Maximum number of bitcoins

[Mahkul]

Is there a solution to this?

A solution to what?  Don't lose your bitcoins.

Problem is, If I lose bitcoins, the market loses bitcoins. The solution I'm looking for is to the inevitable deflation. If Bitcoins are to be a stable currency, it must be, you know... stable.

You can make as many copies of your wallet.dat as you wish. You cannot make any copy of your real coins that you can lose due to having a hole in your packet. This limits the probability of losing bitcoins greatly, unless someone is stupid enough not to do backups.

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[ribuck]

If Bitcoins are to be a stable currency, it must be, you know... stable.

That proposition is correct, but...

Bitcoin is not a stable currency. It is better than stable. It will inevitably deflate, to the benefit of everyone who doesn't lose their wallet.

[myrkul]

Problem is, If I lose bitcoins, the market loses bitcoins. The solution I'm looking for is to the inevitable deflation. If Bitcoins are to be a stable currency, it must be, you know... stable.

You can make as many copies of your wallet.dat as you wish. You cannot make any copy of your real coins that you can lose due to having a hole in your pocket. This limits the probability of losing bitcoins greatly, unless someone is stupid enough not to do backups.

True, but if life has taught me anything, it's that if something can happen through human stupidity, it will. Probably multiple times.

Bitcoin is not a stable currency. It is better than stable. It will inevitably deflate, to the benefit of everyone who doesn't lose their wallet.

You have a point, but deflation is problematic in an entirely different way than inflation. Sure, it's great that you could buy a house with only 5 btc, but no one likes seeing zeros at the front of their paycheck.

It's more of a perception thing.

[mpkomara]

Once bitcoin becomes stable, any owner of bitcoins should wish that a small number of others' bitcoins were lost every year.  In fact, I hope that many of you lose your bitcoins right now.  Not too many of you, but at least some.  What else would you ask of a scarce currency, myrkul?

[myrkul]

What else would you ask of a scarce currency, myrkul?

I believe that's been established. I like my money supply stable, neither inflating, nor deflating. That way, I know what the cost of a loaf of bread will be tomorrow, and the next day, ad infinitum.

I will grant you that knowing that my btc will become more valuable simply by not being lost is good. I will grant that other factors besides money supply determine market value. My point is, will people abandon btc when paychecks start to look small?

Of course, we could always phase in a btc2.0 when btc 1 starts to deflate to the point of absurdity (0.00000000001 btc for a meal, for example). It's all pretty moot, anyway. These are issues for our grandkids (or theirs!)

[Mike Hearn]

No, you are correct. Bitcoin is a slightly deflationary currency when looking only at hard coins.

However nothing stops somebody from setting up a fractional reserve bank based on BitCoins. In fact at some point it's downright likely. At that point you'd have quite high inflation as we see now. The blurb on the front page about being free of 'arbitrary inflation' does not seem really accurate to me.

As to losing wallets. It has of course happened. I lost the coins I minted back in mid 2009 when it was possible to make lots with just a CPU, sad face. As BitCoin gets more valuable though working, automatic wallet backup solutions will be built and losing your wallet will become less common.

[myrkul]

However nothing stops somebody from setting up a fractional reserve bank based on BitCoins. In fact at some point it's downright likely.

Thought experiment time: How do you go about loaning "spreadsheet bitcoins"? Seing as how btc are designed to avoid double-spending, which is exactly what fractional reserve banking is.

[ribuck]

... no one likes seeing zeros at the front of their paycheck...

Meh. Someone will come up with a catchy name for the sub-units. Then, instead of getting a paycheck of 0.000432 BTC, you will get a paycheck of 43,200 Satoshis. Problem solved.

I like my money supply stable, neither inflating, nor deflating. That way, I know what the cost of a loaf of bread will be tomorrow, and the next day, ad infinitum

I'll be happy knowing that tomorrow's loaf of bread will cost no more than today's loaf.

[myrkul]

... no one likes seeing zeros at the front of their paycheck...

Meh. Someone will come up with a catchy name for the sub-units. Then, instead of getting a paycheck of 0.000432 BTC, you will get a paycheck of 43,200 Satoshis. Problem solved.

