Bitcoin is digital gold for a digital generation.
Libertarian proponents of cryptocurrencies, like America's Founding Fathers before them, argue that fiat currencies are nothing but Monopoly paper: Why does fiat cash have value when it's not backed by any real asset, such as gold or silver?
In 1786, Thomas Paine wrote: "Gold and silver are the emissions of nature: paper is the emission of art. The value of gold and silver is ascertained by the quantity which nature has made in the earth." He added, "But the evils of paper money have no end. Its uncertain and fluctuating value is continually awakening or creating new schemes of deceit."
America's Founding Fathers opposed a national central bank and fought its creation for decades. Modern Americans would be wise to heed their ancestors' wisdom.
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[caption id="attachment_34415" align="aligncenter" width="1000"] Gold was a common form of commodity-money prior to the wide use of national fiat currencies. (Shutterstock)[/caption]
Bitcoin and National Currencies
Skeptics argue that bitcoin's value will eventually vanish. But they miss the point.
Governments around the world have failed to stabilize their national currency â to the point where these paper-issued notes have lost most of their purchasing power since inception. For instance, the U.S. dollar has lost nearly 98% of its buying power since 1913, the year the Federal Reserve Act was enacted which established the Federal Reserve system.
These are a few countries with the highest annual inflation in 2017:
- Venezuela: 652%
- South Sudan: 182%
- Congo: 41%
- Libya: 32%
- Angola: 30%
People who want to preserve their wealth turn to bitcoin.
Venezuela is fourth all-time in bitcoin trading volume (11.2%) and Nigeria is seventh all-time (4%). Many around the world are awakening to the illusion and deception of central banks and governments â that many of these national currencies are but paper with diminishing buying power. And that institutions have failed to protect the people's purchasing power.
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It's Not a Deposit
Over the centuries, central banks and governments have routinely engineered schemes to confiscate people's wealth by debasing the national money.
Fast forward to today and just look at the misleading language used in finance. Banks mislabel simple transactions. You shouldn't call your electronic cash stored in your bank as a "deposit." When you give your teller $500, you're actually lending that amount to your financial institution. The bank loans out (most of) your $500 to borrowers and charges interest (that they get to keep) on your capital. (See article Fractional-Reserve Lending is Pure Fraud.)
Throughout history, paper money (fiat cash) have failed as mediums of exchange because they are not backed by an underlying asset that has any real value. The U.S. dollar used to be backed by gold but the Gold Reserve Act of 1934 saw the government forcibly take people's commodity-money (in this case gold) and substituted these for paper-based, unbacked Federal Reserve notes (today's U.S. dollar).
It was a heist. The 1934 law forced Americans to redeem all their gold-money for paper cash. But such legislation should have been deemed by the Supreme Court a violation of the U.S. constitution.
But here we are more than 80 years later holding diminished U.S. greenbacks that have lost nearly 98% of its purchasing value. In the 1950s, a bottle of Coca-Cola cost your grandparents 5 cents. Today you can spend a couple of bucks buying Coke at a vending machine. It's not because Coke has become scarce: The company sells over 1.9 billion servings per day. Coke's price has skyrocketed since the 1950s because the dollar has lost its buying power.
Bitcoin as an Alternative
If bitcoin's underlying value is zero, as skeptics suggest, then why is it trading at thousands of dollars per unit? Why isn't bitcoin trading at $10 or $50?
Bitcoin has high value because people around the world have lost confidence in their national currency, including the dollar (the global currency). Secondly, the U.S. dollar has lost a lot of its purchasing power. Bitcoin's expensive price reflects its economic role as digital gold, as well as, lack of buying power of national currencies.
If the dollar were strong, bitcoin wouldn't be worth as much at the dollar exchange rate.
Cryptocurrencies are very risky, volatile and they have an uncertain future. But this innovation is competing against the severely mismanaged, downward-spiraling fiat cash of incompetent and/or corrupt central banks and governments. Think every Banana Republic in the world that are making their citizens suffer through high inflation.
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What Gives Digital Gold Value?
So why do commodities such as gold and silver have value? Should they replace paper-based national currencies?
Throughout history, our ancestors used commodity-money as form of payment. These include salt, gems, seashells, gold, cattle, farm harvest, weapons and other precious items that have near-universal utility. The problem with fiat cash is that it's just printed paper with no practical use.
Gold and silver require labor, heavy equipment and other resources in order to get mined from the ground and stored in vaults. Like gold and silver, bitcoin has limited supply. A central bank or government cannot simply turn on the printing press and significantly expand bitcoin supply, unlike what the Federal Reserve does with the fiat dollar through the monetary policy known as "quantitative easing" (QE).
As of mid-2018, there are only about 17 million units of bitcoin in circulation. And only a maximum of 21 million units of bitcoin will ever be mined. Value is reflected in scarcity. Unlike with national currencies in which a central bank or government can simply debase the national money (and steal people's wealth or buying power in the process) by printing more cash out of thin air.
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Disclaimer: The views and opinions expressed in this article belong solely to the author. Information contained herein should not be construed as investment advice.