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Recently, Michael W. Green published a serious, nuanced, and rhetorically sharp critique of Bitcoin. Unlike many other simplistic or ill-founded dismissals from the fiat world, his essay “Bitcoin Is Not Sound Money” deals with undeniable tensions: the massive wealth gains by early bitcoiners, the risks of a deflationary money, Bitcoin’s energy consumption, attempts at crony capitalism, and the philosophical problem of designing a just, moral monetary order.

The concerns deserve serious engagement because I think that Green is half right.

He is right that the Bitcoin maxi narrative, as told by most Bitcoin influencers, is inconsistent with sound money. Forever passive ‘hodling’, store-of-value revisionism, and never ending number-go-up fantasies do not describe a generally usable money because proper money foremost must serve as a good medium of exchange. Everything else follows or is secondary.

Green is right that many bitcoiners may be losing the original vision and cypherpunk ethos of Bitcoin. Green is right that some supposedly innate properties of Bitcoin would make it unsuitable to solve the many problems which fiat money creates in the real economy. And he is right to demand that any candidate for sound money must be judged by its fitness for the real economy and its morality.

Where Green goes wrong is in treating Bitcoin as a finished money, just as the Bitcoin-Maxi narrative does. Figuratively speaking, he is criticising a half-built house, the walls erected but the roof still missing. The house is uninhabitable but this is not because the builder’s plan itself is flawed.

Digital Gold

Bitcoin is often described as digital gold: immutable, verifiable, censorship-resistant. Its maximum stock and programmatic issuance is fixed, thus it can serve as a ‘hard’, sound base money (or M0 when talking in money aggregates). And within weeks after Bitcoin’s launch in 2009, early bitcoiners discussed that there was something missing.

––

Sepp: “Satoshi, it is important that there be a limit on the amount of coins.”

Satoshi: “The coins are issued in a limited, predetermined amount by a majority.”

Sepp: “I understand. But it is also important that this limit be adjustable to take account of how many people use the system.”

Satoshi: “There is nobody to act as a central bank to adjust the money supply as the population of users grows.”

Sepp: “Is there a formula to decide what should be the total amount of coins?”

Satoshi: “I don’t know a way for software to know the real value of things. If there was some clever way, the rules could have been programmed for that. In this sense, it’s more typical of a precious metal. As the number of users grows, the value goes up.”

Sepp: “If it’s going to be used for payments, you don’t want to have large changes in the value of the coins. Stability of the coins’ value is desirable for long term use.”

–

This lack of an adjustment mechanism and the resulting instability pose a serious problem for broader adoption. Ever since, a small part of the Bitcoin community has remained aware of this issue and thinking about how to complete the Bitcoin system, Hal Finney’s ‘Bitcoin Banks’ prediction is a well-known example.

In Search of Stability

Austro-Maxi bitcoiners are maximal about Bitcoin as base money, while not mistaking it as a complete monetary system. We want to see Bitcoin with ‘stable’ purchasing power, a supreme medium of exchange for the real economy. We believe Bitcoin’s base layer with its final supply of 21 million units is non-negotiable, but also requires an elastic, self-liquidating credit money layer tied to real production. Within Bitcoin Austria, we discussed the first proposal to build the missing layer (M1) on top of Bitcoin already when the Greek Euro Crisis of 2015 showed the severity of the gap.

This essay is not a defense of bitcoin maxis. Starting from Green’s objections, it lays out the position of Austro-Maxi bitcoiners. It is a response from those of us who want a complete Bitcoin system in which his objections no longer apply. Bitcoin, as it currently stands, is not yet sound money for modern digital civilization, but Bitcoin can be and the path to get there is clearer and much more reachable than Green’s essay suggests.

Three Financial Primitives is Too Primitive

Green builds part of his argument on three financial primitives: currency, debt, and equity. Currency cancels obligations. Debt moves resources from the future into the present. Equity is the residual claim after debt is paid. From this he concludes that Bitcoin wants to be currency while behaving like equity.

This framework is incomplete, insufficient for the task at hand. It fails at the first step because it leaves out the very category and mechanism needed to understand monetary systems, and thus to understand Bitcoin.

The Missing Commodity

The first problem is the missing commodity ‘primitive’, leading to a category error of equating Bitcoin with equity. Bitcoin is decidedly not equity.

Equity is a claim on an enterprise, but Bitcoin is not an enterprise. There is no residual after liabilities. At its current development stage, Bitcoin may appreciate and can be bought as a speculative asset, but appreciation alone does not make something equity. Gold can appreciate, land can appreciate. Any scarce commodity can rise in price because more people demand it, without thereby becoming a share in a business.

Bitcoin is not equity masquerading as currency. It is better understood as a scarce digital commodity, a form of specie. Specie alone does not make a complete monetary system but it can serve as hard base money within a sound monetary architecture.

The Missing Money

The second problem is the missing distinction between base money and credit money, leading to a conflation of functions in a total system.

A monetary system is not just a single primitive, it is a layered structure. At the bottom stands the commodity layer which serves for final settlement. Above it stands an institutional credit layer which enhances and monetises backed credit instruments denominated in that commodity. The lower layer ensures verifiable discipline, the upper layer enables smooth circulation.

Comparisons with just gold do not help understanding. Gold was never the whole monetary system, it was base money. The real economy did not operate by only moving coins from hand to hand, but through bills of exchange for commercial credit. A cargo could be sold, paid, and shipped long before the final settlement in gold coin or bullion. Gold coin was the anchor, it was not the primary medium of exchange.

The Missing Function

The third problem is Green’s chartalist definition of currency, which leaves out its primary economic function.

Currency is not merely an instrument for cancelling legal obligations, this view idolises a problematic legal privilege and leads astray. Currency foremost bridges time inside the structure of production. It enables division of labour, specialisation, technological advances, and productivity gains. Primary goods sell into the production and supply chains before final consumers buy them out of it. Between these two points, production, transport, storage, and trade must be financed. Currency is a prerequisite for this time interval.

This is where the theory of credit money comes into play. There is a fundamental difference between real credit issued against self-liquidating commercial claims backed by real goods versus financial credit issued ex nihilo, out of thin air.

The Missing Backing

A real bill, meaning a bill of exchange drawn against the value of real goods, is not arbitrary money creation. It is a monetary claim arising from a real commercial transaction. Goods have been produced and need to move. These goods’ economic value is the upper limit of real credit issuance. The buyer owes payment, the seller holds a claim. If that claim is accepted, enhanced, and secured, then credit money for circulation has emerged from the real transaction itself. It is elastic because trade is, it is disciplined because real goods are scarce and the real bill matures. At the end point, the goods are sold, the obligation is paid, and the credit extinguishes itself.

That is categorically different from credit expansion not backed by a self-liquidating commercial transaction. Historically, this was called a ‘dry’ bill, a bill drawn for finance rather than against the value of goods received.

Economically, a dry bill bids for existing value but depends on future production. It clandestinely debases honest real money, finances and refinances ever growing deficits, which is the core problem of the fiat experiment.

Green is right that debt can be likened to an economic time machine, but there are two different kinds of it. The first is real and sound commercial credit, the second is credit inflation. Fiat money creates economically illicit purchasing power, in hopes that business income or asset appreciation will suffice to pay the claim in the future.

This economic distinction is missing from Green’s framework. As a result, he treats the Bitcoin question as if the only alternatives were rigid Bitcoin with no elasticity, or a recreation of fiat banking on top of Bitcoin, while the missing third possibility is the economically correct way.

The Missing Theory

I call this the ‘Dual-Layer Theory of Money’, similar to the duality of light which refers to its nature as both a wave and a particle. In this theory, a monetary system is comprised of a stock of base money plus an elastic supply of credit money denominated in that base money. The base money layer gives the system its unit of account, finality, and honest discipline. The credit money layer adds its medium of exchange for circulation and the capacity to finance production. Conflating the two layers is bad theory, collapsing them into state-controlled fiat money is bad currency.