I like my money supply stable, neither inflating, nor deflating. That way, I know what the cost of a loaf of bread will be tomorrow, and the next day, ad infinitum

I'll be happy knowing that tomorrow's loaf of bread will cost no more than today's loaf.

Fine points, both of them. Especially the first. Admittedly, I'm just picking nits here, and worse, my grandson's grandson's nits, but still, the question was a good one. Thanks (all of you) for answering it to my satisfaction.

Now: can anyone figure out a way to FRB with bitcoins? Cause I'd LOVE to be able to make some out of thin air. I contend that it can't be done, however.

[ribuck]

Now: can anyone figure out a way to FRB with bitcoins?

How do you know that MtGox isn't already doing this? Holding a number of bitcoins that is smaller than the total of the bitcoin balances of all its customers?

Technically it's doable, although I don't see any economic incentive.

If anything, the incentive is the other way. Hold fewer dollars than the total of the Gox-dollar balances of all its customers. Buy bitcoins with the rest. When someone wants their dollars back, sell some of the bitcoins (and hope like hell that the exchange rate has gone up rather than down in the meantime).

[myrkul]

Now: can anyone figure out a way to FRB with bitcoins?

How do you know that MtGox isn't already doing this? Holding a number of bitcoins that is smaller than the total of the bitcoin balances of all its customers?

Technically it's doable, although I don't see any economic incentive.

Well, yes, it's technically doable to hold less than all your customers' accounts "hold"... but risky. True fractional reserve banking requires actual inflation: loaning out the same money twice or more. No bank can do that with bitcoins. The worst they could do is loan out so much that if they get a run, someone's getting screwed. (Actually, the worst they could do is loan out so much that if anyone actually had the temerity to use their money, they'd be screwed) As you pointed out, there's incentive against that. I don't think inflation will ever be an issue with btc.

[ribuck]

True fractional reserve banking requires ... loaning out the same money twice or more.

Sure you can do that with bitcoins. Imagine if MtGox went into the lending business. They lend money to someone, and suddenly that person's MtGox balance shows some bitcoins, without MtGox needing to accept any more Bitcoin deposits.

If everyone who borrowed money from MtGox withdrew their money, that would cause a run. But if borrowers just used it as a "bank account" for paying to other MtGox accountholders, there would be no run.

With any kind of fractional reserve banking, if there is a run someone loses out. If MtGox went into the fractional reserve loans business and suffered a run, the losses would be borne by MtGox or by its creditors or by its depositors. When a bank suffers a run, the losses are borne by the bank's shareholders, or by its creditors or depositors, or by the taxpayer.

[myrkul]

Sure you can do that with bitcoins. Imagine if MtGox went into the lending business. They lend money to someone, and suddenly that person's MtGox balance shows some bitcoins, without MtGox needing to accept any more Bitcoin deposits.

But that is not inflation. It just looks like inflation, on paper. If I think I have X BTC in my account, but MtGox only has Y (where Y<X) available, any transaction of Y+1 or greater will fail.

As long as they have income >= outflow, they'll get away with it. But that first big purchase will literally break the bank.

tl;dr: You cannot spend "spreadsheet bitcoins"

[ShadowOfHarbringer]

True fractional reserve banking requires ... loaning out the same money twice or more.

Sure you can do that with bitcoins. Imagine if MtGox went into the lending business. They lend money to someone, and suddenly that person's MtGox balance shows some bitcoins, without MtGox needing to accept any more Bitcoin deposits.

If everyone who borrowed money from MtGox withdrew their money, that would cause a run. But if borrowers just used it as a "bank account" for paying to other MtGox accountholders, there would be no run.

With any kind of fractional reserve banking, if there is a run someone loses out. If MtGox went into the fractional reserve loans business and suffered a run, the losses would be borne by MtGox or by its creditors or by its depositors. When a bank suffers a run, the losses are borne by the bank's shareholders, or by its creditors or depositors, or by the taxpayer.

I think i see few problems with running a fractional reserve bank with bitcoin:

1. In the internet era information flows very quickly, so the probability of a bank run is high if people start to suspect something.
1a. It's too easy to call the bluff with bitcoin. If people want to take their funds out of the bank, they can do it instantenously. Much easier than with gold. So it is bank run is even more likely.
2. To run a fractional reserve bank in any country of the world, you need to cooperate with local authorities or you will be closed down. And since authorities will not understand what Bitcoin is, there may be problems.
2a. The central bank would have to have reserves of Bitcoin for fractional - Bitcoin based system to work.... Nah, too complicated, not likely to happen in the closest future.

