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Why do people value bitcoin?

In order to understand how bitcoin can be considered useless to some economists and extremely valuable to others, let’s look at the history of money creation, the politics involved with money creation and previously failed currencies around the world. To gain an understanding of bitcoin, when the media only focuses on the price of bitcoin, is almost impossible. To value bitcoin (actually the bitcoin protocol), a person needs to understand what problems bitcoin is solving for people around the world.

There should be (and are) use cases that show the bitcoin protocol transferring value between people around the world, that banks may or may not be willing to deal with.

What do Central Banks do?

America’s Federal Reserve (their 3rd Central Bank – after the first and second failed), Bank of England, European Union or Bank of Argentina, the Central Bank control the monetary policy of their respective country. Increasing the money supply, setting interest rates and supervising the banking sector, are a few of the many areas central banks are involved in a countries currency. How your currency performs when you are buying things at the store, or trading it for another currency, is directly tied to actions the central bank has taken in accordance to the politicians monetary policy.

money creation worldwide

Historical Failings of Central Banks

The 2008 financial crisis is one of the better covered bank failures (rumored to be the motivation Satoshi needed to create bitcoin), there are many central banks around the world that fail it’s citizens all the time though.

The Swedish banking crisis of 1992, where the government (taxpayers) assumed the banks bad debts

Italy‘s central bank has been warning of a looming banking crisis throughout 2018.

The Argentina Great Depression of 1998 – 2002 started right after Russia‘s financial crisis but before Brazil’s Real was devalued 35% in 1999. Brazil is seeing this again just like Argentina is.

Turkey is going through an economic crisis currently, that brings back memories of the 2001 crisis they had.

Let’s not forget the European Debt Crisis of 2010 that Greece, Portugal, Ireland, Spain and Cyprus citizens all paid for.

India had to airlift 47 tons of gold to the Bank of England and 30 tons of gold to Switzerland during their 1991 crisis, to secure a $600 million emergency loan. Bitcoin’s transaction fee’s will never be as high as what India paid to ship gold to the bankers in England for an emergency loan.

India is still having huge issues with their economy and keeping the Rupee stable.

Then there is the Chinese Yuan, which nobody can figure out how to properly value.

These are only the most recent failings of central banks. Covering every financial crisis that central banks were involved in before Black Monday, could be an entire book in itself.

The ability for politicians and central banks to claim they have things “under control” is declining, as these failures continue.

Bitcoin as a Decentralized Store of Value

The proof of work system that bitcoin uses to mine bitcoins is intended to mimic the mining of gold, digitally. One cannot just “create” bitcoin without a computer willing to solve complex math problems that become increasingly difficult over time.

Printing money is easy to replicate. The early central bankers new this, so they used gold to back their national currencies. The US dollar was backed by gold during the Bretton Woods agreement, allowing all national currencies to “peg” their currency to the US dollar and have it redeemable in gold back in 1944.

The 44 nations that had their currencies pegged to the US dollar had to accept “Nixon Shock” in 1971, which removed gold backing the US dollar. Since every nation held US dollars for years (they were convertible to gold after all), arguing about the removal of the gold standard, would only lower the value of the US dollars every country held at the time.

This is where the total supply of bitcoins being 21 million, should make a little more sense. You cannot just create bitcoins out of thin air, they need to be “mined” by solving increasingly difficult math problems, over a set period of time to release new bitcoins. Controlled supply of bitcoin is built into the protocol, for everyone to benefit from the scarcity principal. Anyone complaining that bitcoin isn’t backed by anything, should ponder how easily central banks printed the dollars they value so highly.

Unless your dollars are immune to hyperinflation (which every country has been been affected by throughout history), accepting central banks “inflationary measures” with your dollars is costing you money.

usd value decline

Banks as a Centralized Store of Value

Everyone has and needs a bank account, right? That’s where people keep their money safe, if they have any!

Wrong.

Banks know you need to use them, that’s why they charge everyone for holding money in them.

Bank of America charges $12 monthly to their poorest customers just to have an account open.

