Those who have been paying attention will have noted something of a fiscal and monetary malaise – some might say crisis – stocking the world economy in recent years. These problems are no doubt in some considerable measure behind the recent interest in Bitcoin.

Indeed, Bitcoin can help solve some of those problems. Some though persist despite the virtues of Bitcoin.

The big benefit of Bitcoin is its remedy to fiat currency and the inevitably ensuing inflation . Inflation is a terrible problem that impoverishes most people. The exception being the well placed interests – such as the big banks and their favored customers – who are first receivers of the newly invented money.

Unlike a fiat currency, though, the value of which is effectively set by the issuer (most likely the government) by means of its control over supply and influence over interest rates, Bitcoin is a market valued currency. Like any real money it is valued by the market for what it can do – including its virtue as a medium of exchange and store of value.

This is Bitcoin’s strong suit. As no individual or organization controls, and therefore none can manipulate in their own interest, the supply of the currency, Bitcoin resists the inflationary pressures characteristic of fiat currencies.

Fiat currency though isn’t the only problem contributing to the present problems of the world economy. Another is fractional reserve banking. This is the practice by which banks magically multiply the amount of money in the economy.

This is done by lending out most of the value of deposits as loans, yet claiming to still have the depositor’s savings available. The money can’t both be in the depositor’s account and in the hands of the borrower.

This bit of financial magic is defended, with some justification, as fuelling the economic machinery: it certainly increases monetary liquidity, and entrepreneurial benefits may result. There are tradeoffs to everything though and costs of fractional reserve banking can be immense.

First, the practice contributes to inflation, by magically multiplying the money supple. Second, it contributes to exaggerated business cycles, as borrowers are misled about the actual availability of resources, due to artificially suppressed interest rates resulting from illusionary large money supply. The inevitable result is eventually recession – if not depression. Third, it eventually leads to bank runs: as the somewhat ponzi-like scheme eventually collapses. When everyone wants their money back at the same time, it just isn’t there.

Bitcoin’s susceptibility to reserve banking has been painfully revealed by the suspension of Bitcoin withdrawals by the Tokyo-based Mt. Gox exchange. Mt. Gox has been the world leading exchange between U.S. dollars and Bitcoin. It has, though, been engaged in fractional reserve lending practices. And, now, those who have put Bitcoins in can’t get them out.

The official explanation for the suspension has been technical malfunction. The fact though is that Mt. Gox has been engaged in suspension of convertibility for almost a year now and using various ruses to inhibit withdrawals of Bitcoin in the meantime.

What we’re seeing with Mt. Gox is the first ever digital bank run. And the response has been the same as that of banks through history: bar the door! It’s now looking doubtful whether those with Bitcoin accounts at Mt. Gox will get all – or possibly even any – of their money out.

A solid, market based currency is wonderful and welcomed, but not a panacea for poor investment decisions. The interest from fractional reserve banking is alluring, but willful myopia to its risks puts your savings in grave danger. Bitcoin’s virtues do not include a financial redo.

Anyone hoping to be benefiting from the Bitcoin renaissance in global finance, you need to stay abreast of events by getting the scoop at the Bitcoin Profit Calculator site. Wallace Eddington has been storming the blogosphere with his recent analysis. See particularly his popular article on Bitcoin exchange trading funds .