Bitcoin’s fixed supply is not the flaw Green believes it to be. It is exactly what one wants from base money. The real question is whether a sound credit layer can be built on top of Bitcoin without recreating state money, fractional-reserve, or speculative credit expansion. That is the question we must ask, and the monetary system we must build.

Bitcoin alone cannot finance the real economy. Just declaring Bitcoin legal tender as in El Salvador does not enable the economic capability of credit money. No base money can do this in an advanced economy with its elongated supply chains. Bitcoin still needs to build and grow its missing credit superstructure.

The Real Bitcoin Dilemma

Green calls Bitcoin a temporal wealth transfer machine. The emotionalising power of this labeling is obvious. On the surface, it refers to a fact: early holders gained enormously, while later entrants must buy into an already appreciated asset, but a large gain by early adopters is not in itself a defect, it is a normal result of price discovery under uncertainty and with ongoing progress.

Alice recognises a new technology early, Bob buys land before a city prospers and grows around it, Charlie funds a company before the market understands the true importance of its product. In each case, later demand revalues the earlier position. This can look unfair after the fact because the winning bet becomes obvious to everyone only once it has already won, but before that time, it was doubtful and risky. Many inventors and their early supporters were mocked and ridiculed.

On Speculation

Also, speculation is emphatically not a societal negative just because it succeeds and produces winners. Speculation on rising prices keeps real goods stored in warehouses which preserves them for times of scarcity. Also, speculation can turn out well, and it can turn out badly. Most early business ideas are highly risky, most fail and disappear, at a total loss to investors. Those who allocate their money, time, and reputation before an idea succeeds do not take from those who arrive later. The opposite is true: technical progress and productivity gains usually benefit the economy and the whole society.

However, benefiting from a voluntary discovery process and asking for a level playing field is different from lobbying politicians for tax privileges and special protections. The former belongs to a free economy, the second is rent-seeking incompatible with honest capitalism.

A bitcoiner who bought early has no moral right to demand that governments stock up on bitcoin, that pension funds be forced by law to subsidise his exit, or that tax law benefit his Bitcoin position. Here, Green’s critique is justified. However, this is not a critique of Bitcoin’s monetary nature, it is a justified rejection of political opportunism pushed by certain influencers and lobbyists. The real dilemma of Bitcoin lies elsewhere.

At this phase of Bitcoin’s development, its volatility weakens its use as a medium of exchange. If people believe that Bitcoin will appreciate, they will prefer just to hold it. If they prefer to hold it, they will not spend it. If they do not spend it, Bitcoin will remain primarily a savings technology rather than a circulating money. The very property that makes Bitcoin attractive as protection against fiat debasement makes it difficult for Bitcoin to become money in the full economic sense.

Money at Work

Money in the proper sense cannot just be kept in a vault. It must transmit value through time and carry goods through the supply chain. A functioning monetary system must allow the farmer to be paid some time before the final consumer buys the food. The exporter must finance goods in transit, the manufacturer must pay suppliers until the goods are finally sold to a consumer. Each business needs to turn future sales into present purchasing power. If money is reduced to holding, the real economy becomes starved of currency in circulation.

The slogan “store of value first, medium of exchange later” is only half true. It may describe a path for Bitcoin as a digital commodity, but not the birth of a complete monetary system. A money proper must mediate the exchange of goods, finance production, and extinguish real credit. If Bitcoin appreciates in cold storage while commerce remains denominated, financed, and settled in fiat credit, then Bitcoin has not fixed the money. It has been reduced to a savings asset inside the fiat order.

At the end of Green’s essay, his burning-house metaphor touches the real dilemma. The fiat system is burning, Bitcoin is presented as the exit, but those who saw the smoke first are already outside and everyone else must squeeze through later at a higher price. That is a valid criticism of passive hodling and the naive number-go-up narrative, but not a criticism of Bitcoin itself.

The Real Bitcoin Dilemma is whether Bitcoin shall remain a savings technology for the few, while the real economy continues to run on fiat money, or whether Bitcoin shall get the missing layer that allows businesses to use it in trade and pay workers. Should it become an ideal money that serves the many?

Hodling was Bitcoin’s necessary first phase, it is not its true potential.

Where Green Hits, and Where He Misses

Green’s remaining objections touch on privilege, taxation, energy, credit crises, state enforcement, and morality. Some hit their mark, particularly against the immature, store-of-value Bitcoin-maxi story, others miss the potential of a complete Bitcoin monetary system.

Bitcoin Cronyism

Green rightly calls out those bitcoin maxis who lobby for strategic reserves, pension mandates, tax carve-outs, and legal tender laws, designed to increase the value of their own holdings. Moral Bitcoin must remain a bottom-up, voluntary, opt-in proposition, and not seek top-down nation state enforcement, which would be fiat politics painted orange.

Legitimate demands ask for equal treatment under the law, an end of discriminatory regulation, debanking, punitive taxation, legal uncertainty or obstruction designed to protect the fiat monopoly.

Personally, I expect Bitcoin to prevail because it is technically robust, credibly scarce, globally recognised, and already the Schelling point for digital base money. But my subjective prediction of the probable future is different to asking for state favouritism. Austro-Maxi bitcoiners want the market, not the state, to pick the winner.

Bitcoin ETFs

Green’s critique of Wall Street’s “institutional toll booths” is valid. Bitcoin ETFs are not peer-to-peer cash, not self-custody, and they offer no escape from nation-state captured financial intermediaries.

These ETFs make Bitcoin exposure easier and acceptable for many traditional investors, but they do not advance a Bitcoin-native economy. They do not enable paying wages in Bitcoin, financing goods in transit, or settling real trade on Bitcoin rails. They are not monetary progress. Instead, they repackage Bitcoin inside the same trusted third-party architecture it was meant to escape.

Even if Wall Street is turning Bitcoin into another fee earner, this does not weaken Bitcoin’s candidacy for a sound money. It proves the Austro-Maxi point: as long as Bitcoin remains only an appreciating asset in fiat units, it has not yet fixed the money.

Tax Privileges

Green rightly criticises maximalist demands for Bitcoin-specific tax carve-outs that allow equity-like gains with currency-like spending treatment. That would be a privilege dressed as neutrality.

But he is wrong when he implies that the existing tax treatment is neutral. Most current tax systems are hostile to monetary competition to a state’s fiat currency, excessive and bureaucratic. Nobody should need an accountant, tax software, and capital-gains calculations to buy coffee, or suffer intrusive surveillance of their spending.

Governments ought to remove artificial friction from payments in any currency used as a medium of exchange, whether Bitcoin, gold, or stablecoins.

Monetary Deflation vs. Productivity Growth

Another of Green’s objections is that a Bitcoin standard would be deflationary and choke the economy which collides with the mainstream Bitcoin narrative which emphasises the increased purchasing power of early holders.

However, falling prices do not necessarily stem from harmful deflation. Only true monetary deflation is destructive. A contraction or shortage of circulating credit hurts commerce, spoils goods, and makes debts harder to pay. Productivity-driven price declines are a very different matter. If goods become cheaper because production becomes more efficient, ordinary people will be richer, not poorer.

An economy on sound money distributes technological progress first to workers, savers, and consumers. With fiat inflation, wage earners are disadvantaged by the lag between price increases and later wage adjustments. With sound money, the time lag from productivity growth works to the favour of workers because wages stay the same while goods become cheaper. Savers also benefit when real productivity rises, because their past savings then buy more.

The late nineteenth century offers historical evidence of this: relatively sound gold money coincided with rapid productivity growth, and many goods became cheaper as industrial output expanded dramatically.

Bitcoin-Collateralised vs. Bitcoin-Native Credit

Green criticises fiat credit against Bitcoin collateral, especially long-term debt secured by a supposedly ever appreciating asset. While it may initially reward passive holders and defer taxation, this path risks turning into a dispossession machine over time.

