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St. Louis Federal Bank writes about the utility of Bitcoins and other crypto assets.

Jan 16, 2018 Posted /  2629 Views

St. Louis Federal Bank writes about the utility of Bitcoins and other crypto assets.

Aleksander Berentsen and Fabian Schär of the Federal Reserve Bank of St. Louis in their latest article published about the fundamentals of bitcoin and other cryptocurrencies. In the article they covered the utility of bitcoin and other alternative crypto assets and throughout made the case that crypto assets have complete potential to become a new important asset class. The duo also proclaimed in the article that bitcoin in some ways is more robust than many fiat currencies.

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Welcoming Cryptocurrencies

Astonishingly, Berentsen and Schär welcomes the digital currencies into the present currency ecosystem and state that “Bitcoin is not the only currency that has no intrinsic value.” The duo further points out that “State monopoly currencies, such as the U.S. dollar, the euro, and the Swiss franc, have no intrinsic value either. They are fiat currencies created by government decree. The history of state monopoly currencies is a history of wild price swings and failures. This is why decentralized cryptocurrencies are a welcome addition to the existing currency system.”

Recently many critics had claimed that bitcoin’s price should soon plunge to zero as it has no intrinsic value which is why the co-authors of the Federal Reserve Bank of St. Louis article pointed out that the same argument should also be applied to the multiple government-issued currencies around the globe.

The consensus rules

The authors also appended about the probability that Bitcoin’s consensus rules might be changed to permit an increase in the supply of bitcoin tokens. The authors remarked that this kind of change in monetary policy is more likely in a fiat currency protocol.

“Undesirable changes in fiat currency protocols are very common and many times have led to the complete destruction of the value of the fiat currency at hand.” They further state “It could be argued that, in some ways, the Bitcoin protocol is more robust than many of the existing fiat currency protocols. Only time will tell.”

Bitcoin is the most apparent

The article from the Federal Reserve Bank of St. Louis majorly shared some basic insights on the cryptoassets however, the article also bestowed a general viewpoint on the future of blockchain technology.

As per the authors Berentsen and Schär, the most apparent application of the blockchain technology currently is bitcoin, which presents us with a new type of asset. The article discusses how cryptoassets like bitcoin are assembling their own asset class and have the probability to enlarge into a fascinating apparatus for investment and diversification.

The article goes on to say “Bitcoin itself could over time assume a similar role as gold,” The PDF also specifies about the applications of blockchain technology in the areas of coloured coins, smart contracts and data integrity. The authors have especially mentioned about Ethereum network as a leader in the area of smart contracts.

Hazards of Blockchain Technology

Berentsen and Schär in the article also covered some major risks associated with cryptoassets. They discussed about the splits from major cryptoasset networks, such as Bitcoin Cash (Bcash) and Ethereum Classic, however the impact they might have and what these sorts of spin-off assets can do is not discussed. The paper also remarks that extreme power consumption is one more potential risk of blockchain technology, however the authors do not agree that proof-of-work mining is wasteful.

“There are those that criticize Bitcoin and assert that a centralized accounting system is more efficient because consensus can be attained without the allocation of massive amounts of computational power,” says the article. “From our perspective, however, the situation is not so clear-cut. Centralized payment systems are also expensive. Besides infrastructure and operating costs, one would have to calculate the explicit and implicit costs of a central bank. Salary costs should be counted among the explicit costs and the possibility of fraud in the currency monopoly among the implicit costs.”

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Tags: Federal Bank bitcoins crypto assets utility of Bitcoins

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