editorial note: decent place to begin to gather information re: BTC
How Bitcoin Compares to Fiat Currency’s House of Cards
Double standards are like mosquitoes to me: after hearing their buzz for a while, I want nothing more than to shine a flashlight their way and swat them down mercilessly. One such double standard is the harsh way in which economists and commentators criticize Bitcoin technology, while at the same time taking for granted the financial system that they live under every day.
Yes, the value of Bitcoin and other cryptocurrencies is very volatile still, and the ecosystem that develops around them has been a Wild West so far. But in the six years of Bitcoin’s existence, the underlying technology—decentralized and open source in nature—has proven itself to be extremely robust and constantly evolving. Bad computer code is replaced over time by good code (or at least by a stable workaround), and likewise, bad companies are forced by the market to make way for better ones. Creative destruction rules the cloud.
The same things cannot be said about the fiat currency system. Banks and central banks are still running old cranky software, with systems that sometimes haven’t been updated since the 1960s. Vital parts of the service and technology is centralized and therefore frozen in time, in a spiderweb of ever-expanding bureaucratic rules. And bad banks don’t die; they are kept alive with “Bailout IVs” from the government, and they become zombie banks. In Fiat Land, it’s King Inertia who waves the scepter.
Fiat money itself is also increasingly fragile. According to a study of 775 fiat currencies, there is no historical record of any that have held their value:
“Twenty percent failed through hyperinflation, 21% were destroyed by war, 12% destroyed by independence, 24% were monetarily reformed, and 23% are still in circulation approaching one of the other outcomes…The average lifespan of a fiat currency is 27 years.”
The post gold standard U.S. dollar is no exception. Despite being 44 years of age, which makes it a true veteran of the fiat space, it has lost 97% of its value since inception.
And that is just touching the surface of the kind of problems the fiat system produces. As we’ll see in a moment, debt levels, certainly not a sign of economic health, are higher than ever before in history. Inflation is also on the rise in many nations—melting away people’s savings and pushing them into the arms of speculative money managers. And central banks around the world are preparing for bank holidays and bank defaults.
When a system is virtually frozen in time and changes only for the worse, it is fair to say that it is broken, and that it needs replacing. That is exactly the state of the financial system today.
Now, over to the nitty gritty. Let’s crunch some numbers to see how big the problems really are.
The Biggest Debt Crisis in History
In 2008 we saw a ferocious banking crisis, the worst since the crash of 1929. In response, central banks around the world, including those of the U.S., China, and Europe, printed unprecedented amounts of money to shore up the banking system, and governments wrote out bailout subsidies like never before.
In Europe, for example, governments committed 1.3 trillion euros to prevent the eurobanks from failing. This led to the 2011 sovereign debt crisis, which was was barely contained by the ECB. It scrambled to put together another 500 billion euro bailout program.
What have all these programs, with a combined value of at least $9 trillion, really achieved?
Well, since 2008, “leverage” in the system has dropped from 25:1 to 20:1. This means that for every $20 a bank owes to customers or other banks, it has $1 in hard cash in its own possession. To adequately convey the absurdity of these numbers, an average non-financial corporation in the emerging world (not known for prudent risk management) has a leverage ratio of less than 3:1. In other words, without a central bank as a backstop, most multi-national banks would have been long bankrupt.
Given the avalanche of bailouts and stimulus programs unleashed since the 2008 crisis, government debt in the developed world has now risen to a record level 111% of GDP.
With all this data, it should be no surprise that the BIS estimates the size of the total debt securities market at $100 trillion. That is about $40,000 for every person in the world who has a bank account.
The only way for countries to accumulate so much debt is for them to print money indefinitely, and to continuously drop interest rates. And indeed, interest rates are the lowest they have been since the Middle Ages.
From the 1700s onwards, leading western nations borrowed at rates between 3%-7%, whereas recently we saw a drop in interest rates down to below 1% in the U.S. The rates are a little above 1% now, but German 10-year bonds are trading with interest rates as low as 0.5%. This trend is unprecedented in world history.
Governments, banks, and households borrowing from institutions that can create money out of thin air leads, of course, to inflation.