The model may appear useful during Bitcoin’s monetisation phase, but it cannot be the foundation of a sound Bitcoin economy. If the development of a credit layer is too slow, monetisation drags out, and further price rises of Bitcoin do not materialise, then the continuing interest burden will eventually force sales, trigger taxes, and break the financial flywheel.

Bitcoin-collateralised fiat credit is fundamentally the opposite of the Bitcoin-native, self-liquidating commercial credit: instruments issued against real goods already sold into the supply chain, denominated in Bitcoin, maturing upon their final sale, and extinguishing themselves upon settlement on the Bitcoin mainchain. That model never requires a sale of Bitcoin.

This distinction is crucial. The right kind of credit finances actual production and trade. The wrong kind inflates asset prices and creates fragile bubbles. Green’s critique is valid against Bitcoin-collateralised fiat debt, but it does not refute the possibility of a properly designed real-bill credit layer denominated in Bitcoin. The next chapter will expand on this solution.

Energy Consumption vs. Grid Stability

Bitcoin consumes real energy. This cannot and should not be denied. Sound money does not come free, whether Bitcoin or gold. Final settlement, censorship resistance, and monetary independence require a real-world cost. In Bitcoin, that cost is proof of work.

Fiat money is not free either. It carries enormous costs: expensive monopolistic institutions, constant inflation, economic distortions, and catastrophic consequences in times of hyperinflation, fiat currency crises, or upon loss of interbank trust.

Green’s critique treats Bitcoin mining as ordinary industrial consumption or pure waste. This misses the unique characteristics of mining. Bitcoin mining is location-flexible and interruption-tolerant. It can monetise energy that would otherwise be stranded or curtailed, power available at the wrong time, in the wrong place, or in excess of local demand. This flexibility makes it especially valuable for renewable energy projects.

Bitcoin mining can already improve the economics of solar, wind, hydro, and geothermal by acting as a flexible buyer of last resort. It can make new renewable capacity more financeable in challenging regions. The picture is far more nuanced than Green suggests:

• In Texas, Bitcoin miners serve as a flexible load on the ERCOT grid. They can curtail during peak demand, thereby helping to prevent costly blackouts such as the $26.5 billion incident of 2021.

• In Australia, mining absorbs power during periods of negative electricity prices when excess solar and wind drive wholesale prices below zero. Miners consume this surplus, improving project economics and reducing wasted energy.

• In Africa, the impact is particularly beneficial. Mining monetises stranded renewable energy in areas with weak or non-existent grids. It can serve as the anchor customer for mini-grids, enabling electricity access for communities that previously had none.

While non-renewable mining still exists, the trend is positive. Bitcoin increasingly buys intermittent and stranded energy. The energy intensity per unit of newly mined Bitcoin falls with every halving. As the block reward trends toward zero, miners will rely more on transaction fees. The environmental critique, though understandable, increasingly reflects an overly static view of the industry.

Ultimately, a valid comparison must weigh Bitcoin’s visible energy use minus its grid-stabilisation and renewable-enabling benefits against fiat’s hidden costs: inflation, financial fragility, bureaucracy, surveillance, sanctions, bailouts, and financial crises.

Anarcho Capitalism vs. Minimal Government

Green criticises bitcoiners who demand courts, sheriffs, and contract enforcement while simultaneously claiming Bitcoin is voluntary and politically neutral. This is indeed often heard in the bitcoin maxi narrative where some embrace the uncompromising Rothbardian anarcho-capitalist idea which ignores the limits posed by physical reality, the nature of man, and the need to adapt to present conditions before trying to transcend them.

The Austro-Maxi position is aligns with the limited government teachings of Mises and Hayek in Austrian Economics: minarchism. The rule of law, the protection of private property, and the ex-post enforcement of ex-ante voluntary contracts are hallmarks of civilisation, not betrayals of freedom.

A Bitcoin monetary system makes use of commercial bills of exchange. The bill mechanisms are easier and arguably more civilised when formalised by international law, with legal recourse, and enforcement of general, neutral rules. States need not help Bitcoin win, but they should stop suppressing monetary competition. They should apply the same laws to everyone and every money.

Bitcoin Volatility

Green criticises that Bitcoin’s high volatility is far above that of major fiat currencies which limits its use as a general medium of exchange. Most businesses cannot easily denominate wages, debts, or everyday obligations in an asset whose purchasing power can swing so violently.

This objection carries weight in developed markets where fiat currencies are relatively stable over 30, 60, or 90 days, which are typical periods for trade finance. In countries with bad currencies and weak banking institutions, the situation is very different. A growing $2.5 trillion trade finance gap practically blocks a significant part of international trade of the poorest countries.

Most importantly, today’s Bitcoin volatility is a symptom of its incomplete development. A pure savings asset without a functioning credit money layer cannot be stable. The reverse is also true; after gold was demonetised, its price became volatile despite millennia of relative stability when it functioned as money.

Like gold before its demonetisation, Bitcoin can be expected to capture the monetary premium. Its purchasing power should rise towards its fundamental monetary value and stabilise against the major fiat currencies. Historically, after the end of wartime suspensions of gold redeemability, the purchasing power of gold usually returned to its prior level within just a few years.

The Moral Test

Green’s most interesting critique is his moral evaluation of Bitcoin through John Rawls’ veil of ignorance. He asks whether a rational person, unaware of their position in society, would accept a system that creates a privileged caste: early holders who extract ongoing wealth from all later participants.

This premise only holds if Bitcoin remains an incomplete store of value. It does not hold in a completed Bitcoin monetary system. If a self-liquidating credit layer can be built on top of Bitcoin’s fixed base, the dynamic changes fundamentally.

New participants would no longer be limited to buying existing coins from early holders. They could get access to Bitcoin by producing real goods, selling them into the supply chain, and obtaining Bitcoin-denominated credit money backed by those real goods.

The real question is how. We will answer this in the next chapter.

On an institutional moral test, the comparison is even clearer. A monetary system should be judged by whether it secretly debases its unit of account, harms workers and savers, privileges insiders and politicians, censors outsiders, socialises losses, and creates purchasing power without corresponding real production.

On every one of these dimensions, fiat is vastly inferior to a complete Bitcoin system. Green himself acknowledges these moral failures of the fiat system and admits he knows no viable alternative.

The Missing Layer

The power of Green’s critique rests on an incomplete Bitcoin: Bitcoin as hoarded asset, as collateral for fiat borrowing, ETF inventory, national reserve. A volatile, risky Bitcoin. Against that intermediate version, his objections bite hard.

The best response to Michael Green is not to defend Bitcoin as it currently stands, but to finish building a complete system. That is what the Bitcredit Protocol project sets out to achieve: an elastic credit money layer built on top of Bitcoin without changing Bitcoin Core.

The Dual-Layer Theory of Money

Bitcredit Protocol embodies what I call the dual-layer theory of money: sound money requires a fixed-supply monetary base, expanded with an elastic, self-liquidating credit layer denominated in that base money. In Bitcredit, Bitcoin serves as the fixed base; e-bills split into e-cash provide the elastic credit layer.

The wholesale-money mechanism of Bitcredit is the classical real bill, now electronic, Bitcoin-denominated, and updated for the digital age. The retail-money mechanism is the ‘minibill’: a novel, non-custodial form of Chaumian e-cash with privacy by default.

Bitcredit is a free and open-source software protocol built on the Bitcoin technology stack, with Nostr used for communication and coordination.

This is how it works:

A producer sells goods into the supply chain and draws a commercial bill on the buyer using the eBill reference app. The e-bill is not arbitrary credit, it is backed by real goods already produced and moving toward consumption.

