The Bitcoin Money Creation Compared to the Fiat Money System

Bitcoin Money Creation

The largest crypto-currency Bitcoin by market capitalization is now recognized worldwide, even though the currency is largely lacking in terms of state acceptance. An important topic for interested parties is the question of money creation compared to traditional foreign exchange. Here bitcoin and fiat could hardly work differently.

The distinction is best achieved by first looking at the creation of money in the case of a “real” currency. The obvious example is the euro.

The Main Task of its Creation with Central and Commercial Banks

The monetary system is composed of different approaches.  The central bank is responsible for determining the quantities in circulation. The distribution takes place via the commercial banks and their automatic network. At the level of individual countries, the euro coins are being raised – this is the responsibility of the mints. The state collects the difference between the costs of coinage and distribution on the one hand and the nominal value (also nominal value) on the other hand.

The third variant of the Fiatgeld money creation is called Giralgeld. Almost 90 percent of the total money supply is now managed and managed on this digital path. This capital is distributed by commercial banks, in particular through lending. From the borrowed money of the central banks, banks can generate around 40 times more.

Central Banks Can Create New Money Reserves At Any Time

An interesting aspect of the bank money: Central banks can create money from nothing. High costs or excessive bureaucracy? None. The central banks can switch and administer.

The past banking and economic crisis of 2007 has shown that banks are only too happy to launch “printing presses” as soon as budding crises announce themselves. Thus, cheap money is created, which gives commercial banks cheap on a large scale to stabilize the economy and stimulate consumption. The meaning and success of these measures should not be discussed. There are economic experts who are critical of this monetary policy and demand greater government influence.

However, the indication that money can be drawn from a void is indispensable in the comparison to the cryptocurrency, as we will see later on.

Bitcoins Are Created Within the Community

The money creation in the Bitcoin, however, is completely different. The central term, in this case, is the so-called mining, which can be translated as “digging” into German. The developers have defined a maximum of 21 million bitcoins right from the start. This cap was intended, inter alia, with a view to maximizing inflation security.

Miners create new blocks within the Bitcoin blockchain. An infinite money creation like fiat excludes the Bitcoin universe. This provides stability in terms of the pure money supply – this system does not rule out price losses, as the past months have shown in the Bitcoin price development.

This is how the mining of bitcoins succeeds in practice

The process of mining is as follows: Miners provide power through their computing systems needed for transaction processing, network synchronization, and ultimately backup. This process within the cloud (hence the term “cloud mining”) can be done from anywhere in the world.

Users who participate in mining are paid in the form of smaller Bitcoin shares. How high the reward is in detail, decides the provided computing power. Miners confirm within the blockchain accumulating transactions recorded in the “account book”. The book includes all previously created blocks.

The mining control mechanisms largely exclude counterfeit blocks. In addition to the mentioned cloud mining, which actually only requires a crypto-wallet and a rented cloud access, there is the “ASIC-Mining”. With good graphics cards and special computer chips, professional users even mince Bitcoins on the computer.

Many Coins Are Lost in the Digital World After Mining

One aspect that should not be concealed from mining is systemic losses. According to recent studies, there is always the disappearance of coins. For example, this happens when accounts are hacked on trading platforms and crypto-wallets.

Some analyzes assume that up to four million coins are lost forever. These losses do not go to the account of criminals alone. Investors who spend years ago investing money in Bitcoins and forget about these investments or have lost credentials are also responsible for the loss. One thing is certain: if all planned coins are mined in 2040, the number of available bitcoins will be well below the 21 million marks.

The most obvious difference between fiat money and cryptocurrency is to be seen in the creation of money primarily in the active participation of users in the digital currency. In fiat money, only the (national) banking world regulates the money supply in the market.

The price of Bitcoin recorded at the editorial time (07:00 clock) a minimal fall in the price of – 1.58 percent to a price of 5,710.11 euros. The market dominance is 53.8 percent.

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