Illustrating this is an inflation world map that I made in May 2013:
Here is the updated January 2015 version:
Now, one could argue that this just shows the dollar’s strength rather than actual inflation, but consider that the U.S. dollar still is the world’s reserve currency, and the most important way for foreign central banks to defend the value of their currency is to buy back their own currency from whomever offers them U.S. dollars. As was the case with many other collapsing currencies, the hyperinflation of the ruble in 1998 started when the Russian central bank had no more dollars with which to buy back its own currency.
That said, the long-term value of the U.S. dollar is highly questionable. Since the U.S. went off the gold standard in 1971, central banks have been increasingly diversifying their reserves, as shown below.
Whereas in the 1970s central banks had no problem with holding up to 65% in U.S. dollars, that amount has now declined to 40%-45%. That certainly doesn’t signal a vote of confidence in the greenback.
National central banks are also increasingly moving physical gold back within their own jurisdiction. We’ve seen both Germany and the Netherlands repatriate 120 tons each, as well as Poland, Venezuela, Ecuador, Mexico, Switzerland and others participating in the “gold repatriation movement.” It is no coincidence that this movement started in 2011 at the time of the sovereign debt crisis in Europe; governments are afraid of defaults, devaluations, and/or hyperinflation, and want to prepare for the launch of a new currency.
Take a moment to absorb how gargantuan the problems of the financial system have become.
Now consider this: central bankers often contradict each other and themselves, but one thing they unilaterally stand for is “stability.” The U.S. Federal Reserve, for example, says its goal is “a more stable monetary and financial system.” Its European counterpart, the ECB, has as its mission statement “to maintain price stability and to safeguard the value of the euro.”
Where is this “stability” central bankers keep talking about? How can we believe in a system that achieves exactly the opposite of that which its leaders proclaim?
Over the last 10 years, central banks have created new money to the tune of $14 trillion, and that amount is still growing. Just this week, the ECB announced that over the next 18 months it will pump another €1.1 trillion into the eurosystem.
Here is what Gideon Gono, Zimbabwean central banker and father of the $100 trillion bill, has to say about the newfangled post-2008 financial paradigm:
“I’ve been condemned by traditional economists who said that printing money is responsible for inflation. Out of the necessity to exist, to ensure my people survive, I had to find myself printing money. I found myself doing extraordinary things that aren’t in the textbooks. Then the IMF asked the U.S. to please print money. I began to see the whole world now in a mode of practicing what they have been saying I should not. I decided that God had been on my side and had come to vindicate me.”
Gono is right: his example is being followed by every prestigious central bank in the world. And when journalists dare to mention the elephant in the room, they are scoffed at. In fact, this happened just this week, when ECB chairman Mario Draghi was asked whether his policy of money printing would lead to hyperinflation. He dryly responded that despite the massive stimulus programs, “Somehow this runaway inflation hasn’t come yet”.
In 2008 it became clear that the emperor had no clothes. By now, it should be clear that his entire court is also threadless.
I will keep my opinion about what all these financial omens forebode for another time, but it should be clear by now that the fiat system is anything but stable.
In fact, the stability in our financial system only exists to the extent that people believe in it. It is a mirage much like Bernie Madoff’s “empire” was: as soon as enough people withdraw, it will come tumbling down.
A new crisis is brewing in the system, as has happened every 40 years since governments started monopolizing the industry of money and banking. But this time truly is different. For the first time in history, the people have access to a decentralized, open source and globally accessible backup financial system.
There may be some problems that arise when Bitcoin technology is scaled up formillions, and then hundreds of millions of users. No doubt there is angst and volatility ahead, and for all we know the Bitcoin network will fail and some other cryptocurrency will take over. But there is no way this ingenious technology is going back into the bottle.
We now have access to a protocol that allows for honest global banking with or without intermediaries. For those eager to divest from a financial system of falling cards, I highly recommend drawing from an alternative deck: the exciting world of cryptocurrencies.
 Since 1971, the dollar depreciated by 97% against gold, and by 83% against the consumer price index.