The beneficial holder can then present the e-bill to a credit mint, a Bitcredit full node operating through the ‘Wildcat’ dashboard. The mint splits the e-bill into e-cash. E-cash circulates freely through the Bitcredit eCash reference app, enabling instant, private, low-cost, and scalable payments for everyone.

The bill self-liquidates when the buyer on-sells the goods or otherwise pays the bill. Upon the obligatory final settlement on the Bitcoin mainchain, the bill is extinguished. Each bill has a re-minting agreement as a continual liquidity option. A dishonoured e-bill triggers a recourse chain of prior holders.

On top of this safeguard, Bitcredit adds two network-level security layers. Each mint is supervised by a sub-network of other mints called ‘clowder’. If a bill is dishonoured, the mint can draw on a specialised guarantee asset to pay the e-bill. If a whole mint defaults, becomes “rabid”, the supervising mints trigger remedy transactions and assume its liabilities.

Crucially, Bitcredit does not require a change to Bitcoin’s base protocol, to its consensus rules, or block size, or its astoundingly effective game theory. Bitcredit Protocol works entirely as an overlay on top of Bitcoin as it exists today.

Why This Addresses Green’s Argument

Green’s temporal caste argument depends on the hidden assumption that new participants can access Bitcoin only by buying existing coins from current holders. That is true for Bitcoin as a standalone commodity, it is not for a completed Bitcoin monetary system.

Deflation and Credit Crises: Self-liquidating bills fully backed by real goods provide natural elasticity that expands and contracts with the needs of trade and industry, which prevents the increasing base money scarcity Green assumes.

Wealth Transfer: New participants can gain access to Bitcoin-denominated liquidity through production and trade, not only through buying coins from early holders. The temporal advantage is nullified by genuine economic activity.

Rentier Critique: Holding base-layer Bitcoin remains possible, but comes at an opportunity cost. The credit layer channels savings, the value of goods in the supply chain, as capital into productive circulation.

With a real-bill layer available, a new participant need not begin by purchasing scarce base coins, he can enter through production. The farmer sells crops, the exporter sells shipped goods, the manufacturer sells merchandise, the merchant accepts payment from consumers.

From these transactions arise Bitcoin-denominated claims that can circulate as money substitutes when enhanced by the mechanics of the Bitcredit Network. Access to medium of exchange is earned through real work, not inherited from proximity to the genesis block.

The temporal Cantillon effect therefore disappears. The early holder may have benefited from adopting Bitcoin before monetisation, but holders no longer control access. An honest producer can obtain liquidity for the next link in the supply chain by selling real goods and minting an e-bill drawn against that value.

Bitcredit establishes this equality of monetary access under straightforward global commercial law. Credit history, prudence, solvency, and judgment still matter, as they should. Some businesses will have easier access to credit than others. That said, mints will specialise and compete for profitable business, so chances are better than under centrally imposed access regulations.

Volatility is an Initial Phase

Bitcoin’s present volatility is real. But volatility before monetisation is not a refutation of monetary potential. It is the price discovery process of an asset moving from obscurity toward monetary premium.

Like gold before its demonetisation, Bitcoin can be expected to capture the monetary premium. Its purchasing power should rise towards its fundamental monetary value and stabilise against the major fiat currencies.

Supply chain bsúsinesses need not wait until Bitcoin has reached perfect purchasing-power stillness. Fiat liquidity is enormously expensive in certain regions of the world where access to credit has almost dried up. The Asian Development Bank estimates this trade finance gap at $2.5 trillion.

A Bitcoin-denominated real-bill layer allows trade to be financed and bridge the time horizon required for production or a commercial transaction. Stability then comes not from a central bank striving for a CPI target, but from the structure of production itself: real goods moving on real credit, denominated in hard Bitcoin and extinguished by final settlement on mainchain.

Beyond Stablecoins

Stablecoins solve a narrower problem. They accelerate fiat. They make dollars more portable, even programmable, and usable despite broken banking systems. In many countries, that is genuinely useful.

But a stablecoin is still a fiat claim. It depends on an issuer, banking access, reserves, redemption, compliance, and the political perimeter of the dollar system. It may improve the plumbing of fiat, but it does not escape fiat.

Bitcredit aims at a different monetary object: not tokenised fiat, but Bitcoin-denominated commercial credit. The unit is Bitcoin, the backing is real goods, the settlement asset is Bitcoin. It is not just about payments, but financing without artificially imposed gatekeepers.

No Longer Merely Theoretical

We are still early. A monetary institution is not declared into existence by a whitepaper, not even by available free open-source software. It must prove itself through everyday usage and repeated settlement.

Since the initial discussions in Bitcoin Austria following the Greek debt crisis in 2015, the Bitcredit concept has moved from theory toward implementation. The protocol is deliberately lightweight and focuses on verifiable commercial claims that settle verifiably on Bitcoin. Early experiments have shown high interest from merchants and producers who want to transact and finance in Bitcoin without relying on fiat rails. Testnet transactions already simulated various multi-stage supply chains, such as coffee, cacao, grain, soy, meat, and timber.

This is the missing roof on the half-built house Green criticises. With it, many of his strongest objections no longer apply. Bitcoin can transition from digital gold to the foundation of a complete, sound monetary system for the digital age.

Widening the Door

We agree with Green’s burning-house metaphor. Passive hodling of Bitcoin makes no sound money. He is right that ETFs do not complete Bitcoin. He is right that tax privileges and collateralised fiat borrowing can become rent-seeking. He is right that a Bitcoin standard without a sound credit layer would be dangerous.

But Green is wrong to treat those failures as Bitcoin’s final destiny.

The door is only narrow if Bitcoin remains an asset hoarded by the few. Our task is not to criticise the exit from the failed fiat experiment, but to widen it, and tear it down. Like people tore down the iron curtain and the Berlin Wall which blocked the exit from the socialist experiment.

Bitcredit Protocol is the Austro-Maxi initiative to breach the fiat wall. We do not ask for permission or for changes to Bitcoin Core. We do not lobby the state to impose Bitcoin, we do not need Wall Street to custody Bitcoin or wrap it in fiat. We are not waiting for number-go-up. We are completing Bitcoin with the monetary layer it still lacks.

Bitcoin is not sound money yet. But it can be, if we apply sound economics, put in the hard work, and bring the grit required to finish what began with Bitcoin. Then “Fix the Money, Fix the World” can become more than a slogan: it can become reality.

Glaucon: I mean lending and borrowing. Credit in the sense of promises to pay in the future rather than immediate settlement.

Socrates: So you mean claims on Bitcoin, not actual Bitcoin itself?

Glaucon: Exactly. IOUs, loans, deposits — all those require trust, and Bitcoin was built to eliminate trust. Therefore, Bitcoin and credit don’t mix.

Socrates: Interesting. You believe credit depends on trust, and Bitcoin removes the need for trust. But if credit could be issued without trust, would you still object?

Glaucon: Without trust? That sounds impossible. Lending always involves uncertainty.

Socrates: Does it? Suppose a merchant issues a bill of exchange payable in Bitcoin, and that bill is guaranteed by a chain of other merchants, where each verifies its validity and stands ready to redeem it. Has trust been eliminated?

Glaucon: It is greatly minimised, perhaps. But even so, such systems will remain small. People want final payment, not promises.

Socrates: Do they? History suggests otherwise. From ancient trade to the gold standard, credit systems built vast economies atop scarce money. Why would Bitcoin differ, if it shares gold’s scarcity?

Glaucon: Because Bitcoiners are ideologically opposed to credit. They don’t want “paper Bitcoin” or claims that could fail.

Socrates: Then ideology, not technology, would be the limit. But ideologies evolve under economic pressure and in special situations. If merchants find it advantageous or profitable to extend credit safely on Bitcoin, will they not do so — regardless of ideology?

Glaucon: Perhaps some will, but it can’t scale. There’s no central bank to backstop defaults.

