We compare the U.S. Dollar with Bitcoin on their key attributes to determine which is better for transactions and preserving wealth, which is most absurd and which has serious flaws.
Topics covered include:
- How are new U.S. Dollars and Bitcoin created
- How much has the supply of each currency grown
- How both the dollar and Bitcoin have had rule changes
- Why Bitcoin transactions are faster than non-cash U.S. dollar transactions
- Why both the dollar and Bitcoin require add-on layers to facilitate transactions
- How tax treatment of a currency can encourage or discourage its use for payments
- Why divisibility is a critical attribute of any currency
- Why Bitcoin has been as volatile as the Russian ruble
- Why Bitcoin is energy inefficient while having built-in incentives to use renewable energy
- What will determine the long-term viability of Bitcoin and the U.S. dollar
Show Notes
Check Processing—Federal Reserve Bank of New York
Gold Reserve Act of 1934—Federal Reserve History
Creation of the Bretton Woods System—Federal Reserve History
A Complete Guide to Understanding and Protecting Against Inflation—Money For the Rest of Us
Bitcoin: A Peer-to-Peer Electronic Cash System by Satoshi Nakamoto—Bitcoin
Mapping the Major Bitcoin Forks by Ashley Viens—Visual Capitalist
Total Circulating Bitcoin Chart—Blockchain
There’s Enough Bitcoin For Everyone by Paul Opoku—Nasdaq
Lightning Network: Scalable, Instant Bitcoin/Blockchain Transactions
Bitcoin Energy Consumption Index—Digiconomist
The Bitcoin vs Visa Electricity Consumption Fallacy by Carlos Domingo—Hacker Noon
El Salvador Readies Bitcoin Rollout With 200 ATMs for Conversion by Michael D McDonald—Bloomberg
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Transcript
Welcome to Money For the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is Episode 355. It’s titled Which Money Is Crazier: The U.S. dollar or Bitcoin?
Consider for a moment, if you arrived on the planet and you’re being introduced to two different monetary systems, the U.S. dollar and Bitcoin. You know nothing about them, and someone is going to explain both of these monetary systems to you, so you can decide which is better or which is more absurd.
The thing about the U.S. dollar in the fiat currency system is we’re used to it. We’re used to the fact that currencies fluctuate relative to each other, that they’re not backed by anything. But there have been developments in currencies that have required us to adapt, such as buying stuff online, something we didn’t do 25 years ago, using PayPal or Venmo to send payments to each other. One hundred years ago people didn’t use credit cards; we’ve had to adapt to that.
So what I thought I would do in this episode is let’s just step back and compare the U.S. dollar to Bitcoin. What is it, how is it created, how its supply has grown, how it’s used, how volatile is it, how often is it used in illicit activities? What about its energy use? And when we’re done, we’ll circle back to see, is one form of currency is better than the other? And seeing that Bitcoin is the new currency on the block, should it even be around? Is it even useful?
What Is the U.S Dollar?
Let’s start with the question we should ask about all financial instruments—what is it? The U.S. dollar is a non-interest-bearing liability of the U.S. Federal Reserve, the Central Bank that was established by the U.S. Congress in 1913. It’s a debt instrument. It says it right there on the currency, the Federal Reserve Note.
What is the Federal Reserve? It’s a financial institution that’s at the heart of the U.S. dollar system. The Federal Reserve has assets of over $8 trillion and liabilities of about $8 trillion, including $2.2 trillion of this currency in circulation. The Federal Reserve only has $50 billion in capital, so it is highly, highly leveraged.
The paper bills and coins are just one aspect of the dollar. Most of the dollars are digital cash, stored at financial institutions. One of the roles of the Federal Reserve, in conjunction with the banking system, is to make sure there is no double-spending. So that an individual doesn’t write a bad check; write a check and there’s insufficient funds.
The U.S. dollar monetary system is a proof of stake system, where you have the Federal Reserve and 12 Regional Federal Reserve Banks. Those regional banks are owned by Commercial banks. They have stock in those Federal Reserve Banks, and those Federal Reserve Banks are set up like private corporations. Ultimately, the control rests with the Board of Governors of the Federal Reserve.
What Is Bitcoin?
What is Bitcoin? It’s a peer-to-peer version of digital cash, with the transactions and ownerships stored on a non-centralized public ledger. The concept is based on a nine-page whitepaper by Satoshi Nakamoto, who released that paper in 2008. Bitcoin is a proof of work system. So there aren’t these big financial entities that have a stake in the system; it’s distributed. And in order to confirm there isn’t double-spending of Bitcoin, there are verifiers of all transactions known as miners, and that public ledger is available on all these servers run by miners. Anyone can download that ledger, and it has all the transactions that have occurred with Bitcoin since its inception.
How much money is outstanding in each of these monetary systems? There’s $18.8 million Bitcoin, and there are $21 trillion. Significantly more dollars than Bitcoin.
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