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The supply of bitcoins can be inflated in the same way that the supply of dollars is inflated, namely by fractional reserve banking. In fact the amount of doll

by lottin 5y ago

The supply of bitcoins can be inflated in the same way that the supply of dollars is inflated, namely by fractional reserve banking. In fact the amount of dollars created by the federal reserve is a small proportion of the total dollars in circulation. The other thing is that the quantity of money, which is one of the key variables influencing the price level, does not remain constant even if the supply of money does, because of trade imbalances. For example, any trade deficit is necessarily offset by an outflow of money, thus reducing the quantity of money in the economy. Therefore if you think that the adoption of bitcoin as currency would prevent your cash balances from losing value in any way, shape or form you're completely wrong.

fleddr 5y ago
There is no such thing as fractional reserve banking in Bitcoin. Say you have a wallet with a balance of 10 BTC and decide to act as if you're a bank. The first lender comes, requesting a loan of 30 BTC. You don't have 30 BTC, and it basically already stops there. You can't transfer the 20 extra BTC to the lender, since that BTC does not exist. You can't make up your own BTC as it's all on-chain. You can make up however much fiat money you want. You can own 10 BTC and loan out the USD equivalent of 30 BTC in USD, but that's traditional fractional reserve banking, which has nothing to do with Bitcoin.
- PeterisP 5y ago
  If a significant amount of consumers would not hold their BTC on-chain but at some institution (which, if BTC would become very popular, would very likely be the case for most users - these mainstream users are very different from the groups which use BTC now) then they would effectively be holding IOUs-denominated-in-BTC issued by that institution, and the supply of those would be likely be much larger than real on-chain BTC, just as in the fractional reserve banking scenario. I.e. I strongly believe that any widespread mass adoption of BTC would actually result in a mass adoption of BTC-flavored-fiat and a relatively smaller use of actual on-chain BTC; simply because of the preferences of the mass consumer market which aren't really aligned with the advantages of keeping stuff directly on-chain.
  - fleddr 5y ago
    Right now, a lot of Bitcoin is held at exchanges, which you can consider an IOU. However, it's still real Bitcoin reflected on-chain. As a user, you basically bought your Bitcoin from the supply of real Bitcoin the exchange holds in aggregated wallets. Should the exchange run short in supply, they buy real Bitcoin from other parties. It's all on-chain. Exchange wallets are well known and actively tracked. Theoretically, an institution could let you buy Bitcoin that doesn't exist or which they don't own. This strategy would fall apart in mere weeks. Say there's a new bull run and people are mass buying Bitcoin, for about 50 billion USD per week. You, the exchange, don't actually have this Bitcoin, yet in your books you pretend that you do. The customer is none the wiser. Your revenue is 50 billion USD. Bitcoin doubles in USD value and customers are now mass selling and/or withdrawing their Bitcoin (which you made up). So now you have to either payout 100 billion USD or actively buy real BTC at its high price, which just doubled. Unless you have an additional 50 billion USD at hand, your exchange collapses and goes bankrupt. Can an exchange sell slightly more BTC than they own? Technically, yes. Can they do many multiples of actual supply? No.
    - PeterisP 5y ago
      What you describe is a currency exchange risk, which would be the same of a bank holding a position in (for example) Japanese Yen but not covering it and holding their assets in USD instead. The fraction reserve banking is a bit different issue, it's mostly about working in a single type of currency but backing short-term liabilities (e.g. account balances) with long-term assets (e.g. mortgage loans). So a customer A deposits 1 BTC and on-chain it gets transfered to the institution. Then when a customer B gets a loan of 1 BTC there's still just 1 on-chain BTC but 2 BTC-denominated IOUs, so the effective supply has doubled. Obviously, both of them can't withdraw the same coin at once, but the institution is not bankrupt as it has enough assets to cover all their debts, it may be temporarily insolvent though if a bank run happens. The key difference from ordinary banking, of course, is that noone really takes loans denominated in BTC, so right now there's not much that an institution could have on the asset side other than "real" BTC. However, in a hypothetical world where BTC becomes the "mass market money" in some countries, then there would be BTC-denominated loans which would (among many other interesting effects) drive the pressure towards an equivalent of fractional reserve banking.
- lottin 5y ago
  > There is no such thing as fractional reserve banking in Bitcoin. Wrong. There's such a thing as fractional reserve banking in bitcoin. Any entity that takes bitcoin deposits from customers can engage in fractional reserve banking and create new bitcoins out of thin air. Fractional reserve banking works perfectly well with bitcoin just like it works perfectly well with gold or with any commodity. It doesn't rely on fiat money at all, in fact fractional reserve banking was invented long before fiat money was a thing.
  - fleddr 5y ago
    "There's such a thing as fractional reserve banking in bitcoin" Explain how it works then.
    - lottin 5y ago
      You don't know how fractional reserve banking works? It's quite simple. An exchange, or any institution that takes bitcoin deposits, can take a fraction of the deposited bitcoins and lend them out, so far as the depositors don't withdraw all the bitcoin deposits at the same time. As soon as this happens, the amount of bitcoins in circulation goes up by the loaned amount.
      - fleddr 5y ago
        Nope. The only amount of Bitcoin in circulation is in actual wallets. Including deposits at exchanges, which are just aggregated wallets. There's no such thing as loaning out a Bitcoin. You can loan out the fiat equivalent of it or a synthetic token (wrapped Bitcoin), but these are swaps, which is not the same thing as a supply increase. Truly loaning out BTC means moving the actual coin to the customer's wallet. Say I run a bank that has 10 depositors that deposited 1 BTC each. My balance is 10K. Next, I assume they won't claim this BTC anytime soon so I "loan" out this 10K 10 times, for a total loan value of 100K BTC. Hence, I created 90K out of thin air. This doesn't work. You didn't give the loaners BTC, you gave them something else. No new BTC was created. With fiat, actual new money would be created this way, not with BTC.