Socrates: And yet, must credit require a backstop? Or can mutual guarantees serve that role, as in the age of private bills before central banking?

Glaucon: That world collapsed — undercapitalised wildcat banks, panics, fraud.

Socrates: Indeed. But those systems lacked digital transparency and cryptographic auditability. Now every issuance could be verified in real time and fraud detected early.

Glaucon: That changes things… Still, liquidity might be thin. People hoard Bitcoin; they don’t circulate it.

Socrates: So the issue is not whether credit can exist, but whether holders will part with their Bitcoin to fund it. If returns compensate for risk, why wouldn’t they?

Glaucon: Because Bitcoiners prefer self-custody, not lending.

Socrates: Well, businesses can issue just a bill of exchange in payment of goods. Bitcoin only needs to be sent at final ymaturity, after 30, 60, or 90 days. So as there is no custody — what remains of the objection?

Glaucon: You’re saying Bitcoin could host credit without banks and without trust.

Socrates: I’m saying that if we define credit as time-shifted exchange, for which Bitcoin provides unstoppable settlement, then credit on Bitcoin is not a contradiction — it’s an evolution.

Glaucon: Then perhaps my claim should be refined. Not that there will never be much credit on Bitcoin, but that there will be no unbacked credit.

Socrates: That, I can agree with. The difference between “unbacked” and “trust-minimised” is the difference between illusion and reality. That’s why I say that only bills issued against value, thus backed by real goods, are valid credit for a general money substitute.

Glaucon: You have made a clever case, Socrates, but it all collapses on one fact: Bitcoin is too volatile. No one will borrow or lend in a money that can swing 20 percent in a week. Credit needs stability, not chaos.

Socrates: A powerful argument indeed. But tell me, volatile against what?

Glaucon: Against goods, services, other currencies — the real economy! If I lend one bitcoin today and it loses a fifth its value before repayment, I’m ruined.

Socrates: Then you are not describing volatility in Bitcoin itself, but volatility in the exchange rate between Bitcoin and the fiat system, are you not?

Glaucon: That’s semantics. The world still runs on fiat, so that’s what matters.

Socrates: True — for now. But in credit, what matters is what both sides agree to settle in. Suppose both lender and borrower denominate and earn in Bitcoin, within a circular Bitcoin economy. Would the volatility you speak of still matter to them?

Glaucon: Perhaps less, but such a Bitcoin circular economy barely exists. There is maybe one or two dozens globally.

Socrates: And yet, every credit system began small — merchant credit in medieval fairs, bank credit in Renaissance Italy, even dollar credit in the 19th century. Credit superstructure growth itself breeds stability. Why would Bitcoin be exempt from this dynamic?

Glaucon: Because Bitcoin lacks a stabilising mechanism. Gold had long-term price anchors; central banks later added monetary elasticity. Bitcoin’s supply is fixed — it can’t absorb shocks.

Socrates: You confuse monetary elasticity with credit elasticity. Even under a fixed supply without central banks, merchant credit can expand and contract credit — through bills of exchange. Could not such peer-to-peer credit smooth volatility by redistributing liquidity over time?

Glaucon: In theory maybe, but in practice, lenders won’t risk their capital until volatility subsides — and volatility won’t subside until there’s more credit. It is a chicken-egg problem.

Socrates: A fair paradox. Yet history offers a resolution: stability emerges naturally from credit, not before it. The more an economy prices and denominates credit in a money, the more stable its purchasing power becomes. Volatility is not a brick wall but a symptom of youth.

Glaucon: That’s wishful thinking. Bitcoin’s volatility is structural — fixed supply meets speculative demand.

Socrates: Indeed, speculative demand is the present state. But what happens when credit channels allow long-term productive use of Bitcoin — financing trade, production, logistics, and inventories? Would not speculative cycles give way to intertemporal exchange?

Glaucon: Maybe. But until then, it remains gambling, not credit.

Socrates: So we agree that volatility prevents short-term fiat-referenced credit, but not necessarily productive merchant credit within a Bitcoin-based economy.

Glaucon: That’s a very narrow loophole.

Socrates: Narrow today, but even the world’s broadest rivers begin as trickles.

“We must look at the price system as a mechanism for communicating information.”
– F.A. Hayek (1945)

“Who says a currency must have a stable value?” a bitcoiner once asked me after a discussion about Bitcredit Protocol. “What’s so bad about deflation as Bitcoin increases in value over time?”

It is striking how today’s bitcoiners and modern central bankers favour opposing kinds of monetary instability while both groups shrug off the third÷ middle path.

Central bankers claim that an annual inflation rate of two percent is needed to prevent deflation. They argue that deflation discourages consumer spending and investment, they say it slows down the economy, creates unemployment, and traps debtors’ as their burden grows in real terms. They can point to many deflationary periods in history that brought economic depressions and misery, such as the Great Bullion Famine in the Middle Ages and the Great Depression of the 1930s.

Bitcoiners, conversely, recognise the problems caused by inflation but most seem oblivious to the downsides of deflation. “Inflation is bad because it erodes people’s purchasing power”, they reason, “therefore deflation must be good.” Not so. Overeating is bad for one’s health but starving to death is not good either.

Deflation is problematic

Their casual attitude toward deflation subconsciously rationalises their supposed self-interest: they hold Bitcoin and hope to benefit from its appreciating exchange value. This is a treacherous hope, though, misleading short-term thinking.

Bitcoin is not just any asset. As a money, its utility lies in facilitating exchange transactions. We cannot consider only one-sided interest when both parties must mutually agree on which money to use: buyers and sellers, tenants and landlords, debtors and creditors, payers and payees.

Monies not only compete on long-term inflation or deflation but mostly on short-term volatility: users prefer the more stable money. The spectacular rise of stablecoins like Tether, pegged to inflationary fiat currencies, is testament that stability over a few months is more relevant for most than avoiding inflation noticeable only over a few years.

Finally, falling prices can be an initial symptom of a deeper issue: a shortage of media of exchange when producers must sell goods already produced. However, subsequently supply chains grind to a halt, not for lack of goods produced or labour available, but for lack of liquidity. The shortage of goods causes prices to rise. The initially falling prices are but symptoms of the real problem.

So, a stable exchange value is a critically important property of a money. Fortunately, this stability is a natural, spontaneously emerging quality of a well-designed, neutral monetary system as we will see in the next chapter.

At this point, we must recognise two difficulties:

1. The concept of a stable money is somewhat elusive. What does ‘stable’ really mean and what not?

2. What are the rules of a well-designed monetary system that produces a stable money?

This chapter addresses the first question which requires nuance and precise definitions beyond that of everyday conversations.

Prices and Intuition

Our brains are wired to expect stable prices, people think in nominal terms. In 2014, I conducted a study with two colleagues to investigate how accurately shoppers in the UK could predict the current prices of a wide range of consumer products.1 Among other interesting insights we found that, on average, shoppers’ price estimates were approximately 9 percent lower than actual market prices. The differences varied by gender, shopping frequency, and product category, ranging from dishwasher tablets and chocolate bars to leather sofas and diamond rings.

Interestingly, this average gap corresponded roughly to four years worth of UK inflation at the time. We concluded that the underestimation was not a cognitive bias or a flaw in people’s abilities but a consequence of the unnatural debasement of the British Pound by the Bank of England.

Three Causes of Price Changes

Prices are condensed information. They aggregate dispersed, even private, information about markets and coordinate the economic decisions of free individuals spontaneously, without central command. Much of our planning and decision-making is intuitive. When our intuition about market prices is distorted, this leads to inefficiencies and misallocation of labour, capital, and resources – in severe cases to the collapse of entire economies.

Price changes stem from three main categories of causes: (1) fundamental, (2) political, and (3) technical. Depending on the cause, price changes can be beneficial or harmful, as follows:

1. Fundamental causes arise from two types of real-world events.

   1. Variabilities, such as good or bad harvests, commodity discoveries or shortages, and weather events.

   2. Progress, such as new technologies, scientific breakthroughs, product and business model innovations, and general productivity improvements.

