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.
Indeed, Bitcoin can help solve some of those problems. Some though persist despite the virtues of Bitcoin.
The major Bitcoin advantage lies in remedying the threats of fiat currency and the inevitably ensuing inflation . Inflation is the great and secret impoverisher. Under its burden we see the purchasing power of our money gutted. Not all suffer equally, though. The well placed and politically connected (think big banks and their favored customers) profit handsomely by receiving first issuance of this money-from-nowhere. They can therefore purchase goods at pre-inflated prices, prosper immensely, and leave the rest of us to bear the burden of inflated prices that only come after they've made out like bandits.
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.
Here, Bitcoin shines. Since no individual(s) or organization can arbitrarily decree the Bitcoin supply, it is not subject to the self-serving manipulation characteristic of government's use of fiat currency. Consequently, Bitcoin effectively resists inflationary pressures.
Fiat currency though isn't the only problem contributing to the present problems of the world economy. Another is fractional reserve banking. This is the practice by which banks magically multiply the amount of money in the economy.
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.
This bit of financial magic is defended, with some justification, as fuelling the economic machinery: it certainly increases monetary liquidity, and entrepreneurial benefits may result. There are tradeoffs to everything though and costs of fractional reserve banking can be immense.
a) It contributes to inflation. It's really not that different from what the government does: money is created out of thin air. In the process, though, an illusion is perpetuated about saving levels. b) Growing directly out of this latter deception, business cycles are created. The ephemeral money supply increases create the false impression of higher tendencies to saving, which mislead entrepreneurs to borrow at the resulting artificially suppressed interest rates. Those rates, though, are sending false signals, which the borrowers discover too late. The result is recession - possibly depression. c) Borrowers are not the only direct victims of these practices. If depositors come to recognize these banking practices as the Ponzi scheme they are, they demand return of their deposits. The problem with that, of course, is that the money isn't really 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.
Mt. Gox's official explanation has been to blame a recent moratorium on withdrawals on technical malfunction. The problem with this spinning of the matter is that Mt. Gox has engaged in a low profile, high volume convertibility suspension for the last year. Multiple ruses have been deployed over that time. It appears, though, the gloves are now off.
What we're seeing with Mt. Gox is the first ever digital bank run. And the response has been the same as that of banks through history: bar the door! It's now looking doubtful whether those with Bitcoin accounts at Mt. Gox will get all - or possibly even any - of their money out.
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.
Indeed, Bitcoin can help solve some of those problems. Some though persist despite the virtues of Bitcoin.
The major Bitcoin advantage lies in remedying the threats of fiat currency and the inevitably ensuing inflation . Inflation is the great and secret impoverisher. Under its burden we see the purchasing power of our money gutted. Not all suffer equally, though. The well placed and politically connected (think big banks and their favored customers) profit handsomely by receiving first issuance of this money-from-nowhere. They can therefore purchase goods at pre-inflated prices, prosper immensely, and leave the rest of us to bear the burden of inflated prices that only come after they've made out like bandits.
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.
Here, Bitcoin shines. Since no individual(s) or organization can arbitrarily decree the Bitcoin supply, it is not subject to the self-serving manipulation characteristic of government's use of fiat currency. Consequently, Bitcoin effectively resists inflationary pressures.
Fiat currency though isn't the only problem contributing to the present problems of the world economy. Another is fractional reserve banking. This is the practice by which banks magically multiply the amount of money in the economy.
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.
This bit of financial magic is defended, with some justification, as fuelling the economic machinery: it certainly increases monetary liquidity, and entrepreneurial benefits may result. There are tradeoffs to everything though and costs of fractional reserve banking can be immense.
a) It contributes to inflation. It's really not that different from what the government does: money is created out of thin air. In the process, though, an illusion is perpetuated about saving levels. b) Growing directly out of this latter deception, business cycles are created. The ephemeral money supply increases create the false impression of higher tendencies to saving, which mislead entrepreneurs to borrow at the resulting artificially suppressed interest rates. Those rates, though, are sending false signals, which the borrowers discover too late. The result is recession - possibly depression. c) Borrowers are not the only direct victims of these practices. If depositors come to recognize these banking practices as the Ponzi scheme they are, they demand return of their deposits. The problem with that, of course, is that the money isn't really 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.
Mt. Gox's official explanation has been to blame a recent moratorium on withdrawals on technical malfunction. The problem with this spinning of the matter is that Mt. Gox has engaged in a low profile, high volume convertibility suspension for the last year. Multiple ruses have been deployed over that time. It appears, though, the gloves are now off.
What we're seeing with Mt. Gox is the first ever digital bank run. And the response has been the same as that of banks through history: bar the door! It's now looking doubtful whether those with Bitcoin accounts at Mt. Gox will get all - or possibly even any - of their money out.
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:
Anyone hoping to be benefiting from the Bitcoin revolution in global finance, you need to stay on top of events by getting the scoop at the Bitcoin Profit Calculator blog. Wallace Eddington has been storming the blogosphere with his recent analysis. See particularly his popular article on Bitcoin exchange trading funds .
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