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Even if we assume a fixed global supply of bitcoins (which is a big assumption because it assumes bitcoin deposits at institutions will always be backed by full
by lottin 5y ago
Even if we assume a fixed global supply of bitcoins (which is a big assumption because it assumes bitcoin deposits at institutions will always be backed by full reserves), that doesn't mean that the supply of bitcoins in a particular economic area will be fixed. It most certainly won't, unless international trade stops.
- woodruffw 5y ago> which is a big assumption because it assumes bitcoin deposits at institutions will always be backed by full reserves Where is this assumption coming from? I have never heard this before. > that doesn't mean that the supply of bitcoins in a particular economic area will be fixed. It most certainly won't, unless international trade stops. Putting non-competing sectors of the economy in competition against each other for a slice of a fixed monetary supply is another basic and sufficient precondition for deflation. There’s a very good reason we don’t do that currently.
- lottin 5y ago> Where is this assumption coming from? I have never heard this before. The global supply of bitcoins is fixed if and only if financial institutions are not allowed to hold fractional reserves against deposits.
- woodruffw 5y agoMaybe I’m missing something obvious here, but it’s not clear why (1) any bank would offer a Bitcoin denominated account, or (2) how it even makes sense to perform fractional banking against Bitcoin. You can’t change the underlying amount in the ledger and the ledger is the value source, unlike physical Federal Reserve Notes.
- lottin 5y agoWell, crypto-exchanges already offer deposit accounts backed with reserves. If at any point the reserve ratio falls below 1 (we don't know if this has already happened), the quantity of bitcoins in circulation will increase as a result of that.
- woodruffw 5y agoI know of some cryptocurrency exchanges that offer stablecoins, which are a dollar-denominated asset that’s (theoretically) backed by cash in the bank. We’ve seen plenty of evidence that the largest stablecoin players are actually fraudsters. I don’t know of any exchange that offers a deposit account that’s dollar-denominated but backed by cryptocurrency. I can think of lots of reasons for that, FDIC regulations being the least of them. But again, even that wouldn’t make the number of bitcoins in circulation increase: it would be an unstable (and illegal) financial fiction.
- lottin 5y agoI'm talking about bitcoin-denominated accounts backed with bitcoins. These are the standard exchange accounts that most people have.
- woodruffw 5y agoOkay. In what world would any retail consumer accept a Bitcoin-denominated account based on marginal Bitcoin reserves? Exchanges would be forced to purchase on the open market to meet their withdrawals during demand, which would cause another deflationary spiral. It’s a nightmare scenario with no conceivable upside compared to actual currency. And again, this is before we get to the problem of “the government lets you do this.”
- lottin 5y agoI don't think you're following me. This isn't some hypothetical scenario. It's common for people who own bitcoin to have their bitcoins deposited at some exchange. Since exchange customers are unlikely to withdraw all their bitcoins simultaneously, exchanges don't have to keep 100% reserves. For instance, they can lend out some of the reserves, or they can use them for whatever purposes they want. When this happens the quantity of bitcoins in circulation goes up. To all effects and purposes, new bitcoins have been created and put in circulation.