Bitcoin Forum

There are confusion I have in my head.

I do not know how saving bitcoin lead to capital formation. I mean, if I save bitcoin, that signal my time preference. IE, I prefer to wait for something rather than have it now. Or I rather spend on some future good that required X amount of money that I don't have rather than something now.

With resources like timber, I know that if I saved X amount of them, I can build a complete room.(If the room is not completed, it would be expose me to the outside elements)

So, I know that saving bitcoin would be akin to somehow getting enough resources to accumulate so that I can build x and y. But bitcoin can't help you build stuff x and y.

You don't form capital by holding a coin, you get to hold a coin for forming the capital and not consuming your 'fair share' yet. Deferred consumption is the only way capital can accumulate.

An accumulation of capital is good for doing things that would otherwise by impossible or for getting better efficiency from economies of scale.

In a society with no real savings nothing can really improve. Bitcoin will make savings easier and safer. Right now the default is the savers get screwed for saving. You can pay brokers, tax accountants, etc to lessen the screwing if you have above a certain amount, but a lot of people get locked in the cellar.

As deflation takes hold and the value of bitcoin increases, monies held in the bank would see shorter returns but overall increase in wealth, nes pas?

Not right now, but in the future, probably.

Capital is made of means of production :  companies, tools, knowledge, machines,...

Bitcoin doesn't make capital, just as it doesn't make orange juice.  It only permits you to buy it.

Thank you for assuring my belief that bitcoin is more than a fad. I see endless possibilities and new social arrangements based on bitcoin et. al.
Maybe someday, someone will claim that they were here at the beginning, but we can always confirm that in the blockchain.  LOL!

Yes, I am quite aware of that.

I was merely wondering how could saving/hoarding bitcoin lead to higher capital accumulation of production factors.

I am guessing that it somehow tells the market the time preference of human beings, thus determine how much resource are available in the future for spending.

The explanation posited by the other forum goers seem to fit...but the answer seem to be bit unsatisfactory.

When bitcoin starts developing and being more accepted there will appear bitcoin funds, where you put your bitcoins for a while and they lend them out or invest them. That way bitcoin savings will be also investment and you will get bitcoin interest rates.

Leaving my money in a bank account means i lose it over time because the interest rates on savings are zero and fees eat up the rest eventually leaving you with nothing. Leaving my value in bitcoins doesnt do this.  :)

FreeMoney gave a good explanation.

Even if you don't lend your savings to investors, the simple fact that you save - that is, you produce more than you consume - allows others to have easier access to the goods that you restrained yourself from consuming. This production share will be there, available for investors to use more easily.

Interest rates? Don't see how that'll work, theree'll never be more than 21 million of em. Hard wrapping your mind around such a radical new paradigm isn't it.

I've developed a formula for converting bitcoins into capital.

Step 1. I have BTC, I want to buy productive capital
Step 2. Hi! I build productive capital for BTC. Wanna buy?
Step 3. OK. I buy! Wait, I don't have enough.
Step 4. That's ok. Do you want to pay in installments?
Step 5. Sounds good!

So?

Interest rates don't depend on monetary inflation.

It would appear so, since a limited quantity isn't an impediment to a natural interest rate.

Ok, explain please. I have all 21 million bitcoins in the world and lend them to you at... I dunno, 50% interest, coz I'm a nice guy. Where do the other 10.5 million bitcoins come from? Or do we just agree that when you pay them all back the same 21 million btc will now be worth 50% more? But bitcoin is backed by nothing, or rather there's no government to say that one bitcoin is worth one ounce of unobtainium or whatever, so how would it work?

I see what you're getting at, but you are forgetting that money has a velocity. Yours is an extreme example, but the idea is that the borrowed money will be spent into the economy to purchase productive capital and pay wages to produce a good or service that will then be bought with some of those very same bitcoins that you just borrowed and spent. 1BTC can change hands many times. If the terms of the loan allow for monthly installments, then meeting the terms of the loan is possible in your scenario, so long as the lender is also spending bitcoins. It becomes even more possible when you're only talking about lending out a fraction of the BTC in circulation.

If you can aquire all 21 million bitcoins or find any takers at 50% interest then you might have a point.  Such as it is, you don't, and I think that you already know that.

There is a myth going around on the internet promoted by some wackos that says: The only way to pay debt and the interests is to print more money. Its false. You could pay a 100.000 dollar debt with a money supply of only 50.000 dollars (for example).

You can have interest rates with a fixed money supply.

Your hypothesis is just impossible.

And no, you don't need to have all money in existence being borrowed to have a credit market. Just a fraction is enough. Naturally, the higher this fraction is, the lower the interest rates will tend to be.

Interest rates are a fundamental price. They reflect people temporal preferences versus the amount of savings in the economy. These things exist despite monetary inflation.

