork last year. I wrote about it extensively for Forbes. I have never, ever suggested that the Bitcoin hard fork is in any way similar to this, and nor have I suggested that Segwit is anything like Classic. I am not so ignorant. I think you are confusing me with someone else.

  7. "The new coin undoubtedly exists: it is currently trading at $383.61"

    yes I read those reports too but where, when the main exchanges have said they are not going to support it ... So who is doing the trading?

    who has had a chance to even split their wallet?

    My guess is those pesky hi tech Chinese miners have set up a few round robin transactions so there appears to be trade but it's nothing more than a ruse.

    "You haven't understood my point about bimetallism at all"

    I understand the point, metals have intrinsic value, it just isn't relevant to fiat currencies or crypto which don't ..

    "If you can't code, then you have no basis whatsoever on which to critique my discussion of coding. I know what I'm talking about."..

    Whether or not you can code is as I pointed out above irrelevant. Your comment was with respect to immutability which I stated above refers to the transactions not being reversible. It does not refer to a concept that code is somehow burned into the ether.. although sometimes one could be forgiven for believing so such as with a recursive transaction creating a child DAO and robbing the DAO concept of millions.. that look like a pretty immutable code [error] to me.

    so it would seems some code errors are not as easy to correct as my spelling.. at least with me you still know what the concept is .. not true with coding thos is it? ;-)

    The solution for the immutable code in the DAO was to do what Cher wanted and turn back time on the ethereum block chain.

    Which in a way serves to further demonstrate my now laboured point.. immutability refers to the transactions which cannot be reversed without winding back the block chain. Thats not making it mutable, that's not a rubbing out an error but starting a new book. . Which is why on Ethereum Classic, which still runs the old ledger the DAO transactions stood.

    "I am very familiar with the story of the Ethereum hard fork last year. I wrote about it extensively for Forbes. "

    there is no need to stick your resume up here I am quite familiar with your work as a journalist, former banker, teacher of music and regular on R4...

    but if you are so familiar why are you so confused about immutability referring to the transactions?

    "nor have I suggested that Segwit is anything like Classic"

    no but you are implying it at least one reads that you are convinced this fork has happened where as I predict Bitcoin cash will fade or at best become some Chinese thing, cos that's the only people interested and I suspect.. However they won't be able to maintain the integrity of the network for long.. and in a month it will be gone..

    same with that trading .. it's the chuckle brothers .. from me to you to me to you.....

    I give it a week before we all watch it slowly die like a fish in a puddle on a sunny day..

    but if you know of an exchange where I can flog my couple of bitcoin cash for $300 couldn't post a link could you cos I could do with a grand right now.

    1. here's the reality....

      Electrum seems to be the most Bitcoin cash (BCC)ready wallet (lucky old me)

      but do it wrong and you will not only sell your BCC but leave yourself open for replay attacks... and lose your bitcoins... at that point a China-man will burst into joyous laughter followed by the immutability of the transaction slapping you in the face...

    2. You haven't understood my point at all. I suspect you didn't even try to understand. Intrinsic value is absolutely relevant to what I was discussing in the post, but as you don't understand what I was discussing in the post, you don't see the relevance of the coinage to crypto.

      Immutability doesn't just relate to the transactions, it also relates to the code. Didn't you learn ANYTHING from the DAO hack? Don't you understand the significance of a hard fork?

      Regarding Bitcoin's hard fork, I am not ignorant and I am not confused. The hard fork has happened. It may well fizzle out, but at present Bitcoin is divided. This is my last word on this. I will not post any more comments from you about this. FYI, most of the main exchanges are supporting BCC.

      Regarding my reference to my Forbes work on the DAO. You spoke to me as if I was completely ignorant of it. I am not "sticking my resume up here", I am reminding you that I am anything but ignorant of it.

      But even if I were putting my resume up here, I would have every right to do so. You seem to have forgotten that this is my blog. I can post whatever I like.

      I am happy to debate constructively, but I don't tolerate rudeness, ad hominem attacks, belittling or put-downs. You seem to think you have a God-given right to post here. You don't. You are a guest on this blog, and I expect guests to be polite. If I don't like what you post, it will be deleted. I posted your earlier comment after it got caught in moderation, even though you were very rude to me about that. But this is the only warning I shall give. Be polite, or be banned.

  8. Greenman-23, you were given fair warning. Responding to my request for politeness with an accusation of narcissism was inevitably going to earn you a ban. Your post has been deleted, and so will all other posts from you that are rude to me or others.

  9. If one is given an amount of currency in the 2nd form (BCC) that matches the amount already held in the 1st form (BTC) for zero cost then does it matter if Gresham's law crowds out the 1st form such that it becomes worthless?

    1. I don't think it does. Others might disagree.

  10. "Code can always be changed."
    While this is clearly true, it could well be possible for a period of time that the complexity/ cost/ acceptability of of changing the code would make it practically impossible. I can't say if this is the case for Bitcoin at the moment. The difference between what is theoretically possible and what is possible in practice can be very important depending on the argument.

    Here I'm not sure if you are argues about the theoretical possibilities of Bitcoin what potential developments. And to be honest I'm not sure of the gap between them.


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