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Bitcoin: Not A Panacea For Everything March 21 http://www.authenticpackersfootballshop....rs_Jersey/ , 2014 | Author: Wallace Eddington | Posted in Finance
You might have noticed the world has been facing a bit of a fiscal and monetary problem of late. Bitcoin devotees are certainly aware of this as it has been the search for solutions which has stoked much of the recent interest in Bitcoin.

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.

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.

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 Thus, they perpetuate the illusion that the depositor’s money is still available to be withdrawn at will.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.

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.

A truly, market based currency like Bitcoin has huge social and personal advantages, which should not be underestimated. It is though no panacea for ill-considered investment decisions. The interest earning appeal of deposits in fractional reserve banking institutions have real allure. Turning a blind eye to their danger, though , can prove costly. Bitcoin’s virtues do not include a financial do-over.

Anyone hoping to be benefiting from the Bitcoin renaissance in global finance, you need to stay abreast of events by following the news 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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