From an economic perspective, price changes from fundamental causes are desirable, their signal helps producers and consumers to adapt and fine-tune to the changing reality in affected industries and regions. Progress, of course, is best as it increases the abundance or quality of goods, and makes them more affordable.

2. Political causes change prices directly or indirectly.

   1. Direct interventions include price caps or floors, tariffs, and taxes.

   2. Indirect influences include geopolitical tensions, wars, sanctions, regulations, as well as government interventionism and cronyism.

Price changes from political causes sometimes work as intended, most often they do not because – due to poorly predicted outcomes by regulators – they ultimately result in just the opposite of what the responsible politicians originally promised, like rent controls leading to a decline in construction and maintenance, thereby causing a scarcity of available rental properties.

3. Technical causes for price changes can stem from monetary policy or system design flaws.

   1. Policy mistakes include an oversupply of money causing inflation or a scarcity of money causing deflation, or deliberate central bank manipulation of interest rates and government-driven credit expansion.

   2. Design flaws or gaps in monetary systems cause the severest price distortions, especially in fiat systems but also in badly regulated commodity-based systems, like Bitcoin’s lack of an elastic layer. They often cause self-reinforcing vicious circles like financial bubbles, bank runs, and hyperinflation, or deflationary spirals and adoption blockages.

This last category always produces harmful price changes which will divert the economy from the productive path, followed by stagnating or declining standards of living, or in extreme cases, ending in catastrophic hardship for entire nations.

In this book, I use the terms ‘inflation’ and ‘deflation’ strictly for changes in the price of money with distortions from such technical causes. A mere increase or decrease in the total money supply is not the same as inflation or deflation; if fluctuations in money demand are well balanced by supply changes, then the monetary stance is neutral or ‘stable’. Therefore, a stable money neither means that prices of goods are stable, nor does it necessarily mean that a money’s purchasing power is stable. It just means that monetary matters do not distort prices in a way where they cannot perform their important systemic function correctly. No more, no less.

Therefore, the monetary policy of central banks aiming at a constant inflation target is not ‘stable’ in the true sense, as it eliminates the informative changes in the exchange value of money needed to guide economic adaptation. Conversely, Bitcoin’s lack of monetary elasticity creates a problem for the real economy as the fluctuating demand for Bitcoin holdings causes unnecessary erratical price changes of all other goods.

Some economists also speak of the ‘money illusion’. Psychologically and on average, people feel richer in times of inflation and poorer when there is deflation. While this concept contains some truth, it lacks nuance. The difficulty is that inflation and deflation move through the economy in a highly chaotic way. It is quite impossible to dissect the manifold real reasons for price changes of specific goods.

Accordingly, the populist commentary about inflation in the media and by the political class rarely talks about the faults in the monetary system or mistakes in monetary policy, but about superficial, visible observations. Usually, the reported ‘causes’ support self-interest and a political agenda: they either blame ‘greedy’ groups of people, such as profit-seeking corporations or wage-seeking workers, or they single out certain product groups or geopolitical events as the ‘cause’ for the broader, slow, and chaotic phenomenon.

The Ills of Deflation

This brings us back to the initial question about “deflation as the value of Bitcoin rises”. Most bitcoiners know about the Cantillon effect that follows an expanding money supply: when new money enters the economy, it benefits the few who receive and spend it earliest, before the prices subsequently rise for all others. In a fiat system this benefits the government, its bureaucracy, and cronies at the expense of trade and industry, the wealth of nations. As an unintended consequence, it also creates social strife, due to the different dynamics of company profits – which rise first – and workers’ wages, where annual wage increases involve a time lag of up to one year

For the economy, deflation is just as bad as inflation. In fact it is worse: the agreed prices of all kinds of long-term contracts lose their link to the economic reality. Businesses must continually reduce workers’ wages or fail, rents become unaffordable unless renegotiated down, pensions and insurance obligations must be adjusted or bankrupt their providers.

When money is too scarce, businesses reduce their investment activities and people reduce their consumption. The weakest economic actors suffer first, low margin businesses close down, indebted businesses go bankrupt. This further reduces incomes, thus savings and consumption. Soon a so-called deflationary spiral takes hold: falling prices force wage cuts, job insecurity and mass unemployment follow. Social unrest and political radicalisation grow faster than with inflation because deflation feels like a trap, a long-lasting depression with hardship and wide-spread hopelessness.

The Bitcoin system, as long as it consists only of a fixed base money layer, will remain deflationary as long as the demand for saving purposes increases. This already poses a significant barrier to business adoption in a modern, capital-intensive economy.

The Ills of Volatility

Unfortunately there is an even bigger hindrance to business and broader adoption which is Bitcoin’s volatility.

Volatility: Bitcoin vs. Fiat Currencies (2015-2025)

A chart of Bitcoin’s volatility over the past ten years shows that it (red line) is much higher than that of the major fiat currencies (blue line), i.e. the US dollar, the Euro, and the British Pound. Most bitcoiners believe that volatility will decline over time, with more adoption as a store of value, and an increasing market capitalisation. However, it is visible to the naked eye that this intuition is incorrect. While these factors may have contributed to a lesser volatility of volatility, the outright volatility of Bitcoin has not improved significantly, despite time passed, growing adoption as a store of value, and its much higher price.

It is logical that Bitcoin’s volatility cannot improve. Bitcoin has fixed supply which is the very property which makes it an ideal base money. However, market demand is highly variable, and the price of Bitcoin changes constantly for manifold reasons such as macroeconomic developments, political acceptance or rejection by governments and political parties, technological advances or failures, and last but not least, the hostility levels of central banks, the incumbent monopoly producers of inferior base money. Every progress or setback influences demand and when a fluctuating demand for a good meets a fixed supply the only possible adjustment is its market price which duly captures and communicates the swings.

The Roadblock Hypothesis

I think - and have been saying this since the Greek Crisis of 2015 - that volatility is an almost insurmountable roadblock for the adoption of Bitcoin by businesses in the supply chain, thus for the development of a circular Bitcoin economy, with the notable exception of very rudimentary, local experiments driven by motivated enthusiasts.

The narrative of an ‘ever increasing’ value of Bitcoin over the four-year halving cycle cannot tip the scales for businesses. They operate with a certain net margin and often with debt capital. If the volatility of Bitcoin runs against them, the effect is much the same as with deflation: marginal businesses realise losses and indebted businesses cannot meet their obligations or covenants. They cannot risk failure for an avoidable monetary deficiency, it would be tantamount to gambling their company.

For people, volatility is just as problematic. The average family just gets by on their monthly income. They risk hardship if they cannot make ends meet due to the large swings in Bitcoin’s exchange value. Neither do they have much leeway for saving nor can they wait out four year price cycles for their bigger purchases.

Events in Lebanon and other countries in a fiat currency crisis have consistently confirmed this problem. People switched to stablecoins pegged – mostly – to the U.S. dollar which they consider stable despite its inflationary nature. Even in El Salvador, where Bitcoin became legal tender besides the dollar in 2021, it could predictably not gain traction against the dollar. The dollar’s annual inflation rate of two percent is less Bitcoin’s daily volatility.

We are all caught in a web of contracts where obligations denominated in a volatile currency would introduce enormous unnecessary risk: supply agreements, employment contracts, lease agreements, pension contracts, insurance contracts, loan agreements, and many more. Currencies compete on stability because businesses and people alike prefer stable currencies over volatile ones.

Next

Having established what ‘stable money’ means and why an ideal money must be stable, we can now turn to a decentralised free market mechanism that produces this stability.

"A stable price level and a high level of employment do not permit the total quantity of money to be kept constant."
– F.A. Hayek (1976)

Let us start our journey from a world without money.

