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Author Topic: St. Louis Fed: In Some Ways, Bitcoin Is More Robust Than Many Fiat Currencies  (Read 25 times)
krishnapramod
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January 17, 2018, 03:01:25 PM
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A research article titled, A Short Introduction to the World of Cryptocurrencies by Aleksander Berentsen and Fabian Schär of the Federal Reserve Bank of St. Louis covers different aspects of Bitcoin, both pros and cons and concludes how in some ways, the Bitcoin protocol is more robust than many of the existing fiat currency protocols, how cryptoassets are well suited to become a new, important asset class, and the potential of Bitcoin itself over time assuming a similar role as gold. Although energy wastage and Bitcoin price volatility has been cited as risk factors, the authors themselves have come up with a counter argument/positive outlook regarding these.

Quote
Cryptocurrencies Are a Welcome Addition to the Current Currency System

Surprisingly, Berentsen and Schär are of the belief that cryptocurrencies are a welcome addition to the current currency ecosystem. While some critics claim bitcoin’s price should drop to zero because there is no intrinsic value found in the cryptoasset, the co-authors of the article from the Federal Reserve Bank of St. Louis point out that this argument also applies to the various government-issued currencies around the world.

“Bitcoin is not the only currency that has no intrinsic value,” states the article. “State monopoly currencies, such as the U.S. dollar, the euro, and the Swiss franc, have no intrinsic value either. They are fiat currencies created by government decree. The history of state monopoly currencies is a history of wild price swings and failures. This is why decentralized cryptocurrencies are a welcome addition to the existing currency system.”

The authors go on to point out that this sort of change in monetary policy may be more likely in a fiat currency protocol.

“Undesirable changes in fiat currency protocols are very common and many times have led to the complete destruction of the value of the fiat currency at hand,” says the article. “It could be argued that, in some ways, the Bitcoin protocol is more robust than many of the existing fiat currency protocols. Only time will tell.”

Bitcoin Is the Most Apparent Application of Blockchain Technology

According to Berentsen and Schär, the most apparent application of this technology right now is the use of bitcoin as a new type of asset. The duo see cryptoassets, such as bitcoin, emerging as their own asset class and having the potential to develop into an interesting instrument for investment and diversification.

“Bitcoin itself could over time assume a similar role as gold,” says the article.

The paper also covers applications of blockchain technology in the areas of colored coins, smart contracts and data integrity.

Risks of Blockchain Technology

Minority splits from major cryptoasset networks, such as Bitcoin Cash (Bcash) and Ethereum Classic, are the first risk pointed out in the article.

One could argue that these sorts of minority forks create uncertainty around the value of a particular cryptoasset, although this is also the case with the creation of new altcoins more generally.

The paper mentions excessive power consumption as another potential risk of blockchain technology, but Berentsen and Schär do not necessarily agree that proof-of-work mining is wasteful.

“There are those that criticize Bitcoin and assert that a centralized accounting system is more efficient because consensus can be attained without the allocation of massive amounts of computational power,” says the article. “From our perspective, however, the situation is not so clear-cut. Centralized payment systems are also expensive. Besides infrastructure and operating costs, one would have to calculate the explicit and implicit costs of a central bank. Salary costs should be counted among the explicit costs and the possibility of fraud in the currency monopoly among the implicit costs.”

The last risk associated with blockchain technology found in the article is bitcoin’s price volatility. Berentsen and Schär claim that a rigid, predetermined supply of bitcoin is not a desirable monetary policy in the sense that it will not lead to a stable currency.

“If a constant supply of money meets a fluctuating aggregate demand, the result is fluctuating prices,” explains the article. “In government-run fiat currency systems, the central bank aims to adjust the money supply in response to changes in aggregate demand for money in order to stabilize the price level. In particular, the Federal Reserve System has been explicitly founded ‘to provide an elastic currency’ to mitigate the price fluctuations that arise from changes in the aggregate demand for the U.S. dollar. Since such a mechanism is absent in the current Bitcoin protocol, it is very likely that the Bitcoin unit will display much higher short-term price fluctuations than many government-run fiat currency units.”

https://bitcoinmagazine.com/articles/st-louis-fed-some-ways-bitcoin-more-robust-many-fiat-currencies

https://files.stlouisfed.org/files/htdocs/publications/review/2018/01/10/a-short-introduction-to-the-world-of-cryptocurrencies.pdf

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January 17, 2018, 03:54:45 PM
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Thanks for the article it was a very interesting read but at the same time this is something we have been saying for a long time, many of the critics of bitcoin point out to things in which fiat is even worst and while bitcoin is not perfect it was designed to be a store of value something that a currency should be as well but that was discontinued since governments wanted to print as much currency as they could.

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January 17, 2018, 04:04:59 PM
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All of what is in that article are something that even if you only visit the forum to read, by default you come across those topics and point of reasoning to promote the knowledge and popularity of bitcoin. But unfortunately, the people in the corridors of power don't see it that way and that is why they continue to wage a massive war against it. However, the onus to propagate is on us in the face of adversity and some negative attacks, at the end and hopefully, bitcoin could come out triumph.

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January 17, 2018, 11:51:04 PM
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I like that goldman sachs and the US federal reserve look to be taking an objective stance on bitcoin and crypto. I think this trend dates back to Ben Bernanke admitting the federal reserve "caused" the Great Depression to a degree by decreasing the supply of currency in circulation. This apologetic tone and appearance of having an independent stance by the fed has persisted for at least the last decade or so. (I can't claim to have been watching them too closely, this is only based on my own impressions)

Potential worst case scenario here is the US federal reserve (and goldman sachs) is playing "good cop" to the "bad cop" of Jamie Dimon and friends. If you've ever watched a movie where they do a good cop / bad cop routine, where the bad cop threatens while the good cop pretends to be sympathetic & they coordinate to attain an end goal, maybe you know what I'm talking about? Sorry to be conspiracy theorist btw. Just trying to cover all the bases.

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January 18, 2018, 12:06:08 AM
 #5

...
Minority splits from major cryptoasset networks, such as Bitcoin Cash (Bcash) and Ethereum Classic, are the first risk pointed out in the article.

One could argue that these sorts of minority forks create uncertainty around the value of a particular cryptoasset, although this is also the case with the creation of new altcoins more generally.

...

How did they arrive at this questionable conclusion?

If the forks in 2017 have shown one thing it is that Bitcoin is incredible resilient. Instead
of losing value to the forks BTC actually appreciated in value and the forks were basically
a free dividend for Bitcoin holders.

Maybe BCH created a bit of uncertainty due to their spam attacks on the main blockchain, but
all the other forks were pretty much a non-event.



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