Doubt about Bitcoin's growth potential

[DeathAndTaxes]

My only concern so far with bitcoin is the lack of, or inability to, prosecute fraud and uphold contracts. That's what makes lending difficult in my opinion. Also, we could have institutions that practice fractional reserve banking, but it is not backed or guaranteed (FDIC). This means that customers (lenders) of the bank are at much more risk because of the high percentage of the reserves (customers money) being lent out. This makes their savings illiquid and risky. So in order to do this, the institutions would have to offer high interest rates and not be able to guarantee instant liquidation at moment's notice.  

A contact in Bitcoins is no different than a contract for bandwidth or gold or manure.  Most "contracts" in Bitcoin land haven't been enforced because:
a) they aren't contracts.
b) they are unlawful (i.e. Pirate's savings plan was usurious in every state of the United States).
c) they involve thieves.

Put a,b,c in a "deal" involving dollars and you will be equally broke.

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[Shagnasty]

My only concern so far with bitcoin is the lack of, or inability to, prosecute fraud and uphold contracts. That's what makes lending difficult in my opinion. Also, we could have institutions that practice fractional reserve banking, but it is not backed or guaranteed (FDIC). This means that customers (lenders) of the bank are at much more risk because of the high percentage of the reserves (customers money) being lent out. This makes their savings illiquid and risky. So in order to do this, the institutions would have to offer high interest rates and not be able to guarantee instant liquidation at moment's notice.  

A contact in Bitcoins is no different than a contract for bandwidth or gold or manure.  Most "contracts" in Bitcoin land haven't been enforced because:
a) they aren't contracts.
b) they are unlawful (i.e. Pirate's savings plan was usurious in every state of the United States).
c) they involve thieves.

Put a,b,c in a "deal" involving dollars and you will be equally broke.

We need a real bank, but who certifies it? Do we need to certify it? Security is a huge issue as the hacked exchanges have shown. We can't have safe lending until there is liability.

[fivemileshigh]

Please help me understand/explain to an economist friend of mine...

He argues that Bitcoins have no chance in global success because....


...Where is he right/wrong?

It's a little early to draw a conclusion about the right/wrong part, but I would suggest asking him how would he define success? what would he accept as criteria that must be met for bitcoin to be considered successful?

I'm curious as to his response.

[ChupacabraHunter]

I truly hope Bitcoin's insurgence will be one time when Gresham is proven wrong!

Gresham's law only applies to exchange rates as dictated by law. Bitcoin is a whole new beast as it's rates are beyond what the law can decree, so Gresham's law doesn't apply in this case.

After we see what happens with Bitcoin, perhaps we can formulate Satoshi's Law. 

GO SATOSHI's LAW!!!

[mobodick]

For Bitcoins to be successful, it has to be able to replace the existing debt!

Whos debt? This reveals a thinking stuck in old system.

But old system thinking gave you the internet and the computer you wrote your post with.

[Severian]

But old system thinking gave you the internet and the computer you wrote your post with.

TCP/IP is new system thinking - open-source and non-proprietary. It's becoming the norm with those that grew up with it.

[mobodick]

But old system thinking gave you the internet and the computer you wrote your post with.

TCP/IP is new system thinking - open-source and non-proprietary. It's becoming the norm with those that grew up with it.

...like roads.. 

[Adrian-x]

We can't have safe lending until there is liability.

Why does anyone need to borrow Bitcoin?
There is not much of an economy yet, the bulk of the economy is supported by selling drugs. 

If you have good credit borrows from the bank, and buy Bitcoin's.

If you are lending in this environment you have questionable money management skills.
If you borrowing BTC in this environment you are most likely a doing something any legitimate bank would not condone. 

[Adrian-x]

When I made my fist Bitcoin purchase I didn't want to spend my hard earned Bitcoin's so I bought some and used those.  This was the type of action that grows the economy; however I only used Bitcoin because I am an enthusiast.

