Sunday, February 28, 2021

Bitcoin cannot replace the banks

 Cryptocurrency hopes are based on a misunderstanding of how money is created

The bitcoiners think that the government creates all the money, but it is the regulated commercial banks which make most of our money.

Holding any asset in the hope that it becomes money is, to be sure, a long-term investment strategy. But it also shows a flawed understanding of how dollars work, and who creates them now. Most of what currently functions as money in the US and any developed economy does not come from the government. It comes from commercial banks. Banks do not just hold money, or transfer it. They create it.

Bitcoin is turning out to be a good way to reinforce the system we already have. There’s a lot about this system that functions poorly. The supply of credit money can be unstable, as banks stop making loans in a downturn, right when people need them the most. There is little incentive to extend cheap credit to people who need small loans. But there isn’t much, so far, that Bitcoin seems to have done to fix these things, and it’s not at all clear how it will.


1 comment:

Unknown said...

I thought the whole point of retiring currency, usually through taxation, was to give that currency a stable value for as long as possible and such stability helped markets to work. You could sell something for currency and expect to be able to buy something of equivalent or near equivalent value in a matter of weeks, even months if not years. When Bitcoin is jumping in value by 10% or more in a day how on Earth could you possible think it has any useful market trading equivalence to a refluxing currency?