Cryptocurrency Guide 101- The Problem With Our Money System-Part 1

Cryptocurrency Guide 101

Welcome To Michael Yu’s cryptocurrency guide 101. This is going to be a 3 part guide and in the end I am going to combine the 3 posts into 1 big long one for your viewing pleasure.

The first post and the one you will be reading will talk about the fallacy of the modern banking system.

The second one which you will most likely enjoy, will be a very long article involving the theory of Bitcoins and how it functions in relation to fiat currency- Fiat Currency is money system we use now. Money backed by the government.

The third guide is what will make you a rich man. We will talk about investing and how to invest. If you wish to be a millionaire investor, I suggest you read this in full detail.

Lately, there’s been a huge growth in cryptocurrency. Prices have gone up and there is massive public interest in Bitcoins. We will delve deeper behind the mechanics of Bitcoin, but we will first look our current money system is and why Bitcoin was invented in the first place.

What Led to the Creation of Bitcoin?

Lets make it clear that Bitcoin was not the first cryptocurrency by theory. The idea of cryptocurrency started in the late 90s and pioneered by Nick Szabo. Many people think he might be the famed Satoshi Nakamoto but no one really knows. He designed the concept of decentralized digital currency called “Bit Gold”. It was never implemented but it laid the foundation out for Bitcoin.

Bitcoin was officially announced by the mysterious creator Satoshi Nakamoto. He released a “white paper” explaining in technical details a safe decentralized system of money different from the current one we use. The current system uses a fiat system which is backed by “faith in the government”. This new currency would be backed by the millions of computers connected together in a decentralized web. No one owns Bitcoins but everyone can own a piece of it. We would skip the central banking system and create a system of currency for the common folks.

The mysterious creator known as Satoshi Nakamoto is also a legendary figure. He is estimated to own 1 million Bitcoins and with the current price as of December 27th, he would be worth approximately $15 billion. No one knows his true identity. Theories range from him being an alien from the future to being a group of computer programmers. We will never find out because he mysteriously vanished in 2011 and left the development of Bitcoin to a group of core developers. It is interesting to note that Satoshi never withdrew a dime of his Bitcoin. In doing so, he may destroy the system he helped create. So as of now, hes worth billions of dollars but could possibly live in a shack.

Bitcoin was an invention created after the 2008 financial crisis. It seeks to solve the problems that modern banking poses by eliminating the middleman. Originally people believed that the banking system could not fail. They believed that the banking system was backed by “faith of the US” government” and was immune to hyper inflation. That was wrong, the banks did inflate and crumble. Only with the support of the US government and 12.8 trillion dollars of tax payer’s money,  we were able to bail the failing banks out. It is estimated that each person in the US lost $19,000-$40,000 in cash. What would you do if the banks reimbursed you that amount today? We would probably take a nice long vacation perhaps? I would invest all mine into cryptocurrency!


How The Banking System Failed Us

The banking system failed us many times. It switch from a system backed by gold to switching to a fiat system multiple times. As a reminder, a fiat system is the system we use now and is backed by the “trust of the government”.

In banking, the banking system uses a terrible system called Fractional Reserve Banking. What this means is that the bank is legally allowed to use 90% of what you deposit and use it to invest in anything it wants, including subprime mortgages. Some investments could be amazing and others could be downright terrible. For example, when you deposit $100 into the bank, the bank is allowed to use $90 of your money and invest it elsewhere. If you wanted your money back, you could usually get it back because safely because the pool of money is so large that 1 person doesn’t matter.

But what happens if everyone and their mother wants to withdraw money from the bank because they do not believe it’s safe in there anymore? The bank would not have enough money to give out because it invested in so much elsewhere and the banks themselves go bankrupt. That’s exactly what happened in The Great Depression in the 1920s and 2008. Then the only way to save the bank is if the government decides to intervene because banks are “too big to fail”. That’s exactly what the government did and it costed all of us a lot of money.

There’s an old business saying that is true to this day and Donald Trump used it ingeniously. It goes like this ” If you owe the bank $100 that’s your problem, if you owe the bank 10 million that’s the bank’s problem”

Bitcoin solves that problem by cutting out the middleman. It is a peer to peer transaction with no middleman and no central authority. Every transaction recorded in Bitcoin history is able to be viewed publicly. There are no disputes and the currency is protected by a chain of interweaving computers to provide the integrity of each dollar.

Backed By Faith Of The US Government?

All of our currency including cash,credit card and debit cards are all backed fully in “in faith of the US Government”. What the hell does that mean? It means that we are putting our entire trust in the money that we worked so hard for in the US government. We believe that they would never let us down and preserve the value of our currency; that we wasted many years of our lives to obtain. We then prove our wealth by the large numbers in our bank accounts with nothing in real life to show for.

That is the current system we live in. That is called the fiat system. As citizens to the fiat system, we are completely reliant on the government to not fail. However, there have been numerous cases in history where the government did indeed fail. Countries like Greece, Zimbabwe and many Latin American countries all experience hyperinflation. The government can keep printing all the money it wants, but the total value of its currency stays the same.

In essence, any country can experience hyper inflation. The US is not immune to it.

Backed By Gold?

Historically, all forms of money was backed by gold. It was a universal means of cash and people around the world trusted it. It was scarce and finite. It was globally recognized and no one can artificially create it like the fiat money we use now. No one country controls all the gold and its value holds through the test of time. There are not a lot of real gold mined, in fact it is estimated that if you combined all the gold ever mined by humans in history, it would only fill up 3.5 Olympic sized swimming pools. That is nothing considering the long history of humans.

Gold is trustworthy because it cannot be sliced up to smaller pies. You can not print out more gold. You can only painstakingly mine for more gold and even then its not a guaranteed success. As more and more fiat money is printed out, it loses its value and started inflating. Let me tell you a little secret. Every 20 years, the value of your money gets inflated so much that it decreases by half. So if you have $100,000 in the bank today. In 20 years, your $100,000 will be valued at $50,000. The banks make a money from the inflation. That is why it is advised that you don’t hold your savings in cash form because of the inflation. You are losing money each year. Instead, transfer your money into something that becomes more valuable over time. Perhaps Cryptocurrency perhaps?

The Great American Scam

After World War 2, the world was struggling. Europe was completely obliterated and Asia just got nuked. Everything was a ruin and every country except the United States suffered hyper inflation. The US government at the time was still backed by gold. It was the most solid form of currency and as a result, decided to give out US currency in exchange for gold. This led the US to have a massive gold inventory by the 1950s.

However, by the mid 1960s, the US government was investing more than it could chew. As a result, other countries after their healing process wanted to exchange their US dollars in return for the gold. The US did not have enough supply to pay back the countries and so they decided to change their system to a fiat system in which we still use today.

The world was unhappy but other countries all followed the fiat system. We are still using this system today.

The fiat system does hold its value over gold in some cases. It is through the fiat system that we have cash,credit card and debit cards. It would be a terrible idea to have everything backed in gold and carry gold around for our transactions. It would pose a safety risk and would be cumbersome. However, there is a better solution to the fiat system!

Stay Tuned for…. Cryptocurrency 102- Bitcoins… Coming Soon!

  • Sam B.
    December 28, 2017 at 1:17 am

    Very well written!

  • Andrew S.
    January 11, 2018 at 7:28 pm

    Good read

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