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"There's such a thing as fractional reserve banking in bitcoin" Explain how it works then.

by fleddr 5y ago

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.
  - lottin 5y ago
    Wrong on all counts. Bitcoins can be lent out, just like anything else can be lent out. All you need to make a loan is a loan agreement, and any asset can be lent out with a loan agreement, including bitcoins. There's nothing magical about bitcoins that prevents them from being lent out.
    - fleddr 5y ago
      You're stilling missing a very basic concept. You cannot loan out BTC that you do not have. If you have 50 BTC, you cannot loan out more than 50 BTC in actual BTC as loaning out BTC involves MOVING the BTC to me, which means you no longer own it. Yes, you can loan out BTC. The point is that you can't loan out BTC that you do not have.
      - lottin 5y ago
        An exchange has 1000 BTC in deposits and holds 100% of the deposits as reserves. The exchange makes a loan for 500 BTC. The 500 BTC come from the reserves. Now somebody has 500 BTC. The depositors still have 1000 BTC, except that the deposits are now backed by 500 BTC, instead of 1000 BTC (hence the name "fractional reserve"). The supply of bitcoins has gone up by 500 BTC.
        fleddr 5y ago
        The supply DID NOT go up. You can do as much shadow book keeping as you like, but you didn't create a single new BTC. Nobody but miners can increase the BTC supply.
        lottin 5y ago
        The supply did go up. It's simple arithmetic. This stuff has been going on for hundreds of years now. It's well known and understood.
        fleddr 5y ago
        I can write on a piece of paper that I have 50 BTC, but that doesn't create new coins. Miners create new coins, which land in wallets. Simple. You can't do this with gold either, despite "paper gold". It represents more gold than gold above ground, yet still within supply. Only fiat money allows you to create new money out of debt.
        lottin 5y ago

"There's such a thing as fractional reserve banking in bitcoin" Explain how it works then.

by fleddr 5y ago

"There's such a thing as fractional reserve banking in bitcoin" Explain how it works then.

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.
- lottin 5y ago
  Wrong on all counts. Bitcoins can be lent out, just like anything else can be lent out. All you need to make a loan is a loan agreement, and any asset can be lent out with a loan agreement, including bitcoins. There's nothing magical about bitcoins that prevents them from being lent out.
  - fleddr 5y ago
    You're stilling missing a very basic concept. You cannot loan out BTC that you do not have. If you have 50 BTC, you cannot loan out more than 50 BTC in actual BTC as loaning out BTC involves MOVING the BTC to me, which means you no longer own it. Yes, you can loan out BTC. The point is that you can't loan out BTC that you do not have.
    - lottin 5y ago
      An exchange has 1000 BTC in deposits and holds 100% of the deposits as reserves. The exchange makes a loan for 500 BTC. The 500 BTC come from the reserves. Now somebody has 500 BTC. The depositors still have 1000 BTC, except that the deposits are now backed by 500 BTC, instead of 1000 BTC (hence the name "fractional reserve"). The supply of bitcoins has gone up by 500 BTC.
      - fleddr 5y ago
        The supply DID NOT go up. You can do as much shadow book keeping as you like, but you didn't create a single new BTC. Nobody but miners can increase the BTC supply.
        lottin 5y ago
        The supply did go up. It's simple arithmetic. This stuff has been going on for hundreds of years now. It's well known and understood.
        fleddr 5y ago
        I can write on a piece of paper that I have 50 BTC, but that doesn't create new coins. Miners create new coins, which land in wallets. Simple. You can't do this with gold either, despite "paper gold". It represents more gold than gold above ground, yet still within supply. Only fiat money allows you to create new money out of debt.
        lottin 5y ago