Bitcoins are virtual currency. In my world of limited understanding I avoid them because I think they are:
Really just a promise made via a social contract. The record of each contract is uniquely recorded in the encrypted block chain distributed around the web.
Along the way real cash has been exchanged for bitcoins. Unlike a bank or national currency there is no central warehouse holding all the dollars or gold if you wanted to cash your bit coins in. To get your money back when selling your bit coin depends on someone willing to buy them with real money. Speculation and scarcity of supply has pushed the value of each Bitcoin promise to many times what some paid in the beginning for their first Bitcoin.
It looks like a giant upside down pyramid. The value is only what it is for as long as people want to buy a promise at the current inflated value. If all of a sudden no one wanted a Bitcoin, or the cleverness of the blockchain was broken destroying the integrity of the records, theyâll all be worth exactly zero. EG by a super quantum computer, or a simple silicon eating bacteria destroying the worlds computers.
P.S.
The underlying value of everyday coins and notes is also doubtful these days. Most of my money exists purely in the bank as debt on a ledger. In some ways if the system was to fail absolutely, I might be ahead.
" The pound was a unit of account in Anglo-Saxon England, equal to 240 silver pence (the plural of penny) and equivalent to one pound weight of silver. It evolved into the modern British currency, the pound sterling."
Indeed, much âcreationâ of money is done by institutions being allowed to lend much more than they have on deposit. This would never have done in the days of the gold standard.
Lenders do not just lend out money from depositors. They borrow money on markets and lend that out at higher interest rates, and they lend out investors money.
It is all real money held as debt.
It is only reserve banks that can create sovereign money, called fiat curency.
Lord Turner, formerly the UKâs chief financial regulator, said âBanks do not, as too many textbooks still suggest, take deposits of existing money from savers and lend it out to borrowers: they create credit and money ex nihilo â extending a loan to the borrower and simultaneously crediting the borrowerâs money accountâ.
That in no way means that money is âcreated out of nothingâ.
It means that on one side a credit is created in official fiat money, and a debt is created on the other side. It balances out.
Not covered in the commentary are the risks of printing too much. Hyper-inflation as the notional value of a currency collapses is not unique in the modern history.
Crypto currencies have the added risk of crashing in value, just like the past runs on bank deposits during financial crisis. IE anytime there are more sellers seeking to cash out of a crypto currency than demand.
The RBA said of Bitcoin So, while bitcoin can be used to make payments, currently its use as a means of payment is limited and it does not display the key characteristics of money.
As I said previously, central banks, reserve banks create money for a sovereign nation.
But is not free.
The Government or banks that use this money have a debt to be repaid, and until repaid have to pay interest.
When this money gets repaid, then the repaid money can be cancelled just as easily as it was created. Depends on whether there is enough money in the system to support natural growth or if there is too much and runaway inflation could occur.
Australia is fortunate in that it has plenty of goods and services that other countries want to buy, and so demand for the $aud sees it very stable.
There are many other qualified commentators I could find that say that it is. The link to Wikipedia had several mentions, here is another. If you look there plenty of others.
Countries and districts without reserve requirements[edit]
Canada, the UK, New Zealand, Australia, Sweden and Hong Kong[10] have no reserve requirements.
This does not mean that banks canâeven in theoryâcreate money without limit. On the contrary, banks are constrained by capital requirements,
One could talk about âreserve requirementsâ, âcapital requirementsâ, âdebt to equity ratiosâ, and plenty of others but these are just a part of business. Especially the business of banking. A crucial sector that quite rightly gets a lot of oversight from regulatory authorities. Banks failing is a recipe for an economy failing.
But I do NOT accept, and my big fat economics textbook explains to me, as does what I have found on the Internet, that banks, apart from central banks, create money out of nothing.
So, is bitcoin actually âmoneyâ. Trying to get back on topic.
I donât think it is. Its use in payments is very limited and generally has to be traded into real money through bitcoin traders who charge commissions, and are increasingly under scrutiny for things like anti-laundering, and tax.
I use mine as a stand to raise the computer monitor to a more convenient viewing height.
I do have a light weight paperback one that was once useful for swatting biting insects. I suspect that neither version align with the one used by the Federal Treasurer. I also suspect the RBA governor uses a different one from the Treasurer. And when there are party room meetings, the most used economic reference might have little in common with either.
Iâve one poorly reviewed text on political science (oxymoron?) that fails to explain the last reliably.
All this suggests printed money is much like a published book. Based on a perception of value, and worth only what someone is prepared to offer in exchange. Similarly Bitcoin may or may not be more valuable than that latest e-book I downloaded.
When commercial banks lend money, they expand the amount of bank deposits.[18] The banking system can expand the money supply of a country beyond the amount created or targeted by the central bank, creating most of the broad money in a process called the multiplier effect.[18]
Banks are limited in the total amount they can lend by their capital adequacy ratios, and their required reserve ratios. The required-reserves ratio obliges banks to keep a minimum, predetermined, percentage of their deposits at an account at the central bank.[note 12] The theory holds that, in a system of fractional-reserve banking, where banks ordinarily keep only a fraction of their deposits in reserves, an initial bank loan creates more money than it initially lent out.
It seems rather rude of the Bank of England to disagree with you but there it is.
And here we have the fundamental problem of âwhat is moneyâ. Is it real currency as in notes and coins or bullion reserves, or is it the effect on the economy when âmoneyâ circulates through the banking system.
I had troubles getting my head around the concept that for every $1 put through the banking system and lent out meant that $1 divided by the reserve ratio went into the economy. So with a 10% reserve required ( I think it is) on banks in Australia, that $1 lent out means $10 in effect. The âmoneyâ in the economy increases due to this multiplier effect, but the âcurrencyâ does not, unless the Central Bank decides to create more, or indeed remove some.
After itunes gift cards it seems the preferred âcurrencyâ from a wide variety of hackers and scammers, especially those who encrypted your HDD. One can thus conclude its âacceptabilityâ is in direct proportion to the number of scammers and hackers that seems to be growing, or at least not reducing.
Consider the home builder who borrows from a bank some money that is "createdâ by the bank being allowed to lend far more then it has. This seems rather abstract and obscure. Then the builder is paid with that money for building the house, who in turn pays his suppliers who provide more concrete good like - well concrete. Or tradesmen who then draw cash out of a teller machine or buy groceries.
So âmoneyâ that starts as the ability for software (that alters patterns in chips or oxide coatings on spinning disks) to lend money the bank doesnât have ends up exchanged for ice-cream which makes your mouth cold and increases your waistline. So the parable of the loaves and fishes is really about modern banking.
The difference between established banks and bitcoin mining is the complexity and hence cost of the things software has to do to create âmoneyâ. If you donât want to pay for high speed computers and electricity to mine bitcoins become a bank.