3 ms·

> Early adopters weren't enthusiastic about bitcoin because they hoped it would end fractional reserve banking Just to amplify your point: There is a weird ide

> Early adopters weren't enthusiastic about bitcoin because they hoped it would end fractional reserve banking Just to amplify your point: There is a weird idea that that monetary multiplication (like fractional-reserve banking) is not possible with bitcoin. However, anytime someone lends bitcoin or shorts it on an exchange, they increase the bitcoin in circulation past the base count of 21 million btc (or however many have been minted at the time). The idea that bitcoin would somehow escape fractional-reserve banking was only held by people who do not understand the difference between M0 and M1/M2 in elementary macroeconomics.

marcell 6y ago
There is a subtle distinction though. When a bank lends out US dollars, they are effectively creating new money that is treated as “real” money. They don’t technically lend out the deposits. In contrast, crypto lenders can’t create new bitcoin. They need deposits to lend out. The depositer in turn is aware they don’t hold real bitcoin, just a deposit credit at the lender. This is the origin of the crypto mantra “Not your keys, not your crypto.” It’s true that the “M1” value can increase, but unlike fiat money the distinction is (for now) visible to the user.
- jpmattia 6y ago
  > When a bank lends out US dollars, they are effectively creating new money that is treated as “real” money. They don’t technically lend out the deposits. This is exactly wrong. In fact, it is the origin of the term "fractional reserve": They are reserving a fraction of the deposits and lending out the rest.
  - marcell 6y ago
    Right, but in crypto world most people regard coins held in custody as different from coins held in a private wallet. The Mt Gox experience was a good lesson on this topic, if it’s not your keys, it’s not your bitcoin. In comparison, very few people distinguish paper cash money from a bank credit backed by a fractional reserve.
    - jpmattia 6y ago
      > In comparison, very few people distinguish paper cash money from a bank credit backed by a fractional reserve. I would add the words "in the modern era". My grandparents generation regarded those two as very different, having lived through the bank runs of the depression. The difference between their gen and mine is due to the advent of the FDIC. This would also address your point about Mt Gox: Had there been insurance, Mt Gox would not have been such a clusterfk. So no surprise: Coinbase and Bakkt both tout the insurance of their holdings. It's not quite FDIC levels (ie, a defacto government backing) but it's getting closer. As a consequence, it is not too hard for me to imagine a time that custodial accounts will have nearly the same confidence as a private wallet, because the equivalent of FDIC will likely be created by bitcoin-based institutions.
ur-whale 6y ago
>The idea that bitcoin would somehow escape fractional-reserve banking You are correct, but unlike with banks, at least there is an escape hatch: "not your keys, not your coins", which is a lot simpler to implement than walking to your bank and withdrawing all your savings in cash. Sadly, the vast majority of Bicoin buyers just leave their coin on the exchange (or worse: in the case of Paypal, they can't do anything else), thereby opening the door to all kind of shady practices, including FRB.
- jpmattia 6y ago
  > You are correct, but unlike with banks, at least there is an escape hatch: "not your keys, not your coins", which is a lot simpler to implement than walking to your bank and withdrawing all your savings in cash. To be clear: "Not your keys, not your coin" equivalent in the fiat world is not putting your money in the bank, but holding on to it instead. So you put all your fiat in a safe eg. > Sadly, the vast majority of Bicoin buyers just leave their coin on the exchange (or worse: in the case of Paypal, they can't do anything else), thereby opening the door to all kind of shady practices, including FRB. In order to short bitcoin on the exchanges, the exchanges need to have bitcoin to lend out. Naturally these lent bitcoin come from deposits. Exchanges are already practicing FRB on a large scale, but somehow nobody is calling it that (mostly because FRB is not well-understood by the bitcoin community.)
anonisko 6y ago
Isn't the fundamental difference here that we can't print more bitcoin to bail out bad investments? Yeah, you can lend out bitcoin and even do fractional reserves, but ultimately, the bill must come due and over leveraged bad bets will get wiped out and good bets get rewarded. Contrast this to the current environment where we are constantly bailing out and even financially rewarding business and investment failures, which comes at the expense of the working class who both foot the tax bill and aren't well insulated from the ensuing inflation.
- jpmattia 6y ago
  > Isn't the fundamental difference here that we can't print more bitcoin to bail out bad investments? Absolutely. (Although it's "a" difference, not "the" difference.) > you can lend out bitcoin and even do fractional reserves, but ultimately, the bill must come due and over leveraged bad bets will get wiped out and good bets get rewarded. Yes, and the subeconomy of bitcoin investing has a very different risk profile. As an example: I mentioned in another comment, the exchanges are already doing fractional reserves in spades. Bitmex has an insurance fund, and there has been at least one occasion where liquidation could not be covered by the traders and then exhausted the insurance fund. What happened then? The insurance fund paid out pro-rata on the successful bets (the successful traders made less than they should have") and much grousing ensued. So it's the rough equivalent of an old-fashioned bank run, but tempers lessened because some money was made and nobody was zeroed out (other than the losing bets who should have gone negative but were only zeroed out).
  - anonisko 6y ago
    I'm not sure the occasional bank run by people who get over zealous with their greed and desire for MORE is necessarily a bad thing. The problem in my mind is when banks are doing fractional reserve without the explicit understanding and consent of their depositors. This might mean we'll have to get used a world where we pay banks a tiny fee to secure our money, rather than the risk free interest we expect now.
    - jpmattia 6y ago