[ribuck]

But that is not inflation. It just looks like inflation, on paper.

I specifically didn't use the I-word.

If I think I have X BTC in my account, but MtGox only has Y (where Y<X) available, any transaction of Y+1 or greater will fail.

Only external transactions fail in this scenario. You can send your X BTC to another MtGox account-holder, and nothing breaks. And if multiple banks are doing this, provided the transactions amongst them are roughly balanced (within the limits of each bank's fractional reserve), nothing breaks.

There's no doubt that fractional reserves will come to the bitcoin economy, but I think people will come to understand that a "real" bitcoin is safer than a "spreadsheet" bitcoin.

[myrkul]

But that is not inflation. It just looks like inflation, on paper.

I specifically didn't use the I-word.

Only external transactions fail in this scenario. You can send your X BTC to another MtGox account-holder, and nothing breaks. And if multiple banks are doing this, provided the transactions amongst them are roughly balanced (within the limits of each bank's fractional reserve), nothing breaks.

There's no doubt that fractional reserves will come to the bitcoin economy, but I think people will come to understand that a "real" bitcoin is safer than a "spreadsheet" bitcoin.

You're right, [mike] did. You're also right that internal transactions would not fail. But the first time a bank fails to pay an amount that should be there, I think that bank would go out of business. Fast. When starting a run is only a tweet away, Banks step carefully.

One way I see to make this work is to have a small portion of your account (A minimum balance) which is effectively the Bank's until you close the account. That amount of money is used to loan out or make other investments, while the rest is yours to spend. In exchange, you are essentially a stockholder in the bank, and earn dividends based on your share. You can buy a larger share by increasing your minimum balance. This way, while the bank has technically loaned out your money, They did it with your knowledge and consent, and as long as they don't loan out more than their shares, everyone can clear out their available balance without conflict. If you also agree that closing your account has a waiting period (at least to get that minimum balance back), even the shutdown of a bank should be able to be done in a relatively civilized manner.

[ribuck]

One way I see to make this work is [...] while the bank has technically loaned out your money, they did it with your knowledge and consent, and as long as they don't loan out more than their shares, everyone can clear out their available balance without conflict.

That system is safe from loss due to fractional reserve, but the depositor carries some risk from the loan itself. Suppose the bank lends the depositor's money to a house-buyer who defaults, and the bank sells the house for less than the amount outstanding on the loan.

If this happens only occasionally, the default can be covered from the bank's profit margin, but if it happens a lot then the bank will default.

[myrkul]

One way I see to make this work is [...] while the bank has technically loaned out your money, they did it with your knowledge and consent, and as long as they don't loan out more than their shares, everyone can clear out their available balance without conflict.

That system is safe from loss due to fractional reserve, but the depositor carries some risk from the loan itself. Suppose the bank lends the depositor's money to a house-buyer who defaults, and the bank sells the house for less than the amount outstanding on the loan.

If this happens only occasionally, the default can be covered from the bank's profit margin, but if it happens a lot then the bank will default.

Investors always carry risk from the company making mistakes. Just imagine what would have happened had the iPad tanked.

[ribuck]

Investors always carry risk from the company making mistakes. Just imagine what would have happened had the iPad tanked.

Of course! But depositors in a bank don't think of themselves as investors. The investors are the bank's shareholders.

[myrkul]

Investors always carry risk from the company making mistakes. Just imagine what would have happened had the iPad tanked.

Of course! But depositors in a bank don't think of themselves as investors. The investors are the bank's shareholders.

Well, under the plan I outlined, the bank's shareholders are it's depositors are it's investors. This would need to be clearly outlined in the deposit agreement, and spelled out in no uncertain terms, preferably verbally, before anything is signed. This could be spun positively:

NewBank: The bank where YOU own the bank!

But would definitely need to be said, Lest the depositor wonder where their interest is. The upside of this is, While few would actually make use of it, each account holder would have a say in the decisions of the bank (Again, votes based on shares, and thus, risk).