mercredi 19 février 2014

Bitcoin: The Problems It Can And Can't Solve

By Wallace Eddington


Those who have been paying attention will have noted something of a fiscal and monetary malaise - some might say crisis - stocking the world economy in recent years. These problems are no doubt in some considerable measure behind the recent interest in Bitcoin.

To some of these problems Bitcoin does offer a real solution. To others, not so much.

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 does indeed provide a much needed remedy to fiat currency induced inflation. Unlike fiat currency, the value of which is essentially decreed by government, the market establishes Bitcoin's value. It is valued by the market, like any other good, in terms of its benefits: e.g., as a reliable medium of exchange or store of value.

No doubt, it is here that Bitcoin shines. No one person or institution dictates the supply of the currency. Thus, no one can manipulate it for their own benefit as in the case of fiat currency. It is because of this that Bitcoin counteracts inflationary pressures typical of fiat currencies.

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 is done by lending out most of the value of deposits as loans, yet claiming to still have the depositor's savings available. The money can't both be 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.

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.

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:



Aucun commentaire:

Enregistrer un commentaire