I tend to think that interest rates with a fixed will eventually lead to all the money being held by the bank, assuming it's profitable.

Ok look at it this way :
 - 21 billion BTC circulating,
 - Bank makes a 100k BTC loan,
 - Bank eventually gets 105k BTC back,
 - Bank pays its expenses, it's left with 102k BTC ,
[...]
 - Repeat ten times, bank took 20k BTC out of circulation.

Lending with interest works, it doesn't really seem that sustainable to me on the long term, I guess it'll probably all boil down to "hey, let's try and see what happens!"

No, it gets harder and harder, the interest rate decreases until the point it's not worth lending any more.

Lots of savings allow easier consumption. People will stop saving so much and consume/invest more.

Could you elaborate on the "interest rate decreases" part ?

????? This is wrong. Lets check again:

- Bank makes a 100k BTC loan.
- Bank introduces 100k BTC into circulation.
- Bank eventually gets 105k BTC.
- Bank has removed 105k BTC from circulation.
- Bank pays expenses of 3k BTC.
- Bank introduces 3k BTC into circulation.
- Bank loans 100k BTC.
- Bank introduces 100k BTC into circulation

....

In your example, the bank is just adding and removing 100k BTC from circulation (In real life it will be a more smooth and continuos thing). The 2k BTC that gets as benefits will be supposedly spent to buy things the owners need (food, energuy, etc...).

Only part of it, the rest being invested either as capital or lent for... interest :)

Ok. So we have settle that repeating the action does not produce the removal of all bitcoins. Now the issue is with the benefits a bank may have.

This is not really an issue only for banks. It really is a issue for any business. You could say the same with a factory owner that earns 2K BTC. ¿What if he does not spend it? ¿What if he/she uses them to create new business and try to monopolize the economy? Thats really the question you are making, independent of being a bank or not.

The issue is that monopolies are impossible in a free market. Monopolies only happen because of government regulations. If someone is making money in one area (absent of government regulations, like copyright laws or "anti"-trust laws) more competitors are going to enter into the area of business attracted by the benefits. That is why it has been seen empirically that in a free market prices tend to aproach production and labor costs. Also, as the original company gets bigger it gets to a point where it becomes less efficient and the smaller ones can outcompete it.

Not really, my point was basically that by repeating the action an infinite amount of times you end up with all the money owned by the bank.

Yes, that makes sense, guess the thought experiment is valid only with a single bank.

Yes banks make profit, so what?  That is the whole point in providing a service: to make a return on investment.  Banks take risk, and have rewards, (or losses).  You are ignoring the other side of the equation, the bank could take that 100BTC and directly invest it in a new company, and make that 2BTC directly.

There is no 'money' coming from nowhere. Unlike the fiat banking system where there is only 'profit' and no chance of loss (until the whole thing comes crashing down).  In the fiat world, banks 'loan' money from nothing through government enforced dilution of the existing currency.

Usury is good, it is the natural way of putting a 'time value' on capital.  Money is better now, than later (you may not be alive to spend it).

Interest rates are a price. The price for "renting savings". As the price of anything else, it drops when the supply increases, demand being constant.

If lenders keep increasing their savings to lend more and more, they'll be increasing the supply of savings available for lending, thus decreasing the price one has to pay to have access to it.
At an extreme, the interest rates might barely cover the expanses of the lending process itself.

Also, with such low interest rates, consuming/investing becomes so easy, that many will do it. A raise in consumption decreases the savings available... these "forces" push to an equilibrium, that's of course unreachable since the variables of this equation are changing all the time.

I'm discussing the practical side, I don't care about morality.
I would make money from money of I could, but I wonder if such a system would be sustainable in the very long run.

Yup, makes sense

The banks profit also eventually get's paid out as dividends of the bank's shareholders and then they spend it, the same as any other company. Corporate profits don't just get absorbed and held onto forever. Corporations exist solely to make a profit and pass that on to their owners so those funds will make a return to circulation eventually.

*cough* *cough* Usury! *cough* *cough*

The bank making money off of interest is little different then me making money off of digging ditches. Maybe if I dig enough ditches I will eventually have earned all the BTC in existence?

Well, that's theoretically true.  In practice, fractional reserve banking results in the majority of interest bearing loans granted by banks within the Federal Reserve system are loaning out money that did not exist prior to the issuance of the loan.  Roughly 85% of all interest paid towards loans by banks are kept entirely by the bank due to those loans not being backed by any depositors to be compensated.  That 85% interest is the majority of the driving force of inflation in our modern world, the principal amount ceases to exist as the loan is either repaid, or defaulted upon.  This is part of the reason that banks are constantantly loaning out new funds, otherwise as loans are repaid (or defaulted upon) the currency in circulation would decrease, resulting in an overall deflationary environment.

I was speaking of banks operating in a world with a finite money supply, like BTC. Understood about fractional reserve banking.