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Bitcoin Vs Fiat

The differing finanical systems between FIAT currency and BTC may ask you to wonder how BTC has value. In this article I will show you the value of FIAT is not what it may seem and I will explain why BTC is far superior.



I will start off very simply. Money = Trust. They are one and the same. Without trust in the system no financial system will ever work solely down to the fact that belief in its purchasing power is gone.


So, knowing that trust is the driving factor in value you may ask what trust is bestowed into Fiat currencies like the U.S dollar. The main factor of trust in the dollar is the peoples belief in its ability to transact trades and purchases. People allow it to exist as it is known to work.




U.S Dollar



The history of the dollar and what backed it is very interesting. In 1971 Richard Nixon withdrew the Gold Standard as backing to the U.S dollar due to rising inflation and prevent foreign nations from overburdening the system. This essentially decreased the "value" of the dollar and made the value solely based on trust. The intrinsic value of the dollar is actually... nothing. For example something like Gold has intrinsic value as it is worth what people will pay for it and it also has uses such as jewelry. But the dollar is literally just paper with no intrinsic value. This shows that without trust the dollar is worthless.



Fractional Reserve Banking


Nowadays money is not a tangible object but more numbers on a screen. A very interesting subject is that of the fugazi of fractional reserve banking.

Fractional reserve banking will make you question everything to do with finance and everything to do with the economy.


Very simply, fractional reserve banking is a banking system in which banks borrow deposits made by customers to infuse more money into the economy of said country.


When a person makes a deposit into a bank that person would think that their money is sat in a "pot" awaiting for the day they need to take it out. This just isn't true. A fractional reserve is the amount of that deposit that is actually left in that account. This would usually range from 3% to 10%. The rest that is deposited will be used for loans for other customers.


Now, this is where the creation of money into the economy starts. As the customer has deposited their money into the banks account they count this as an asset, correct. However, also the bank counts this money as their asset in which can be loaned out. Therefore, now the asset has been doubled. The customer is able to take loans out on the back of the money they assume they have in their account and the bank can actually give away the money that is in its customers account.


I will explain this in examples as to how this creates a chain reaction of infusing money into the economy.


-Customer A deposits $10,000 into Bank 1 and Bank 1 loans out $9,000 to Customer B (Leaving 10% in Customer A deposit).

-Customer B now deposits $9,000 into Bank 2 and Bank 2 loans out $8,100 to Customer C.

-Customer C deposits $8,100 into Bank 3 and Bank 3 loans out $7,290 to Customer D.

-Customer D deposits $7,290 into Bank 4 and Bank 4 loans out $6,561 to Customer E.

-Finally Customer E deposits $6,561 into Bank 5 and Bank 5 loans $5,904.9 to Customer F.


From the original $10000 deposit by Customer A $46855.9 has been created out of thin air in available currency (the sum of all the deposits plus $5904.9).

This is the simplified way in which banks generate money through the multiplier effect.


You must note that this whole process is built on the trust that the whole of the banks customers do not all withdraw at the same time. This is what is called a bank run. Without complete compliance with the banks from the customers banks would not be able to do what they do.




Banks, Deposit VS Loan


One may ask, how do banks generate money for themselves? And quite simply put, it is through the idea of debt. Notice in the graphic above displaying deposits and loans from the $10,000 that each loan given out creates debt. This is what banks feed off of.

Through loan accounts banks are able to charge interest via percentages of the loan over time. Also you will notice for each loan account there is a deposit account.

All the banks need to do to become profitable to keep the deposit account outgoings less than the loan account interest.

Deposit accounts<Loan accounts.

The banks deposit accounts usually have a yield of 0.13% yearly.

Now compare this to an interest rate of a loan which would be between 10-15% for a high credit score and as high as 28-32% for a low credit score. The difference is phenomenal.



Numbers On a Screen



Throughout this section now you can see that the economy and money that we believe in is really just ... not real. It's imaginary. It doesn't exist. It is just numbers on a screen.

Now this is where i expand onto how Bitcoin differs.


Bitcoin has a set value. Market cap/Circulating supply = Price. The supply will over time increase to 21 million but we know that at 2140 once it has hit that point it will no longer increase.

The U.S dollar will never be like this. An example of this is currently as I am writing this Biden has passed an 430 Billion Inflation Reduction Act printing billions of dollars into circulation. Just like that. By the click of his fingers.

The dollar is unpredictable whereas Bitcoin has its assurances.


Bitcoin does not have "puppeteers" behind its ecosystem generating false numbers into the economy. Blockchain technology does not allow for this.

Although I do acknowledge that Bitcoins price itself can be manipulated at the money, overtime the market cap will increase to such a point that the liquidity is so high it cannot be moved by entities.

With Bitcoin what you see is what you get. Because of Blockchain technology all transactions and wallets are completely open for public viewing which means if you want you can see the inner workings of its ecosystem.


Learn more about Bitcoin, Fiat and the Finance system In CEF Education
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