“Be your own bank” is a common rallying cry in the bitcoin and blockchain scene. But why would anyone want to be their own bank? One of the answers could be observed in 2008, when the US investment bank Lehman Brothers speculated, filed for bankruptcy and triggered a global financial crisis.
As a result, a lot of other banks had to be supported (rescued) with taxpayers’ money to restore lost trust among themselves and to keep the flow of money in the system going. In addition, some banks had become so systemically important over time that they could not simply be allowed to go bankrupt without losing control completely; the phrase “too big to fail” was once again making the rounds, as it so often does in the financial world.
A lot of idealists therefore criticize the current banking system for having control over money centrally in the hands of a few powerful institutions. The question is whether such a centralized system can be secure and trustworthy in the long run. For example, how does a centralized system guarantee that no changes are made to the cash books? How does it protect itself against a malfunction (fire, etc.) or a cyber attack? How can it ensure that only authorized persons have access to sensitive data?
Such dangers and uncertainties could be reduced, if not eliminated, with a decentralized solution.
Shortly after Lehman Brothers filed for bankruptcy in 2008, a nine-page script appeared on the web under the pseudonym “Satoshi Nakamoto,” outlining a new virtual currency: “Bitcoin: A Peer-to-Peer Electronic Cash System.” The founding document details the technical and economic underpinnings of the currency. Amounts were to be transferred directly from participant to participant (peer-to-peer), using cryptographic techniques. The term Bitcoin was born. It is a made-up word consisting of the words bit and coin.
The founding document is peppered with mathematical formulas, written in English. This leads to the assumption that the author, or the collective of authors, is likely to be based in the university world of computer scientists or mathematicians. All that is known is that Nakamoto’s Bitcoin network first produces 50 Bitcoins as a digital currency and from the beginning limits the maximum number of all Bitcoins ever available to 21 million units. On January 03, 2009, the *Genesis Block was created and on January 12, 2009, a Bitcoin was exchanged between two users for the first time.
*The Genesis Block is the very first block within the blockchain. Unlike all other blocks, it was not calculated by the network, but was instead created before Bitcoin was officially released; moreover, it is hard-coded into the source code.
Independent of Central Banks and States
The Bitcoin concept is a true innovation and without precedent in monetary history. Unlike other currencies, Bitcoins do not have bills or coins. Rather, it is an abstract unit of account that can nevertheless be traded on exchanges and exchanged for other currencies. Equally new is that the money is not managed and controlled by a central bank, but decentrally via the computers of Bitcoin users according to certain algorithms. Safekeeping is done with the help of digital wallets.
There can be no inflation with Bitcoin, because the total amount is constant and limited to 21 million units. The independence from states and central banks is one of the greatest advantages and weaknesses of virtual money at the same time. Unlike euros, U.S. dollars, yen, etc., there can be no centralized money supply control and policy here.
This freedom from manipulation is often seen as an advantage over real currencies in an era of loose monetary policy. On the other hand, the lack of control has certainly contributed to the high volatility and bubble formation.
Bitcoins currently tend to be more volatile than conventional currencies. The lack of access is a thorn in the side of the central banks themselves. They are watching the development of the Internet currency as intensively as they are suspiciously.