Why? The purpose of money is to facilitate indirect exchanges, and such exchanges have two sides, one with money and one with goods or services. By starting with money, we risk a one-sided perspective. Most current holders of Bitcoin hope to profit from price appreciation which influences their preferences for its future development and even their perception of its nature. Fiat money advocates are inclined to focus overly on Bitcoin’s current shortcomings: minimal adoption in the real economy, its primary use for speculation, and its high volatility.

So we begin from a clean slate: before money.

“Barter! Not again!” my readers may cry. “We have heard it all before. We know that barter existed only in primitive societies, that it hampers division of labour. We know that famous movie scene from Vienna in the year after World War II. We know about the time consuming problem of finding the right trading partner.”

I know that you know. That is why I will not plague you with the double coincidence of wants by starting with barter. I will start with credit which is what comes after barter but before money.

“How can credit come before money?” you will ask. “If I go to a bank to get credit, they give me money. So money is first, or at least money and credit go together.”

Not so. What we get at the bank is a loan. Credit – in the original sense – is something we have: a personal quality. Having credit used to mean that you are a reliable person, that you are honest and good to your word. People believe that you will keep your promises and honour your debts.

Imagine a little hamlet isolated deep in the remote forests of Ruritania. There lives Farmer Albert who plants wheat and harvests 1 ton of it every year in fall. His wife Alice bakes their bread which is all they eat, year round. Sometimes they get a whiff of fried bacon from their neighbour’s farm. There lives Farmer Bob who raises pigs and slaughters 20 in each spring. Hs wife Bonnie cures and smokes the meat. They eat ham and bacon year-round but sometimes the breeze carries the wonderful smell of freshly baked bread from Albert’s farm.

One fine day, our two farmers agree – unsurprisingly – to exchange half their produce. Bob will send 10 slaughtered pigs in spring, and Albert will send half a ton of wheat in fall. Both families can now enjoy a more varied diet, such as roast pork with bread dumplings, an old Ruritanian favourite. Both are better off due to the economic Law of Marginal Utility.

Note that this is not straight barter. It is credit because time and counterparty risk come into play. Albert is indebted to Bob for half a year. His debt is settled upon delivering the promised wheat, this delivery concludes a real exchange of real goods. The temporary credit cancels out and disappears. Poof!

Also, note that this credit is not denominated in any monetary unit, it is simply expressed in wheat, the future good. Albert and Bob can do their business perfectly fine without a need for money.

“Gotcha! Wheat was used as a form of money in Ancient Egypt,” my clever readers will now object.

Indeed, the boundaries between a commodity and a money blur when that commodity is used as a medium of exchange. Before metal money and coinage, Ancient Egyptians bartered grain for other goods like livestock, tools, or pottery. They also paid their taxes to the pharaoh in grain, which the state stored in huge granaries and redistributed as payment to officials, soldiers, and workers, even speculation.1 However, grain is not a good money, it is foremost a food needed for consumption, and it spoils over time by mould, fungus, weevils, mice, rats, and birds. Once eaten or spoiled, or upon a crop failure, there is nothing left to trade with and the economy breaks down.

Looking further into our hamlet, we see Farmer Charlie, who raises cattle and slaughters 4 animals in spring, and Farmer Dave, who harvests 2 tons of potatoes in fall. If they agree on a similar trade as their neighbours, their credit would be denominated in potatoes. A greater variety of goods is highly desirable, but the more products, the larger the number of denominations. This leads to a confusing cacophony of credit denominations – a proverbial Babel of units of account.

Can the four farmers simplify their exchanges by agreeing on a common standard denomination? For example, they could use wheat for the purpose, just like the Ancient Egyptians.

“But why Albert’s wheat and not my potatoes?” Farmer Dave may then protest.

The farmers could bypass conflicting individual preferences by choosing an outside good to denominate their respective credit. They could agree on, say, 10 goats’ worth of wheat. Or 1 ounce of gold’s worth, 0.1 bitcoin’s worth of it – less tasty but more durable. Whatever commodity they choose, it will assume the role of base money.

Note that there need not be a single goat in our hamlet, not to speak of gold or Bitcoin, as all farmers can settle their debt perfectly fine with what they ultimately want: the real goods.

Throughout this book, I shall use the term ‘real credit’ for credit created in exchange for real goods and ‘credit money’ for real credit denominated in a single, generally agreed commodity – the ‘base money’. In a way, real credit is the raw material for the production of credit money. Financial credit, such as loans, government bonds, company shares, and dry bills of exchange2 yield highly problematic money substitutes, which we shall call ‘fiduciary media’ issued against thin air.

It is the prerogative of any seller of real goods to grant real credit to his buyers, in an instant and at any time. This freedom enables the immediate flow of goods and forestalls undue delays in trade, where goods may deteriorate or spoil altogether. The creation, circulation, and redemption of credit money – which serves as the predominant medium of exchange – is quite independent from the production, trading, and hoarding of the base money commodity – which mostly serves as the unit of account.

Our rustic example above shows that the supply of credit money must be elastic because demand for money appears and disappears depending on the timing of goods ready for sale. In the real economy, money demand changes all the time: there are weekly and bi-weekly cycles for workers’ wages, monthly ones for employees’ salaries or for house rents, there is seasonality during harvest time, Christmas, and holiday periods. And finally, there are long-term fluctuations like the four-year pork cycle.

Both types, fixed base money and elastic credit money, are needed to form a complete monetary system, the former serves for value measurement, the latter for value exchanges. Basic mathematics proves that the total systemic money supply, the fixed plus the elastic component, must also be elastic.

“Elastic? No way! An ideal money’s supply is fixed so that nobody can produce more of it,” some bitcoiners may disagree. “That’s what Austrian Economics teaches us.”

Not so. This is certainly not what the major economists of the Austrian School wrote about the money supply in the context of a free banking system, where banks compete with independent banking policy.

“A stable price level and a high level of employment do not permit the total quantity of money to be kept constant,” writes nobel laureate F.A. Hayek.3 In a similar vein, Ludwig Mises explains that “the theory of elasticity is correct” as follows: “banks increase and decrease their circulation pari passu with the variations in the demand for money. In doing so, they help to stabilise the objective exchange value of money.”4 And Carl Menger wrote: “Production, or more extensive fabrication at least, is very often only possible through credit; hence the pernicious stoppage and curtailment of the productive activity of a people when credit suddenly ceases to flow.”5

As mentioned earlier, not a single gold coin or bitcoin is needed just because our farmers agree on it as a unit of account. Does this mean that in 2015, the Greek people could have changed from the Euro to Bitcoin in an instant? Could they have bootstrapped a Bitcoin system, bypassing the ECB’s blockade?6

Almost. In principle, the Greek producers could have created the raw material for credit money by selling domestic goods, such as olive oil or Greek wine, for bitcoin-denominated credit. However, several hurdles remain for the production of credit money.

1. First, the necessary economic method and system for Bitcoin credit money creation and burning has not yet been developed, nor is there a consensus on what constitutes acceptable proof-of-value.

2. Second, many bitcoiners are sceptical about the necessity for bitcoin-denominated credit money, the quasi-religious 'fixed money supply’ narrative causes them to conflate credit money with fiat money.

3. Third – and most importantly – the volatility of bitcoin is much higher than that of the major fiat currencies, therefore businesses are highly reluctant to assume the risk of bitcoin-denominated credit.

Volatility presents a catch-22: without a credit superstructure backed by real goods, Bitcoin’s objective exchange value will always remain volatile; and while Bitcoin remains volatile, businesses cannot assume bitcoin-denominated credit and the necessary credit superstructure cannot emerge and grow.

Bitcoin has a classical chicken-and-egg problem.

The good thing is that this type of problem is demonstrably solvable; after all, chickens and eggs do exist. In a later chapter, I will present a plan to solve the volatility problem for Bitcoin. Spoiler: we must write code.

