Some flaws in the current financial system and how Bitcoin improves them

This might be a good one for explaining Bitcoin to the average joe aside from the pros of sending Bitcoin anywhere, anytime with tiny fees.

- Hidden Inflation Tax
Many might not realize it, but your purchasing power is usurped every year at a rate of 3% (or higher) through the process of money printing. The most extreme form of this is eloquently referred to as “quantitative easing”, which is where central banks electronically create money to buy government securities (such as bonds) or market securities. This is the devaluing of your money and ultimately destroys savers and forces you to perpetually work to stay ahead of the increasing prices on goods or services.

With Bitcoin, we experience the opposite in the form of deflation. Instead of a monetary system that is micromanaged by a few people, we have a massive decentralized network of miners creating the supply. In addition, the supply is not created at an arbitrary rate, but rather by math that has been precalculated and coded into the Bitcoin protocol. The beauty of this system is that everyone knows what the rate of supply will be and therefore, there’s no surprises. Furthermore, the new supply of Bitcoin is decreased by half around every 4 years until there is no more supply. As long as the demand remains the same, this would mathematically mean that the value of your money would increase, rather than decrease over long periods of time.

- Fractional Reserve Banking
This is a banking practice where only a fraction of the bank deposits (usually one tenth) are backed and available for withdraw by the depositors. So for example, if you deposit $10,000 in the bank they would then turn around and loan out $100,000. Under normal circumstances they would only be able to loan out $10,000 of the $10,000 deposited. However, considering that many people leave large sums of money in the bank, they’re counting on all that money remaining within their system. By running a fractional reserve it allows them to loan out and collect more interest on money that doesn’t even exist to begin with. So from practically nothing, they’re able to create massive value, but the problems occur when there’s a run on the bank and depositors all simultaneously want their money back. This process puts everyone at risk and has led to bank bail-ins or even worse, the bailouts of 2008 which resulted in billions put on the back of the tax payers.

As for Bitcoin, it’s unnecessary to even have to keep your money in a bank since you can secure and store the money yourself. While there are services such as online wallets or exchanges operating as a custodial account (similar to banks), there are non-custodial account options like https://blockchain.info/, for example. This reduces an institutions ability to run a fractional reserve and therefore, removes the risk of having a run on the banks, bank bail-ins, or bail-outs. Even more interesting, the power that these centralized banks wield through their fractional reserve would overtime, ultimately be decentralized and distributed to the users of the Bitcoin network as the masses adopted this new paradigm.

- Financial Transparency
A big problem with many powerful institutions is the transparency about how their funds are being utilized. Whether it’s fractional lending by banks, national taxation by the IRS, or even donations collected for a good cause, the truth is that we have zero transparency. The funds collected by these institutions are often allocated at their discretion and with zero public insight or scrutiny. This type of monetary system is destined from the start to be rifled with blatant corruption or mismanagement of funds. We currently have a system where the people’s financial accounts have to be fully disclosed for tax purposes, yet their representative institutions have zero disclosure and in some cases such as the Pentagon, they mysteriously lose 8.5 trillion dollars (yes, I said trillion) of the tax payer’s money.

Thanks to the Bitcoin blockchain, all transactions that take place on the network can now be tracked from start to finish. This is an amazing new ability that the public has never had before and will help keep these intuitions honest about how the people’s funds are being spent. While you can only currently see address X sending to address Y, as we move forward in developing the Bitcoin ecosystem, many of these addresses will eventually have an identity associated with them. So if you were to donate funds to a charity you’d be able to track the allocation towards paying salaries, services, materials, etc etc.

- Financial Control
Another problem becoming more noticeable with the current financial system is your complete lack of control over funds. There are so many different financial instruments available to choose from, but if you take a step back you’ll realize that none of them offer you complete control or unlimited access. Whether it’s a Gold ETF, government issued bond, stock in a corporation, or even numbers on a screen representing your bank balance, it’s not truly under your control. As we saw with Cyprus many depositors had their money absconded or as we’re currently seeing with Greece the banks are issuing capital controls and limiting ATM withdrawals down to $60 per day. When the system is running smoothly you don’t think about these things much, but when there’s a crisis it becomes painfully obvious that you have zero control over your financial outcome.

The beauty and elegance of Bitcoin is that it puts the power of a bank directly in your pocket with absolute control over your own funds. In addition, it’s completely dynamic in that you can choose to store your Bitcoin offline in a safe at your home, print out private keys then store in a safety deposit box at a bank, or you can even double encrypt your keys in order to store safely in the cloud so that way you’ll have access to your funds at all times anywhere in the world. The ability to implement capital controls does not exist with Bitcoin. Any time, day or night you can initiate a transaction with anyone in the world for any reason and no institution can stop you from doing so. That’s power and that’s freedom.

- Infrastructure Costs
If you think about it, the shear amount of infrastructure needed to operate the current financial system is beyond astounding. Imagine globally the 100 story bank buildings, office equipment, high paid executives, account managers, tellers, armed guards, currency printing facilities, ATMs, vaults, so on and so forth. This alone could easily exceed hundreds of billions if not trillions when you add up all the time, energy, and expenses around the world.

Now when you compare that to Bitcoin, the hardware and electricity costs needed in order to secure the network is laughable. The only other expenses involved in order to successfully operate Bitcoin would be the third parties offering such services as storage/security, user experience or facilitating the on and off ramps from the old system to the new system. As far as replacing the tellers, ATMs, and merchant terminals that could be done with smartphones which most everyone has with them at all times. As these infrastructure advantages and savings are realized, it will only increase the value of the Bitcoin network.

While these are just a few of the many problems with the current financial system, I hope you can start to see why Bitcoin is more than just a speculative long-term investment. There’s a lot at stake for both current and upcoming generations in the grand scheme of things. The people will either have complete monetary freedom through cryptocurrencies or they will continue to receive the status quo through the current archaic financial system. This shift will most likely result in the greatest wealth transfer in human history, so it’s unfair to be too hard on the speculators, but at the same time we should all be mindful of just how important the Bitcoin technology truly is.

Source Atriark