￼ Tuur Demeester is an independent investor and commentator. He has a background in Austrian economics, the school that specializes in the study of boom-and-bust cycles in the economy. He first discovered Bitcoin on a research trip in Argentina, and started recommending it as an investment at $5 in January 2012.
Russia Warns of Banking Wars...and Shines a Golden Light on Bitcoin!
by Bix Weir, 29 January 2015
Get ready for FINANCIAL WAR to break out if the US follows through with threats to kick Russia out of the SWIFT SYSTEM. Only Iran has been booted from the system and don't think for a second that Russia will take it lying down.
Russian Elite Warns Of War With The U.S.
"If there is no banking relationship, it means the countries are on the verge of war."
Andrei Kostin, the head of VTB, reacted angrily when asked what the consequences would be if Russia were excluded from the Swift banking system, a secure means of moving money across borders.
If it were to happen, Kostin told a session on the Russian economy at the World Economic Forum in Davos, "ambassadors can leave capitals. It means Russia and America might have no relationship after that."
"If there is no banking relationship, it means the countries are on the verge of war, or definitely in the cold war," he said in English, growing increasingly red in the face. "It will be a very dangerous situation."
He said that if Russia were excluded from the Swift system, it would make the U.S.--Russia relationship akin to the U.S.--Iran one. He made the comments after noting that Russia had recently created its own alternative to Swift.
So why is the SWIFT System so important and how did the West get control of it?
Here's what Wikipedia has to say about SWIFT...
The Society for Worldwide Interbank Financial Telecommunication (SWIFT) provides a network that enables financial institutions worldwide to send and receive information about financial transactions in a secure, standardized and reliable environment.
SWIFT means several things in the financial world:
1) a secure network for transmitting messages between financial institutions; 2) a set of syntax standards for financial messages (for transmission over SWIFTNet or any other network) 2) a set of connection software and services allowing financial institutions to transmit messages over SWIFT network.
So that's all SWIFT is. It's a secure computer network and software that participants can send financial messages. Hmm.
Basically, to "play" in the electronic global monetary system with everyone else a country must send messages of monetary transfer through the SWIFT system.
It may seem at first glance that the SWIFT system is not that important as we have email these days so why can't one country just email another country that they approve the transfer of $1B from their electronic stockpile of "money" to another countries stockpile of electronic money?
Right? Maybe not.
The complication falls in the fact that there is no other system or standards set up to do this and the transfer of electronic credits called "money" these days is a TRUST game. The West has everyone suckered into their electronic web such that is is virtually impossible to function monetarily outside of your own country if you are trying to transact business in electronic credits.
Russia knows this. They know the game. IF the West just cut off Russia from the SWIFT system Putin could easily say "Russia and Russian companies in Russia will no longer make payments on any electronic debts." Not their National Debt of $235B and none of their companies that have borrowed money from the Western Banking system (Trillions).
Russia can shut their borders a any moment and continue on their merry way.
For trade with "Russian Friendly" countries they can barter if they choose. A million barrels of oil for a million refrigerators from China. If they trust their trading partner they and keep a ledger of the transactions and only settle up when necessary.
There is still a TRUST issue but that can now be solved with BITCOIN if they wanted! Either buying a bunch of bitcoin and using it as money OR even by using the Blockchain to secure transactions!
The Blockchain is the ledger of all bitcoin transactions that is continually tested and verified by the participants in bitcoin. It is how bitcoin works so well with third party verifications happening for all transactions. The Blockchain is already being used around the world to verify and secure transactions and data. Here's some info on it and just a small sampling of the current uses of this ledger:
One commonly hears from promoters of cryptocurrency lines like:
"Currency is only the first use-case!"
"Satoshi's great gift is the blockchain, the foundation which allows Bitcoin to exist at all."
More recently, we just heard from the Bank of England that:
"The key innovation [of digital currencies] in regard [to payments] is the introduction of a 'distributed ledger,' which allows a digital currency to be used in a decentralised payment system. Any digital record of currency opens up the possibility that it may be copied and spent more than once. (…) Rather than requiring users to have trust in special institutions, reliance is placed on the network and the rules established to reliably change the ledger."