marcell 6y ago

There is a subtle distinction though. When a bank lends out US dollars, they are effectively creating new money that is treated as “real” money. They don’t technically lend out the deposits. In contrast, crypto lenders can’t create new bitcoin. They need deposits to lend out. The depositer in turn is aware they don’t hold real bitcoin, just a deposit credit at the lender. This is the origin of the crypto mantra “Not your keys, not your crypto.” It’s true that the “M1” value can increase, but unlike fiat money the distinction is (for now) visible to the user.

jpmattia 6y ago
> When a bank lends out US dollars, they are effectively creating new money that is treated as “real” money. They don’t technically lend out the deposits. This is exactly wrong. In fact, it is the origin of the term "fractional reserve": They are reserving a fraction of the deposits and lending out the rest.
- marcell 6y ago
  Right, but in crypto world most people regard coins held in custody as different from coins held in a private wallet. The Mt Gox experience was a good lesson on this topic, if it’s not your keys, it’s not your bitcoin. In comparison, very few people distinguish paper cash money from a bank credit backed by a fractional reserve.
  - jpmattia 6y ago
    > In comparison, very few people distinguish paper cash money from a bank credit backed by a fractional reserve. I would add the words "in the modern era". My grandparents generation regarded those two as very different, having lived through the bank runs of the depression. The difference between their gen and mine is due to the advent of the FDIC. This would also address your point about Mt Gox: Had there been insurance, Mt Gox would not have been such a clusterfk. So no surprise: Coinbase and Bakkt both tout the insurance of their holdings. It's not quite FDIC levels (ie, a defacto government backing) but it's getting closer. As a consequence, it is not too hard for me to imagine a time that custodial accounts will have nearly the same confidence as a private wallet, because the equivalent of FDIC will likely be created by bitcoin-based institutions.

ur-whale 6y ago

>The idea that bitcoin would somehow escape fractional-reserve banking You are correct, but unlike with banks, at least there is an escape hatch: "not your keys, not your coins", which is a lot simpler to implement than walking to your bank and withdrawing all your savings in cash. Sadly, the vast majority of Bicoin buyers just leave their coin on the exchange (or worse: in the case of Paypal, they can't do anything else), thereby opening the door to all kind of shady practices, including FRB.

jpmattia 6y ago
> You are correct, but unlike with banks, at least there is an escape hatch: "not your keys, not your coins", which is a lot simpler to implement than walking to your bank and withdrawing all your savings in cash. To be clear: "Not your keys, not your coin" equivalent in the fiat world is not putting your money in the bank, but holding on to it instead. So you put all your fiat in a safe eg. > Sadly, the vast majority of Bicoin buyers just leave their coin on the exchange (or worse: in the case of Paypal, they can't do anything else), thereby opening the door to all kind of shady practices, including FRB. In order to short bitcoin on the exchanges, the exchanges need to have bitcoin to lend out. Naturally these lent bitcoin come from deposits. Exchanges are already practicing FRB on a large scale, but somehow nobody is calling it that (mostly because FRB is not well-understood by the bitcoin community.)

anonisko 6y ago

Isn't the fundamental difference here that we can't print more bitcoin to bail out bad investments? Yeah, you can lend out bitcoin and even do fractional reserves, but ultimately, the bill must come due and over leveraged bad bets will get wiped out and good bets get rewarded. Contrast this to the current environment where we are constantly bailing out and even financially rewarding business and investment failures, which comes at the expense of the working class who both foot the tax bill and aren't well insulated from the ensuing inflation.

jpmattia 6y ago
> Isn't the fundamental difference here that we can't print more bitcoin to bail out bad investments? Absolutely. (Although it's "a" difference, not "the" difference.) > you can lend out bitcoin and even do fractional reserves, but ultimately, the bill must come due and over leveraged bad bets will get wiped out and good bets get rewarded. Yes, and the subeconomy of bitcoin investing has a very different risk profile. As an example: I mentioned in another comment, the exchanges are already doing fractional reserves in spades. Bitmex has an insurance fund, and there has been at least one occasion where liquidation could not be covered by the traders and then exhausted the insurance fund. What happened then? The insurance fund paid out pro-rata on the successful bets (the successful traders made less than they should have") and much grousing ensued. So it's the rough equivalent of an old-fashioned bank run, but tempers lessened because some money was made and nobody was zeroed out (other than the losing bets who should have gone negative but were only zeroed out).
- anonisko 6y ago
  I'm not sure the occasional bank run by people who get over zealous with their greed and desire for MORE is necessarily a bad thing. The problem in my mind is when banks are doing fractional reserve without the explicit understanding and consent of their depositors. This might mean we'll have to get used a world where we pay banks a tiny fee to secure our money, rather than the risk free interest we expect now.
  - jpmattia 6y ago