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US bank failure tests FDIC limit, raises questions about fractional reserve banking

Bitcoiners remind critics of banking system's Ponzi scheme roots

👋GM DeFions

Key Points

  • In 2013, a banking crisis in Cyprus caused Bitcoin's value to soar.

  • In 2023, a bank failure in a wealthy area tested FDIC insurance.

  • Fractional reserve banking allows banks to create loans using deposited money.

  • The banking system operates using a similar model to a Ponzi scheme.

It was always inevitable…

In 2013, Cyprus faced a banking crisis that resulted in a deposit run. The government of Cyprus had plans to seize deposits of individuals and businesses with over 100k that were uninsured. At the time, early Bitcoin supporters speculated that a similar scenario could occur in the US. However, most people dismissed the idea as an overseas problem and continued to have faith in the US banking system despite the 2008 financial crisis. Consequently, in 2013, Bitcoin saw its value skyrocket to $1,000 per coin from just $30 earlier that year.

Now, fast forward to March 2023, a decade later, a bank in one of the wealthiest zip codes in the country collapsed, testing the FDIC insurance limit of 250k. Any accounts exceeding this amount were at risk of non-payment, causing widespread panic. However, the Federal government stepped in last night, on Sunday, March 12th, to guarantee all deposits. The question remains, how many more times can they do this? Will they rescue every bank?

Fractional reserve banking refers to a system where banks are required to hold only a fraction of deposited funds for withdrawal purposes. This system allows banks to create loans using deposited money, which, in turn, boosts the economy by freeing up capital for lending. When you open an account with a bank, the agreement states that the bank can use a percentage of your deposits as loans to other customers. This does not mean that you cannot access your deposited money, but if you want to withdraw more than the percentage of funds a bank keeps on hand, the bank will need to acquire funds from other sources to give you your balance.

It's amusing to Bitcoin supporters when they hear non-supporters refer to Bitcoin as a Ponzi scheme. Ironically, the very place where most people deposit their money, the banking system, is the original Ponzi scheme.

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