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Author Topic: What is the actual process of converting a bitcoin to a national currency ?  (Read 844 times)
distcoin (OP)
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June 25, 2014, 03:30:46 AM

As a newbie this is something I've always wondered about.

Somebody has to except an digital message that results in a deposit in their bank account. But couldn't anybody create an arbitrary crypto currency, assign an exchange rate to it and produce the same kind of API that results in a deposit in which cash appears in someones account? What differentiates this from counterfeiting money?

I understand that this happens in the Forex market, but at the end of the day somebody has to generate a dollar deposit out of thin air.

What am I missing?

Every time a block is mined, a certain amount of BTC (called the subsidy) is created out of thin air and given to the miner. The subsidy halves every four years and will reach 0 in about 130 years.
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June 25, 2014, 06:21:51 AM

What am I missing?
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June 25, 2014, 06:46:24 AM

You need to understand the basic mechanism of trading one thing versus another.
Person A has some amount of x and wants y.
Person B has some amount of y and wants x.
They agree on a deal (how much x is exchanged for y) and exchange their goods.
Whether x and y are apples and oranges, euros and dollars, or pesos and bitcoins does not make a difference.
In the trade, they need to make sure that each party actually gets what they agreed upon, so either they exchange in person, or they need trust in each other or a trusted escrow.

In the case of exchanging cryptocurrency for fiat currency, normally an exchange is being involved that acts as a mechanism for finding the price (through their order book) and as an escrow. Dealing with an exchange normally eliminates the need to trust or even know the trade partner because you only trust the exchange. Exchanges can only enable trades up to the amounts that buyers and sellers offered to trade, of course, so neither good is created out of thin air.

Note that "goods" to be traded can also be promises of actual goods. Promises can actually be created out of thin air, for example, I could sell you a promise of 22 million bitcoins if you're willing to accept the deal. Of course I'll never be able to keep this promise...

Onkel Paul

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June 26, 2014, 09:49:44 AM

If I were a country, say Zimbabwe, and wanted to adopt bitcoin as my national currency I would simply peg my existing currency to bitcoin. My central bank would then be instructed to exchange, say 1 zim dollar (Z$) for 0.0001 bitcoin or whatever exchange rate I'm targetting.

This, to me, would be the simplest way as the existing physical notes will then continue to be used etc.  This is the same why many minor currencies match the US dollar (in my lay understanding). 

See these:

If you liked this post buy me a beer.  Beers are quite cheap where I live!
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