Is the Banking System a Ponzi Pyramid Scam

Is the Banking System a Ponzi Pyramid Scam

Is the current banking system a pyramid scam? Let’s analyze this statement well in order to have an answer and how Bitcoin proposes to solve this atrocity.

Let us remember that a pyramid scam pays income for its members with the money of the new participants (something similar to the pension system although that is another matter).

The main reason that makes the traditional banking system a scam is what is known as fractional bank reserve. The fractional reserve concept has very similar concepts: for every $ 1 you deposit in the bank, the bank issues $ 9 more in loans, so at all times there is very little money actually deposited in the bank compared to what people are using , and as long as not everyone decides to get the money at the same time there is no problem.

This borrowed money of course is lent with interest, in other words the bank is charging interest for lending money that does not exist and they profit accordingly. This could become acceptable because the bank is incurring a risk and the moment their plan does not go the way they want they will go bankrupt and all investors (including people who have deposited their money in that bank) they would lose their money … or maybe not.

Unlike a pyramid scam where if it blows up all the participants lose their money, if a bank runs out of funds, the government will be in charge of rescuing it by printing money and using public money, so not only the people who committed the mistake of putting their money in that bank are affected, but all citizens who share their currency with the affected bank, that is, for an American bank all those people who have their money in dollars regardless of whether they have it under their pillow or in a bank that does not operate the system through fractional reserve.

In this sense, the banking system could be considered much worse scam than a ponzi, because no matter how much an individual researches in which bank to put his money, he ends up suffering the consequences of unscrupulous banks and careless individuals unlike any traditional private investment.

When the government decides that a bank is too big to fail, and unconditionally bails it out, it creates an environment in which these banks are encouraged to be as reckless as they can, enjoying all the economic benefits that this attitude gives them without suffering the consequences. that the moment they stumble, they will be rescued and will be able to continue operating normally.

How does Bitcoin solve this problem?

  • Bitcoin has a controlled and limited inflation that is only aimed at those who process transactions (miners) so they cannot be printed anymore in order to save bad businesses.
  • You cannot lend more Bitcoins than there are, as banks do. The blockchain makes sure that 1 BTC always equals 1 BTC.
  • Bitcoin allows a way out for all of us who are not happy with the traditional banking system. We don’t have to play by their rules if we don’t want to.

About Daniel

Project Manager @ Cardano (IOHK)

Madrid, Spain CRIPTOMO