Add on transaction fees, minimum balance fees, foreign exchange fees, lost debit card fees and statement fees, it becomes easy to see why everyone hates the bankers. If you don’t like your current bank, the other bank (controlled by the same central bank), this will surely make you scream in pain at some point.

2 billion people unbanked around the world, might actually be closer to half of the world being unbanked. 370 million Indians with dormant bank accounts being part of the financial inclusion estimates, make it fairly clear, banks still have a long way to go.

Banking declined in South Africa, Argentina, Mexico and Vietnam between 2014 and 2017. People holding their own money is not only common but preferred in some places.

 

less banking accounts

Perhaps people closed their accounts because they didn’t like the costs to wire people from their bank. Western Union and similar services make the majority of their profits around these types of customers.

Bank Security

Banks are needed because they secure your money better than people can do themselves. Everyone is taught this fable.

Equifax was given customers information by the banks, then they had an accident and customer’s data went to bad people. They only waited 6 weeks to tell the public, while insiders sold their stock, the Equifax stock took a tumble shortly after that. 143 million people’s information was obtained by the hackers of Equifax.

Deloitte were hacked in 2017, with US government departments emails, along with banks and global corporations information being stolen from the accounting firm.

Tesco Bank’s data breach had 2.5 million pounds stolen from 9,000 customers accounts. They might get a hefty fine, the customers don’t get any real compensation for their lack of securing other peoples data poorly though.

Citigroup waited a month before telling the 200,000 customers who’s data were compromised about the data breach. The recent hack was better than in 2005 when 3.9 million customers information was “lost” by the company.

Not to be outdone, JPMorgan Chase had a data breach leaking 83 million accounts, approximately 76 million households information and 7 million small businesses information.

Then their is the list of UK government data losses that are too long to mention here.

Banks and government databases are the best targets for hackers. They require so much personal information about anyone that wants to do business with them, there is no reason to hack individuals when a hacker can get millions of individuals data.

Keynesian Economics VS. Austrian Economics

Keynesian economics were great during the 1930’s and have helped create many jobs in finance that technology will replace in the coming years. The breakdown of banking issues above, centralized or physical, are merely some of the reasons that bitcoin holders value a digital token created by computer algorithm over a national currency printed by central bankers.

This is not suggest that a complete collapse of international banking will occur, as bitcoin adoption increases.

People in Venezuela have a good understanding how central banks can manipulate money however they want.

India’s cash ban taught people the same lesson, after years of the Rupee’s value constantly fluctuating.

Russia, Iran and Turkey are trying to figure out ways around US sanctions, the citizens of these countries have a good reason to value bitcoin currently.

College students are more likely to adopt bitcoin and crypto currency, due to the lack of resources and opportunities many  years of Keynesian economists have left for them.

For the average person currently, the use cases and usefulness in daily life, hasn’t really been made clear. Consider how many companies transact daily $10,000 or more through bank wires an accountant sends. Then assume those fee’s are gone and businesses are able to transact between each other without intermediaries.

The foreign exchange kiosks in airports and the banks fee’s for exchanging currencies people use and trade every day. Bitcoin is a global currency that people are able to purchase currencies in any country currently. 

Businesses transacting around the world daily, add billions of dollars in fees to the banks bottom line. Those are billions of dollars that technology like bitcoin and cryptocurrency are ready to disrupt.

Bitcoin isn’t Valuable – Unless I can Buy Coffee at Starbucks with it!

Load bitcoin into a bitcoin credit card wallet that advcash, wirex and many others offer. You can buy coffee (or anything else) with a credit card and the providers remove bitcoin from your shared wallet, to cover the cost of your transactions.

The on-ramps and off-ramps for buying and selling bitcoin are increasing daily around the world. Some people use the gift card options that eGifter and Gyft offer for bitcoin. People also book vacations with sites like future.travel and bitcoin.travel.

 

****More on the Value of Bitcoin can be found in Saifedean Ammous‘s book “The Bitcoin Standard”

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