When I was a teenager I opened my first checking account with Bank of America. I didn't have a job at the time so it was basically an allowance and holiday gift holding account. It seemed great. I could put money in so I didn't have to keep it in a shoebox or under my mattress. Once I got a job I could use direct deposit to put money into the bank. Later my bank gave me a debit card that I could use to spend the money in my checking account on things. This was wonderful. I felt free, but was I financially free? Not at all.
There are many meanings to financial freedom. It could mean having enough money in your account that you do not live paycheck to paycheck. It could mean having all of your assets (house, cars, dishwasher) paid off. For investors in the crypto world, it means complete control over their money. Why is that so important to crypto investors when the bank is holding your money and it is just a debit card's use away? The term bank run is one reason.
A bank run is essentially when the majority of account holders at a bank try to withdraw their cash from their accounts in a very short period of time due to concerns with the bank. Theoretically, this shouldn't be a problem. Generally, the thinking is if a customer puts $1,000 in a bank, they can withdraw the $1,000 at any time. That simply isn't the case if a lot of people chose to withdraw at the same time. The first obvious reason is that a branch only has so much cash on hand, therefore they simply cannot provide cash for everyone. The second and less obvious reason is the bank has your money, but they are doing something with quite a bit if not all of it.
A bank is required to have cash reserves, right? Well, not anymore. Prior to March 2020 banks had to hold 10% in cash reserves however the US Fed announced reserves could be reduced to 0% due to the COVID-19 pandemic. Even prior to March 2020 the 10% seemed low. That means if a national bank has a total of $100B in funds deposited into the bank, it only needed to keep $10B. Now it doesn't have to keep any of it. That is pretty scary when you think about it. What are the banks doing with the rest, if not all of the money deposited?
Banks don't earn money from account holders just putting money in the bank. They are a for-profit company, and therefore they use your money for their profit. Banks for example hold mortgages and vehicle loans. They lend your funds and then receive payments and interest on those payments. Do you see any of the interest? No, you certainly don't.
Banks also earn money by investing in projects, whether they are building large office buildings, funding projects to send people into space, or any other venture. The bank expects to get their investment back and then some when the project is successful. Once again, they invest your funds into the ventures and receive profit. Do you own part of that project? Do you receive a portion of that profit? You guessed it, you certainly don't.
So what happens if someone defaults on a loan or investment goes belly up? The bank losses money. Your money. They sell the house or vehicle for a much lower price than they would have earned if the debtor paid completely. They lose any funds invested in a project that can't be recovered from the project owners who more than likely don't have any money left. So when the bank loses money, you lose money, right? You might not think so but it is certainly possible.
As you can see, banks don't have all your money. When you withdraw all your cash, you are withdrawing from a collective pot. It reminds me of the classic movie "Office Space" where the office is celebrating a birthday. Milton, the red stapler obsessed office worker, is forced to pass the birthday cake down the line to each employee, and when the last piece of cake is served, he is the only one to not get a piece. Because banks have a collective pot with a fraction of the actual deposited funds in it, there is a chance there will be a Milton, or millions of Miltons, who won't be able to withdraw their cash.
Don't forget that banks invest in many ventures and hold many loans. The COVID-19 pandemic caused businesses to close and people to stop paying on their loans. That means the banks lost their investments and weren't getting back their principal let alone interest. This same exact thing happened in 2007-2008. Banks were taking a lot of risks. They were handing out loans to anyone and allowing refinancing of mortgages everywhere. Banks were not afraid of high-risk customers and let out subprime mortgages. People were paying interest only on their loans knowing they would have to pay a fixed, much higher, rate, and yet they used the money for everything from second properties, RV's, boats, you name it. Not only that but housing prices were shooting through the roof. It was not uncommon to see a home skyrocket in value on a weekly basis. How do new families get the experience of owning their own home? Taking these risky loans and promising to pay the higher prices later. Unfortunately later comes sooner than you think.
When the time came for people to pay the higher payments on their loans, they simply couldn't. When that happened people began being foreclosed on. The foreclosing and the bubble bursting on housing prices caused properties to lose value at a great pace. People who paid five times more than the value of their home after the bubble burst just walked away. Second homes were defaulted on. No more lake house. No more mountain house, No more rental. Banks who held subprime mortgages were left holding the bag. Let's just say the bag would be something a child would put on a doorstep and set on fire, hoping the homeowner would stomp the fire out and be left with a very stinky surprise. Banks lost billions, people lost confidence, they rushed the banks. Banks like Washington Mutual went bankrupt. Many other banks were bailed out by the US Government and even used some of that money to pay their executive bonuses. The government claimed we were all safe because the Federal Deposit Insurance Corporation, or FDIC, insures any bank holdings up to $250,000. That might be great for the little guy, however, people who happen to hold more money than that, generally termed the evil elite class, aren't protected enough.
Let's not forget the US government doesn't actually use currency backed by anything other than the US government. If the US is in a financial crisis and people need money the US government can print more. Of course the more money in circulation the less actual value it has, so that is a problem. If knowing a bank can use all your money and lose it doesn't scare you, I don't know what will. If knowing a bank collects fees generated from your money and doesn't give you a cut doesn't enrage you, I don't know what will. If knowing the US Government will generally bail out the risk-taking banks doesn't make your mind explode, I don't know what will. What I do know is that crypto investors have been scared, enraged and their minds have exploded. If they can help it, they don't want the banks to make money of their funds, so they put it into crypto.
Crypto exchanges allow investors to provide liquidity for trading, and those investors earn a portion of the fees. Crypto can be staked with proof of stake mining operations to earn a portion of the fees. Investors can lend their crypto to others and earn interest. Essentially crypto allows the investor to become a bank in their own right. The investor has a number of crypto tokens/coins. That number doesn't get smaller unless they sell some of it. Therefore crypto investors have security and freedom of choice. They are secure in that the crypto they hold is theirs to do with how they want and free to choose what they want to do with it.
Right now there is still a dependency on banks but at the same time, we are at the beginning of a new world of finance with cryptocurrency. I have financial freedom when it comes to my crypto. I think a lot of other crypto investors feel the same way. I invite you all to continue with me on my journey and learn more about cryptocurrency. There are many more ups and downs to write about, lessons to be learned and wisdom to be gained.
Note - Thank you to LadyIsarma for some grammatical assistance!
