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.
Bitcoin does indeed offer important solutions to some of the world's most pressing monetary concerns. It is not though a panacea for poor investment decisions.
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.
Banking black magic though it may be, fractional reserve banking practices are ubiquitous. You know that banks make loans. Have you considered from where they get the funds to do so? They're drawn of course from the savings placed in the bank by depositors. In principle this isn't a problem, and the interest payments made possible will be attractive to many depositors. The problem is banks wanting to have their cake and eat it too. Thus, they perpetuate the illusion that the depositor's money is still available to be withdrawn at will. (Otherwise, far higher interest payments would likely be demanded, if people couldn't access their own money.) Obviously, though, the funds cannot be simultaneously in the depositor's 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.
1) The practice contributes to inflation; the money supply is after all being artificially increased. This increase of money though is not actually an increase of wealth or savings. 2) Consequently, the practice also exaggerates business cycles. Borrowers are deceived into miscalculating the true availability of resources. The phony money supply increases suppress interest rates, so that entrepreneurs borrow thinking there are more available resources for their project than there really are. The inescapable outcome is recession - or even depression. 3) Finally, not only are borrowers hurt in the long run, but depositors are put at risk. When they recognize the Ponzi scheme aspects of the situation, they want their money back. Too often though too many recognize the situation at the same time, leading to bank runs. The money, though, of course isn't really there.
To this problem, Bitcoin provides no answers. That fact is evident in the suspension of Bitcoin account withdrawals at Mt. Gox, a Tokyo-based exchange. The global leader in U.S. dollars and Bitcoin trades, Mt. Gox has been effectively acting as a fractional reserve bank. Clients create accounts and Mt. Gox has been lending against those deposits. Now, though, Bitcoin depositors are being thwarted in attempts to withdraw their funds.
Officially Mt. Gox attributed the suspension of Bitcoin redemption to what it is calling a technical malfunction. This story however seems calculated to obscure the reality that Mt. Gox has been involved in a low profile, high volume convertibility suspension for a year. Up until now, different ruses have been cited to justify its actions. All pretenses though, now, appear to be over.
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.
A solid, market based currency is wonderful and welcomed, but not a panacea for poor investment decisions. The interest from fractional reserve banking is alluring, but willful myopia to its risks puts your savings in grave danger. Bitcoin's virtues do not include a financial redo.
Bitcoin does indeed offer important solutions to some of the world's most pressing monetary concerns. It is not though a panacea for poor investment decisions.
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.
Banking black magic though it may be, fractional reserve banking practices are ubiquitous. You know that banks make loans. Have you considered from where they get the funds to do so? They're drawn of course from the savings placed in the bank by depositors. In principle this isn't a problem, and the interest payments made possible will be attractive to many depositors. The problem is banks wanting to have their cake and eat it too. Thus, they perpetuate the illusion that the depositor's money is still available to be withdrawn at will. (Otherwise, far higher interest payments would likely be demanded, if people couldn't access their own money.) Obviously, though, the funds cannot be simultaneously in the depositor's 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.
1) The practice contributes to inflation; the money supply is after all being artificially increased. This increase of money though is not actually an increase of wealth or savings. 2) Consequently, the practice also exaggerates business cycles. Borrowers are deceived into miscalculating the true availability of resources. The phony money supply increases suppress interest rates, so that entrepreneurs borrow thinking there are more available resources for their project than there really are. The inescapable outcome is recession - or even depression. 3) Finally, not only are borrowers hurt in the long run, but depositors are put at risk. When they recognize the Ponzi scheme aspects of the situation, they want their money back. Too often though too many recognize the situation at the same time, leading to bank runs. The money, though, of course isn't really there.
To this problem, Bitcoin provides no answers. That fact is evident in the suspension of Bitcoin account withdrawals at Mt. Gox, a Tokyo-based exchange. The global leader in U.S. dollars and Bitcoin trades, Mt. Gox has been effectively acting as a fractional reserve bank. Clients create accounts and Mt. Gox has been lending against those deposits. Now, though, Bitcoin depositors are being thwarted in attempts to withdraw their funds.
Officially Mt. Gox attributed the suspension of Bitcoin redemption to what it is calling a technical malfunction. This story however seems calculated to obscure the reality that Mt. Gox has been involved in a low profile, high volume convertibility suspension for a year. Up until now, different ruses have been cited to justify its actions. All pretenses though, now, appear to be over.
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.
A solid, market based currency is wonderful and welcomed, but not a panacea for poor investment decisions. The interest from fractional reserve banking is alluring, but willful myopia to its risks puts your savings in grave danger. Bitcoin's virtues do not include a financial redo.
About the Author:
Anyone hoping to be benefiting from the Bitcoin renaissance in global finance, you need to stay abreast of events by getting the scoop at the Bitcoin Profit Calculator blog. Wallace Eddington has been taking the blogosphere by storm with his recent work. See particularly his popular piece on Bitcoin exchange trading funds .
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