In fact, it honestly seems like EVERYONE is focused on the blockchain, rather than on Bitcoin itself. Pretty much everyone who likes one seems to like the other, but one could not exist without the other -- Bitcoin needs a blockchain, but the blockchain doesn't necessarily only create Bitcoin. So here we are, in the nascent days of this astonishing achievement of human ingenuity -- and what have we got to show for it?
At current, blockchain technology has been used for:
Present Uses for the Blockchain
1. Currency. I hope no more explanation is needed for this first one.
2. Payment systems. Bitcoin and the Bitcoin-like altcoins are this, yes; however, I more intend to draw your attention to the distinct differences between those and systems like Ripple and Stellar. One should also remember to consider BitPay, GoCoin, Coinbase, and the other payment processors here -- their cost-lowering innovations can only occur due to the blockchain technology allowing them not to have to devote time to double-checking data.
3. Proving intellectual property rights. Proof of Existence is the example I most enjoy using for this. It's a very simple system -- you submit an SHA256 digest of your work, it spits out a Bitcoin address, you send a small amount there, and ta-da, you can now prove at any later point in time that you had access to a document that results in a specific SHA256 digest at whatever point in time you "proved" it. You can take this farther than just the written word -- open up a video file, audio file, image file, or whatever else you can think of in Notepad, and you can "prove" that just as easily. And the best part -- you don't have to reveal to anyone else what the digest was of until you need to.
4. Asset ownership. The NXT Secure Asset Exchange and the Counterparty protocol are good examples of this -- they're digitized asset ownership and asset issuance platforms. Peer-to-peer distribution of corporate ownership? I'm sure that won't be at all impactful in the future.
5. Censorship resistance. This is tied in with uses as a currency, but the decentralized nature of the blockchain does things no one has ever been able to do with a currency before. Anonymous, The Pirate Bay, Julian Assange; Dorian Nakamoto, Sean's Outpost, Doge4Water. Funding for activities some would prefer be not allowed to be funded, and funding for charitable ideas that otherwise might have been ignored, but have been embraced instead due to the ease of donating.
6. Censorship resistance (again!). Not just currency-based censorship evasion, but internet domain censorship evasion as well, through Namecoin and .bit domains. At current, it's not fully operational for most users -- though it will be in time. These new domains are the next internet frontier -- providing complete immunity to interference by nefarious third parties.
7. Greatly improved personal data security. You could say that this has been available ever since PGP was introduced, but the blockchain has made it much easier and much better. Using a Bitcoin address to verify yourself, as in onename.io, and then using that account as your authentication for many others is a much more secure system than the currently common "Connect with Facebook/Twitter/Google+".
I say it again...HMMM.
If the West shuts Russia out of the SWIFT system BITCION or a system using the BITCION BLOCKCHAIN may be the best alternative out there.
AND JUST THINK OF THE BITCOIN PRICE IF RUSSIA (or any other country) TURNS TO BITCOIN AND AWAY FROM THE WESTERN BANKSTERS!!
We are talking in the $MILLIONS per coin if something like that were to happen because there is not enough current holders of bitcoin for large players to get in quickly.
Do I think it will happen?
If the West shuts Russia out of the SWIFT system I think it will be a good possibility.
Personally, I think the Central Banksters are more afraid of bitcoin than they are of Putin / Russia - and will therefore - for this reason alone - not shut Russia out of the SWIFT system.
Nice to see bitcoin getting some attention on the watchtower. I fought for that for a while back in the days when this site was useable for a casual user.
Anyway heres some chart porn from the btc-e exchange
Bitcoin is falling from the latest bubble, which is at least 2nd, maybe 3rd bubble in its short history. After peaking above $100o (US) it is starting t0 look cheap once again. Who would have thought you could own a whole bitcoin for only a couple hundred bucks.
Bottom green trendline shows bitcoin price is near a trendline corresponding to other significant low point s of the last couple of years.
On following chart I'm showing bitcoin on log price scale this time.
Note I've also included momentum indicator which is showing bullish divergence compared to price.
In summary now looks like increasingly likely near the bottom of a huge bubble sell-off. Likely you'll never see bitcoin as cheap in the future.
Is now the time to buy some bitcoin?
thanks for posting.
Do you have any long-term projections?