by lottin 5y ago

fleddr 5y ago

There is no such thing as fractional reserve banking in Bitcoin. Say you have a wallet with a balance of 10 BTC and decide to act as if you're a bank. The first lender comes, requesting a loan of 30 BTC. You don't have 30 BTC, and it basically already stops there. You can't transfer the 20 extra BTC to the lender, since that BTC does not exist. You can't make up your own BTC as it's all on-chain. You can make up however much fiat money you want. You can own 10 BTC and loan out the USD equivalent of 30 BTC in USD, but that's traditional fractional reserve banking, which has nothing to do with Bitcoin.

PeterisP 5y ago
If a significant amount of consumers would not hold their BTC on-chain but at some institution (which, if BTC would become very popular, would very likely be the case for most users - these mainstream users are very different from the groups which use BTC now) then they would effectively be holding IOUs-denominated-in-BTC issued by that institution, and the supply of those would be likely be much larger than real on-chain BTC, just as in the fractional reserve banking scenario. I.e. I strongly believe that any widespread mass adoption of BTC would actually result in a mass adoption of BTC-flavored-fiat and a relatively smaller use of actual on-chain BTC; simply because of the preferences of the mass consumer market which aren't really aligned with the advantages of keeping stuff directly on-chain.
- fleddr 5y ago
  Right now, a lot of Bitcoin is held at exchanges, which you can consider an IOU. However, it's still real Bitcoin reflected on-chain. As a user, you basically bought your Bitcoin from the supply of real Bitcoin the exchange holds in aggregated wallets. Should the exchange run short in supply, they buy real Bitcoin from other parties. It's all on-chain. Exchange wallets are well known and actively tracked. Theoretically, an institution could let you buy Bitcoin that doesn't exist or which they don't own. This strategy would fall apart in mere weeks. Say there's a new bull run and people are mass buying Bitcoin, for about 50 billion USD per week. You, the exchange, don't actually have this Bitcoin, yet in your books you pretend that you do. The customer is none the wiser. Your revenue is 50 billion USD. Bitcoin doubles in USD value and customers are now mass selling and/or withdrawing their Bitcoin (which you made up). So now you have to either payout 100 billion USD or actively buy real BTC at its high price, which just doubled. Unless you have an additional 50 billion USD at hand, your exchange collapses and goes bankrupt. Can an exchange sell slightly more BTC than they own? Technically, yes. Can they do many multiples of actual supply? No.
  - PeterisP 5y ago
    What you describe is a currency exchange risk, which would be the same of a bank holding a position in (for example) Japanese Yen but not covering it and holding their assets in USD instead. The fraction reserve banking is a bit different issue, it's mostly about working in a single type of currency but backing short-term liabilities (e.g. account balances) with long-term assets (e.g. mortgage loans). So a customer A deposits 1 BTC and on-chain it gets transfered to the institution. Then when a customer B gets a loan of 1 BTC there's still just 1 on-chain BTC but 2 BTC-denominated IOUs, so the effective supply has doubled. Obviously, both of them can't withdraw the same coin at once, but the institution is not bankrupt as it has enough assets to cover all their debts, it may be temporarily insolvent though if a bank run happens. The key difference from ordinary banking, of course, is that noone really takes loans denominated in BTC, so right now there's not much that an institution could have on the asset side other than "real" BTC. However, in a hypothetical world where BTC becomes the "mass market money" in some countries, then there would be BTC-denominated loans which would (among many other interesting effects) drive the pressure towards an equivalent of fractional reserve banking.
lottin 5y ago
> There is no such thing as fractional reserve banking in Bitcoin. Wrong. There's such a thing as fractional reserve banking in bitcoin. Any entity that takes bitcoin deposits from customers can engage in fractional reserve banking and create new bitcoins out of thin air. Fractional reserve banking works perfectly well with bitcoin just like it works perfectly well with gold or with any commodity. It doesn't rely on fiat money at all, in fact fractional reserve banking was invented long before fiat money was a thing.
- fleddr 5y ago
  "There's such a thing as fractional reserve banking in bitcoin" Explain how it works then.
  - lottin 5y ago
    You don't know how fractional reserve banking works? It's quite simple. An exchange, or any institution that takes bitcoin deposits, can take a fraction of the deposited bitcoins and lend them out, so far as the depositors don't withdraw all the bitcoin deposits at the same time. As soon as this happens, the amount of bitcoins in circulation goes up by the loaned amount.
    - fleddr 5y ago
      Nope. The only amount of Bitcoin in circulation is in actual wallets. Including deposits at exchanges, which are just aggregated wallets. There's no such thing as loaning out a Bitcoin. You can loan out the fiat equivalent of it or a synthetic token (wrapped Bitcoin), but these are swaps, which is not the same thing as a supply increase. Truly loaning out BTC means moving the actual coin to the customer's wallet. Say I run a bank that has 10 depositors that deposited 1 BTC each. My balance is 10K. Next, I assume they won't claim this BTC anytime soon so I "loan" out this 10K 10 times, for a total loan value of 100K BTC. Hence, I created 90K out of thin air. This doesn't work. You didn't give the loaners BTC, you gave them something else. No new BTC was created. With fiat, actual new money would be created this way, not with BTC.