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.
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.
These fractional reserve banking practices are defended, with some validity, as fueling the economy. Such practices do increase liquidity, and entrepreneurial borrowers can benefit in the process. The first rule of economics, though, is always to look for the trade-offs. In the case of fractional reserve banking they're considerable.
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.
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.
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.
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.
These fractional reserve banking practices are defended, with some validity, as fueling the economy. Such practices do increase liquidity, and entrepreneurial borrowers can benefit in the process. The first rule of economics, though, is always to look for the trade-offs. In the case of fractional reserve banking they're considerable.
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.
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:
If you are or plan to be part of the Bitcoin renaissance 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 taking the blogosphere by storm with his recent analysis. See particularly his popular piece on Bitcoin exchange trading funds .
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