When presenting to investors on alternative finance and the advantages of investing through new technologies like Equity CrowdFunding and Digital Currencies, I am often asked what the big deal is and what advantages digital currencies have over traditional government issued currencies known as fiat money.
Yes, fiat money has some big advantages over digital currencies in terms of stable prices. Also, as it is stored at a bank you can to worry less about security as deposits are guaranteed to a certain level by the government and banks take care of deposit security from hackers for example. On the other hand, digital currencies are hugely volatile and digital currency holders need to educate themselves on storing them safely and security.
However this is only half the story. It is when you start to understand what is happening today with Bail-In legislation that you start to realise that some of your wealth should be hedged in digital currencies like Bitcoin and invested through alternative measures.
All around the world policy makers have been trying to remove the burden of taxpayers having to bail out a bank again as we saw with the recent financial crisis and their answer is bail-ins. Bail-in’s is the process of a bank being able to expertise their right to ownership of your money deposited at a bank.
You see, when you deposit your money at a bank three things happen.
1. Banks become the legal owner of your money.
2. Banks spend your money as they wish by issuing loans as they wish.
3. Banks create further money, in fact 97% of the money in the economy with your deposit as collateral all through loans.
So under the event that a bank gets in trouble, which is very likely given that there was no genuine banking reform after the last crisis, rather than tax payer money bailing out the bank, your deposits would be used instead.
The banking system is no different from the £50bn ponzi scheme that Madoff was sent to prison for on a 150 year prison sentence. Banks require new money to pay off old money that does not exist. The government runs the same scheme through bonds, they have to issue new bonds to pay the interest on old bond-holders and the national debt has to increase forever for the government to continue.
Investor ratings service Moody’s even changed its outlook for Canada’s biggest banks to negative from stable, citing concerns over the Canadian government’s plan to implement a “bail-in” system in the event of a bank failure.
It is talked about on traditional media outlets like CBC News like this is very harmless and was pushed forward by Mark Carney, who is now our Governor of the Bank of England.
So yes this is top of the agenda in the UK.
Mark Carney, who was Bank of Canada governor at the time of pushing forward bail-in’s in Canada, said last April it was ‘hard to fathom’ a scenario where Canadians’ deposits would be touched, as happened in the Cyprus bank failure. I am less confident.
So how do you protect yourself and hedge some of your wealth from bail-in’s?
While extremely volatile and you need to spend a bit of time learning how to create paper wallets and store digital currencies in cold storage offline to fully protect yourself from hackers, digital currencies like Bitcoin are an easy way to hedge some of your savings. You can even store them at insured ‘bank-like’ vaults for a fee if you don’t want to learn any of that stuff. Digital currencies still have a long way to go to make them easy to use, but that is improving every day.
Alternative coins to Bitcoin are also available to those that want to build a diversified portfolio of exposure to digital currencies, but they are significantly more risky than Bitcoin. Think of Bitcoin like Gold, alternative coins like Litecoin as silver and all other coins as hugely speculative penny shares.
You see, there are three major differences between fiat currencies and digital currencies.
1. You completely own your digital currency and it is stored with you.
2. You allocate it as you wish as it is transferred person to person rather than bank to bank and unlike a bank account, it is completely neutral to your wealth, sex, race or how you spend it and is available to all connected to the internet.
3. It is created by anybody that downloads a software to their computer and participates in a process called mining. So it is not created by banks, it is created by people without debt.
Remember almost every asset class has exposure to bank bail-in’s as almost every asset is integrated with banking with the exception of certain commodities like Gold.
So to hedge against new rules to make bank bail-in’s easier, you need to look at alternative asset classes like digital currencies, the largest being Bitcoin.
In future posts I will tell you more about getting started, so enter your name and email somewhere on this page to receive updates.