The attentive observe something of a fiscal and monetary malaise - dare we say crisis - within the world economy of recent years. Much of the keenness to explore Bitcoin has been stoked by desire to find investing solutions that escape those problems.
To some of these problems Bitcoin does offer a real solution. To others, not so much.
The big benefit of Bitcoin is its remedy to fiat currency and the inevitably ensuing inflation . Inflation is a terrible problem that impoverishes most people. The exception being the well placed interests - such as the big banks and their favored customers - who are first receivers of the newly invented money.
Bitcoin is a helpful remedy to this problem. Where fiat currency's value is determined by the issuer (i.e., government), through monetary supply and interest rate control, Bitcoin's value is decided by the market. A real, rather than fiat, currency is evaluated by the market for benefits, such as providing a reliable medium of exchange or store of value.
This is Bitcoin's strong suit. As no individual or organization controls, and therefore none can manipulate in their own interest, the supply of the currency, Bitcoin resists the inflationary pressures characteristic of fiat currencies.
Unfortunately, the world's economic problems are not all traceable to fiat currency. Another major culprit is not so easily remedied by market valued currencies like Bitcoin. Fractional reserve banking, whereby the banks magically multiply the money supply themselves, is another matter.
This bit of banking black magic results from the practice of lending to loan clients of the bank the majority of the funds placed in the bank by depositors. This would be a legitimate risk-reward consideration for depositors if there were honest book keeping involved. Instead, though, the banks perpetuate an illusion that in fact the money is still available for depositors to withdraw. People boringly burdened by reality can't help noticing that the same money can't be simultaneously in the depositor's bank account and in the hands of the borrower.
There's no doubt that this little bit of black magic does fuel economic growth, increasing monetary liquidity, and benefits arise from this. At the same time, though, there is a price to be paid.
First, the practice contributes to inflation, by magically multiplying the money supple. Second, it contributes to exaggerated business cycles, as borrowers are misled about the actual availability of resources, due to artificially suppressed interest rates resulting from illusionary large money supply. The inevitable result is eventually recession - if not depression. Third, it eventually leads to bank runs: as the somewhat ponzi-like scheme eventually collapses. When everyone wants their money back at the same time, it just isn't there.
Bitcoin offers no solution to fractional reserve banking, though, as demonstrated by the suspension of Bitcoin withdrawals at a Tokyo-based exchange called Mt. Gox. For some time now it has been the global leader among exchanges of U.S. dollars and Bitcoin. However, despite being formally an exchange, clients do set up account and Mt. Gox has been exercising fractional reserve lending practices. Now, the Bitcoin depositors are finding they cannot withdraw their funds.
The official explanation for the suspension has been technical malfunction. The fact though is that Mt. Gox has been engaged in suspension of convertibility for almost a year now and using various ruses to inhibit withdrawals of Bitcoin in the meantime.
Courtesy of Mt. Gox we appear to be witnessing the world's first digital bank run. Mt. Gox's response? No surprise there, they've turned to the tried and true one of banks through history: Katie, bar the door! There appears to be serious danger that many of Mt. Gox's Bitcoin depositors will lose much, maybe even all, their investment.
So, as valuable (indeed, might we say, invaluable) as a truly, market based currency is, it can't solve all the problems of the current global economic mess. And, on a personal level, Bitcoin is no panacea for ill-considered investment decisions. Certainly there is much appeal in earning the interest on deposits that fractional reserve banking offers. Like everything, though, it comes with a price. Willful myopia to the associated risks puts your savings in danger. Bitcoin's virtues do not include a financial redo.
To some of these problems Bitcoin does offer a real solution. To others, not so much.
The big benefit of Bitcoin is its remedy to fiat currency and the inevitably ensuing inflation . Inflation is a terrible problem that impoverishes most people. The exception being the well placed interests - such as the big banks and their favored customers - who are first receivers of the newly invented money.
Bitcoin is a helpful remedy to this problem. Where fiat currency's value is determined by the issuer (i.e., government), through monetary supply and interest rate control, Bitcoin's value is decided by the market. A real, rather than fiat, currency is evaluated by the market for benefits, such as providing a reliable medium of exchange or store of value.
This is Bitcoin's strong suit. As no individual or organization controls, and therefore none can manipulate in their own interest, the supply of the currency, Bitcoin resists the inflationary pressures characteristic of fiat currencies.
Unfortunately, the world's economic problems are not all traceable to fiat currency. Another major culprit is not so easily remedied by market valued currencies like Bitcoin. Fractional reserve banking, whereby the banks magically multiply the money supply themselves, is another matter.
This bit of banking black magic results from the practice of lending to loan clients of the bank the majority of the funds placed in the bank by depositors. This would be a legitimate risk-reward consideration for depositors if there were honest book keeping involved. Instead, though, the banks perpetuate an illusion that in fact the money is still available for depositors to withdraw. People boringly burdened by reality can't help noticing that the same money can't be simultaneously in the depositor's bank account and in the hands of the borrower.
There's no doubt that this little bit of black magic does fuel economic growth, increasing monetary liquidity, and benefits arise from this. At the same time, though, there is a price to be paid.
First, the practice contributes to inflation, by magically multiplying the money supple. Second, it contributes to exaggerated business cycles, as borrowers are misled about the actual availability of resources, due to artificially suppressed interest rates resulting from illusionary large money supply. The inevitable result is eventually recession - if not depression. Third, it eventually leads to bank runs: as the somewhat ponzi-like scheme eventually collapses. When everyone wants their money back at the same time, it just isn't there.
Bitcoin offers no solution to fractional reserve banking, though, as demonstrated by the suspension of Bitcoin withdrawals at a Tokyo-based exchange called Mt. Gox. For some time now it has been the global leader among exchanges of U.S. dollars and Bitcoin. However, despite being formally an exchange, clients do set up account and Mt. Gox has been exercising fractional reserve lending practices. Now, the Bitcoin depositors are finding they cannot withdraw their funds.
The official explanation for the suspension has been technical malfunction. The fact though is that Mt. Gox has been engaged in suspension of convertibility for almost a year now and using various ruses to inhibit withdrawals of Bitcoin in the meantime.
Courtesy of Mt. Gox we appear to be witnessing the world's first digital bank run. Mt. Gox's response? No surprise there, they've turned to the tried and true one of banks through history: Katie, bar the door! There appears to be serious danger that many of Mt. Gox's Bitcoin depositors will lose much, maybe even all, their investment.
So, as valuable (indeed, might we say, invaluable) as a truly, market based currency is, it can't solve all the problems of the current global economic mess. And, on a personal level, Bitcoin is no panacea for ill-considered investment decisions. Certainly there is much appeal in earning the interest on deposits that fractional reserve banking offers. Like everything, though, it comes with a price. Willful myopia to the associated risks puts your savings in danger. Bitcoin's virtues do not include a financial redo.
About the Author:
If you are or plan to be benefiting from the Bitcoin revolution in global finance, you need to stay on top of events by following the news at the Bitcoin Profit Calculator site. Wallace Eddington has been storming the blogosphere with his recent analysis. See particularly his popular piece on Bitcoin exchange trading funds .
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