What does it mean to “Be Your Own Bank”, and why does Bitcoin make this possible?

First: What's a bank?

Traditionally banks were for keeping money safe — they were well-guarded buildings with thick walls and a big lock. And even to this day, if you went around asking people, “What are banks for?”, a majority of people (I would posit) are likely to say something to the effect, “a place to keep your money safe”.

But are banks really safe?

To some extent... But if the primary role of banking, today, were to keep money safe, then why not just keep our dollar notes (or pounds, euros, etc) in safety-deposit boxes? After all, when you have your money in a checking or savings account, the custodian bank is putting your money at risk — gambling with your money, some might say.

Advantages of a Bank Account

There are at least a few advantages to having your money in a bank account over, say, a well-guarded vault:

  1. Easy Access. With large banking institutions having many branches, you can easily withdrawal your “secured” cash. But this advantage should really be lumped together with...
  2. Payments. By having your money in a (modern, Internet-accessible) bank account, you can relatively easily pay bills, make purchases online or in-person using your debit card, and even send money to friends.
  3. Interest. Having your money in a bank account usually (at least traditionally) entitles you to earn a small return for keeping your money with a particular institution.

Now, given the low-interest-rate environment we're presently living in, that last benefit can hardly justified... Is the probably-less-than-1% interest you could earn even worth the risk? Given even the (US) inflation rate according to Washington bureaucrats is about twice your typical interest rate, it's hard to argue this is any benefit at all.

So that leaves us with effectively with one major need filled by the modern-day banking system: You need a way to pay your rent, get money in and out of your brokerage account, and pay for your books on Amazon. That is, you need a payment mechanism.

Thus, it would appear that banks and financial institutions today are much more necessary in their role as conduits than they are as safe-houses for money. They're just third parties for moving money around; not per se a bad thing, but interestingly, this was never what banks were (traditionally) intended for.

Enter Bitcoin

Bitcoin makes it possible for the first time to do distance payments with no bank or bank-like institution — with no middleman (no PayPal, no credit-card company, no bank, etc). How Bitcoin does this is the subject of many other articles (and books), but it is one of Bitcoin's most widely-regarded benefits over other payment mechanisms.

Now, few would argue that Bitcoin comes with no risks or downsides, so we'll just consider briefly another reason you might choose Bitcoin as a place to store (a small portion of) your wealth.

One of the most important features of Bitcoin is its limited supply. That is, although the number of bitcoins in circulation does increase over time, it increases at a very well-defined and constrained rate. Additionally — and this is one reason some have argued it's “better than gold” — the Bitcoin inflation rate actually decreases as time goes on. (This year the rate of increase may be about 5%, but in another year or so it will be less — maybe around 4%).

Taking It to the Bank

So what's the big deal? Who cares about having another payment mechanism?

Consider the amount of money held in institutions which are publicly-acknowledged to have only a fraction of the money they've been entrusted with (they call it “fractional-reserve banking”). These institutions — many of which nearly went belly-up (with your money) less than a decade ago, only saved by massive state-sponsored bailouts — still hold trillions of dollars in their possession.

Bitcoin provides a way out.


Of course, all this is contingent on Bitcoin's adoption. If the number of investors acquiring Bitcoin, businesses accepting Bitcoin, and/or other uses of Bitcoin does not continue to grow, all the arguments in favor of Bitcoin will largely be moot.