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Banking vs Crypto

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  • Published At: 07.02.19 02:59
  • Last Updated At: 26.03.19 03:18
  • Total Views: 120
Vampire
  • 78
Edit

We live in a broken financial system, a system that is doomed to fail every single time. This is called fractional reserve banking, and it allows commercial banks to profit by loaning a part of their customers’ deposit and just a fraction of the deposits are stored in the account as real cash and is available for withdrawal.

Commercial banks hold a minimum percentage of the money that is deposited in their accounts and they loan out the rest. From an accounting perspective, when the bank makes a loan, both the bank and the person who is borrowing count the funds as assets. They double the original amount from an economic standpoint. The money is then re-used, re-loaned multiple times and that leads to a multiplier effect.

Abracadabra, they create new money out of nowhere.

How does it work?

When someone makes a deposit in their bank account, that money is no longer the depositor’s property, not directly. The bank now owns it, and in return, you receive a bank account where you can withdraw your money. In theory, the customer should have access to their deposit amount on demand but that is not true. The bank doesn't hold on to the full amount, only a fraction normally from 3% to 10% and the rest is loaned or used for operations.

So if they loan out their customer’s money, what would happen if a large group of people decided to withdraw their money?  This is known as a bank run and since the bank only holds a fraction of the customer’s real cash it would cause the bank to fail. In a nutshell, what you see in your account is not real cash, just a number and you have way less than that.

An example of a bank run would be the Great depression in 1929 or the mortgage bond crisis in 2008. Usually, people don’t take out their money all at once, but they will if they think the bank is in serious trouble.

Many economists believe that the fractional reserve banking system is unsustainable and risky because the current monetary system is based on credit/debt and not on real cash. The current economic model relies on the premise that people trust their banks and the government.

Contrary to the system, we have Bitcoin, which is a decentralized digital currency that introduces a very different economic framework. A distributed network of nodes runs Bitcoin and its data is protected by cryptographic proofs and constantly recorded on a public ledger called the blockchain. There is no need for a bank or any kind of intermediary with Bitcoin and no such thing as fractional reserve. Also, the issuance of Bitcoin is finite, it is simply not possible to generate coins from thin air like traditional banking. You have a fixed amount and it cannot be modified ever.

 

Contributors

EDITOR TIME OF EDIT VIEW
Sahay (14) 1 month ago

Comments

Wealthbundance
  • 659
1m ago
Agree to most points. Apart from the fact that the article gives a picture that for BTC to grow.. It needs to fight banks & current monetary system. Just my view that fractional reserve banking is similar to leveraging for banks. And I am of the opinion that for BTC to grow, it first needs to be part of the monetary system where it is possible for it to be sustained along side banks & other assets (like Gold has done in the last century). Only once that is done, it can replace fiat or gold or any other asset for that matter. And it's v encouraging that with Baktt or Etfs, etc it will soon be reality. What do you think about it?
Vampire
  • 78
1m ago
I think ETF’s could be the first step to mass adoption. There is so much uncertainty right now because of manufactured FUD and other reasons. The retail investors and the institutions need to feel confident to trigger a mass buying spree. One thing that could give that confidence is an ETF. I think Baktt is all well and good but until we see heavy buying pressure, this market will remain bearish.

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