Bitcoin Forum

It's often said that the Bitcoin money supply cannot be inflated. But a Bitcoin backed currency surely could be.

What's to stop Fractional Reserve Banking taking hold in the Bitcoin world?

If, as recommended, ordinary users should not hold their own bitcoins, but rather trust them to a 'wallet' service, aka Bank, don't we get a similar situation to Gold backed money, where banks were able to lend more than they had deposited because they were issuing their own currency rather than the underlying asset?

Well, yes and no.  The key difference being that gold was held in deposit because it wasn't as convient to carry as warehouse receipts.  It is unlikely that a true bitcoin bank could ever issue a bitcoin backed credit currency of it's own, because the convience of bitcoin itself is a pretty high mark for an online currency.  Even if it does happen, the risks of such a thing rest solely upon the bank, it's investors and depositors.  No one that does not do business with that bank is at risk of loss of value as a result of either that bank's failure or it's success.

AHHH, ARG, these bitcoins are sooooo heavy!!!!  Please Mr. Authority Bankster, please hold my precious heavy commodity for me!

AHHH, ARG, I can barely manage to use 'The Google', how can I keep my bitcoins safe on my malware infested PC?

In the absence of custom hardware, I see these Wallet services becoming the norm.

I'm not sure it is convenient for non-tech savvy folk to hold their own BTC. And even for the tech-savvy, serious precautions must be taken to ensure there is no rootkit on the system you manage your BTCs from.


I agree that the risks like with the investors and depositors, but does such FRB create inflation? 

A wallet service is not a bank.  At least not like what you are describing here.  A wallet service cannot issue it's own currency as an alternative for bitcoin, because the users are still sending actual bitcoins.  The network will accept nothing less.  It's not possible for a wallet service, no matter how large, to fake a bitcoin or to 'float' a transaction like one would a check.  A particularly large service might be able to get away with short term loans of user's funds, so long as there is never a "run", but it's not really possible to create more funds.

The non-savvy will pay the savvy to create convenient systems for them.  This will just take time.  I'm not particularly computer savvy myself, but the main client isnt' all that complicated.

Inflation is, always and everywhere, the expansion of the base money supply; either in absolute terms or relative to the growth of the economy that it represents.  Deflation is the opposite.  FRB, lacking the capacity to "print" more currency (the primary function of the central bank) can only do this in a limited time frame, but that same expansion of supply must eventually contract to the same degree.  If it happens because loans are paid off, it's business as usual and occurs so slowly and smoothly as to not be noticed.  If it happens because of the bank collapses, then deflation is rapid and catastrophic, but only to those who have had direct dealings with that bank.

We went through this about a year and a half a go. There is a whole long thread.

The short answer is: as long as there are stable or inflating prices of goods vs bitcoins, setting up a bitcoin fractional reserve bank is trivial. However, if goods prices begin deflating vs bitcoins lending simply becomes to risky for too little potential profit.

In a deflationary situation, people tend to hoard bitcoins expecting to get "zero risk" interest. Any lender has to charge substantially more in interest than risk free benefit of hoarding. In inflationary situations, hoarding costs goods value over time. People with excess bitcoins are encouraged to lend for low interest, to make up for the natural loss inflation would cause them.