"There is nobody to act as central bank to adjust the bitcoin money supply as the population of users grows. ... I don't know a way ..."

– Satoshi Nakamoto, 18 February 2009

* * *

About a year ago, after publicly announcing the Bitcredit Protocol proposal, I was confronted with criticism from unexpected quarters. Until then, I was prepared for pushback from etatists who support big government, economists and bankers invested in the fiat money system, and from the political class interested in more spending power.

But two critics from the Bitcoin community made me uneasy. Both were educated, polite and had thought deeply about Bitcoin. They were free market minded, certainly not collectivists. One of them had authored a book about cryptocurrencies, the other was a board member of the Bitcoin Austria association. When these two expressed scepticism about the project combined with a genuine desire to understand it better, I thought that it should be easy to dispel their objections and win them over.

So I met the author in Cafe Stein, a coffee house close to Vienna University. He shared that he was a former banker and now CFO of the Austrian subsidiary of a large corporation. I told him that I started out as a commercial banker with Citibank, moving on to investment banking, and later founded an online bank; how I had first learned about Bitcoin when curiosity led me to the ‘$100 Party’ at Noc Noc Bar in San Francisco’s Lower Haight district in 2013.1 

“Then, during the 2015 Greek Debt Crisis,” I told him, “I realised that a key part of Bitcoin was still missing and until then, our hopes for Bitcoin were in vain.”

“What was that?”

“Well, the idea was that Bitcoin would replace today’s fiat money system. That it would catch on during a currency crisis and save entire countries from economic collapse. But the Greek people could not switch to Bitcoin.”

Realising that my vis-a-vis was still young at the time, I filled him in on how the European Central Bank cut Greece from the Euro liquidity supply after a democratic referendum rejected the ECB’s austerity plan for a bailout with a 61 percent ‘No’ vote versus 39 percent ‘Yes’.2

“Essentially, ECB leadership took the Greek people hostage.” I explained how its then president, Mario Draghi, backed the country into a corner using ECB’s monopoly power over the Euro. Without an alternative money supply, the Greek banks had to close for three weeks. The economic impact for daily life and for the overall economy was severe. Companies could not pay their employees, suppliers, or bills.

Cash machine withdrawals were limited to a small daily amount. Desperate people waited in long lines and often found the machines empty when it was their turn. Many families could not buy daily food or even necessary medication, as retail businesses and pharmacies asked for cash only.

In the end, Greek Prime Minister Alexis Tsipras caved in and signed the EU’s bailout conditions, with some slight modifications so the referendum on the prior version would not apply. Recovery took a long time, the Greek economy experienced slow growth in the following years and unemployment remained high. 

“Despite this desperate situation, Greece could not switch to Bitcoin. One cannot buy Bitcoin when one has no access to one’s bank account. The fiat on-ramp is shut.”

“But,” he objected, shaking his head, “this is irrelevant. Bitcoin turned out to be a store of value, not a medium of exchange. It is an inflation hedge!”

“Not necessarily,” I contradicted, “we can still turn it into a medium of exchange if we build the elastic Bitcoin supply which is needed for trade and industry.”

“Bitcoin holders will never agree to an elastic supply. It is the fixed supply which will increase the value of Bitcoin forever, to millions of dollars.”

I pleaded the bigger picture. “Bitcoin must become a medium of exchange, or it cannot succeed when a fiat system collapses or spins into hyperinflation. This could prevent enormous human suffering and despair like in the 1920’s Weimar Republic or in countries with broken money like Lebanon and Zimbabwe.”

“It is everybody’s own free choice to buy Bitcoin or not. Those who do will be protected against a bank crisis and against inflationary money printing.”

That was the moment when I got a sense that our debate would need more than one cup of coffee. The statement about ‘everybody’s free choice’ was true. But it also was not, as it assumed implicitly that things would stay as they are. 

I think that Bitcoin will not remain a store of value for long if it does not become a medium of exchange reasonably soon, because some other digital currency will then be ‘it’. I will elaborate in a later chapter. Nor do I think that nominal riches in a fiat currency will buy much when the real economy collapses in a hyperinflation or in the event of a banking system breakdown. Finally, the fiat money system and its intrinsic ideology are threatening our free open society far beyond just inflation. Central bank digital currencies are looming on the horizon. If the political class succeeds in imposing them on the people, CBDCs will give unprecedented powers of surveillance, censorship, and control to the state machine, in authoritarian countries just as much as in the free world. We need to fix our money and we do not have much time left.

So how could I respond? A common ground is that bitcoiners agree on the ills of today’s fiat money systems. We are highly critical of governments printing money out of thin air to fund deficits. We dislike that this enables the politicians in power to waste resources and bloat the state. We think of fiat money printing as clandestine thievery from the working people who struggle and toil and still cannot get ahead. We know that the interest rate manipulations of the central planners at central banks cause boom and bust cycles which result in economic instability. The former create bouts of labour shortage, the latter painful unemployment. Inequality rises through wage growth disparity to the detriment of lower income workers. Young people entering the job market find it hard to secure work during a recession, leading to youth unemployment. Artificially low interest rates cause price bubbles in the stock market which favour the well-to-do and the already wealthy, and increasingly unaffordable house prices make it virtually impossible for the average young person to enter the housing market and start a family.

“Don’t you also want these problems fixed and gone?” I asked, “A better world? We can only make this happen if we get rid of the fiat system, and for this Bitcoin must become a viable money for the real economy. That’s why it needs an elastic supply.”

“Not so. This would need a central bank and we know how that ends. It is better to have a fixed supply. You can’t change Bitcoin Core, anyway.”

“This needs neither a central bank nor a change to Bitcoin Core,” I countered, “the new protocol is a separate new layer. It is decentralised and will stabilise Bitcoin and eliminate its volatility.”

“Volatility will abate in time, all by itself. Meanwhile I am insured against fiat money inflation by hodling Bitcoin.”3

I wanted to explain that this is not how it works but realised that this would need a much longer explanation, maybe a whole book. So we left it at that and headed off. I slept uneasy that night as I considered our conversation and wondered if and how I could have convinced my acquaintance.

The essence of his argument was simple: just wait and it will fix itself. This was a very convenient stance, it removed the strenuous need to act. On the surface it was also an accurate statement, given the current state of Bitcoin. It was that seeming truth which bothered me because I know that in economic matters things can and will change. 

I had lived through the internet bubble in 2000 to 2001 when everybody talked about how the internet would change everything and that it was the dawn of an entirely new economy, a New Economy in capital letters, where the old rules were meaningless and the sky was the limit. Prices of internet company shares seemed to know only one direction: up. Media and markets were in a frenzy, every new stock of a company with a ‘.com’ appended sold like hot bread rolls. But all parties must end, and the dot-com bubble ultimately did burst with losses reaching hundreds of billions of dollars. Millions of investors lost their money and many faced financial ruin.

Today’s crypto asset industry shares many similarities with the internet bubble. There is the same speculative frenzy, now called ‘FOMO’, the Fear Of Missing Out on ‘NGU’, Numbers Go Up. There is the same media hype and the same boundless excitement over a revolutionary new technology with a huge but yet unknown impact. Sadly, there are also the sharp crashes and significant financial losses for crypto investors who got ‘rekt’. 

So far, Bitcoin was always able to recover from its crashes which evidences its plausible candidacy as the world’s future base money. Maintaining the fixed supply model promises rich capital gains to those already invested. But there are certain events which could change this very quickly, there is no safety or certainty in its unfinished state. 

This raises two questions: Firstly, are these promises real, and how many holders of Bitcoin will ultimately benefit? How many will be late, miss the short peak and lose all?  Secondly – and this is the deeper question – should Bitcoin remain an investment asset for the few or should it become an ideal money that serves the many? 

An elastic Bitcoin supply is not just an economic choice, it is a moral one.

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Next chapter: A World Without Money