If the Bitcoin economy were bigger I may be compelled to just buy in. However buying Bitcoin to partake in Bitcoin economy will create a demand for Bitcoin. When you look at the "innovation adoption curve" that demand will be filled by the innovators who have lots of BTC to sell. The people who build the economy are the Early Adopters paying the price and the benefactors are the Innovators. (the Early Adopters are key to the successful adoption of Bitcoin for mass market appeal )

In my view you need the Early Adopters to adopt Bitcoin and build the economy in order for it to propagate.  For that to happen the Early Adopters need a motivation to build the Bitcoin economy.  I see wild swings in boom and bust cycles as the ideal stimulant.  Boom bust to me is like gambling only you can cashing out without loss if you have a stable supply of BTC, it also creates risk for the hoarders, once one is in the economy one eventually establishes a legitimate way to obtain BTC and cash out during the swing, thus the economy slowly builds, and the Early Adopters benefit. ( That is, what I am doing now except I am trickle mining, as opposed to building the economy. So technically Miners fall in the Innovation stage, and Silk Road would fall in the Early Adopter stage)   

Without a transferring of Innovators benefits to the Early adopters benefit,  the Fiat to BTC rate will crash. When it crashes the early adopters benefit, and as the Bitcoin economy grows again the innovators benefit disproportionately to the work done by the early adopters and the system crashes again, and this will go on and on until the wealth of the innovators is eroded.

Just like the sun will rise and fall every day and we will have seasons, the system will optimise over time a decade at the least but it is going to be a rough ride and there will be no guarantees, there is a higher probability of a stalemate along the way, but just to be safe you should mine your [btc20] anyway. 

There is no point in knowing if it will succeed before it succeeds, if you knew that, you could cheat the system, if you could cheat the system it would fail.

These debates are fundamentally about risk taking.  What will cause Bitcoin to fail is the horders unequivocal faith that the system will prevail, and the Early Adopters (labour that builds the economy) choosing life as usual. IE. a stalemate.

This stalemate could be the end of cripocurancy or its collapse, and with all natural systems collapse there is fertile ground for rebirth.   

[evoorhees]

Please help me understand/explain to an economist friend of mine...

He argues that Bitcoins have no chance in global success because a this system be used to create credit.

Bitcoins cannot be used to leverage. --> You cannot use Bitcoins to create credit.  ---> It can't replace existing credit already created by the current system.

For Bitcoins to be successful, it has to be able to replace the existing debt!

Please help me:

Where is he right/wrong?

He's wrong because I can owe you 100 bitcoins without having 100 bitcoins. Heck, I can owe you 25 million bitcoins even though 25 million bitcoins will never be in existence at the same time.

Bingo... JoelKatz scores again.

Bitcoins credit can exist just fine. I've made loans, and received loans, both with interest, and both paid back. Guess what... it worked! 

[anu]

Bitcoins credit can exist just fine. I've made loans, and received loans, both with interest, and both paid back. Guess what... it worked!  

But why on earth would anyone borrow Bitcoins at present when you can get a Fiat loan for interest that's lower than inflation?

A Bitcoin loan otoh carries a significant risk of Bitcoin gaining significant value and a default as a consequence.

At some point, when bitcoin is more mainstream, this will change, of course.

[Adrian-x]

But why on earth would anyone borrow Bitcoins at present when you can get a Fiat loan for interest that's lower than inflation?

Prissily, not a good idea to borrow Bitcoin's at the moment, unless you can sucker someone into lending them and default.
But I think the point was you can lend and borrow any amount it is not limited by the total supply. (and it has been tested despite the risk)   

[Roger_Murdock]

Sorry if cross-posting this here is obnoxious, but it seems relevant and I'd be interested to hear people's reactions. Thanks!

You have to keep in mind that the Bitcoin economy exists alongside (and is positively dwarfed by) the "regular" fiat-based economy.  If your concern is that a deflationary currency will result in "too little" investment, it doesn't seem fair to point to the relative lack of Bitcoin loans for investment as evidence to support your argument.  The purchasing power of bitcoins has increased enormously in the last four years.  And I expect that trend to continue because I expect (hope) that the currency will be massively successful.  That long-term increase in purchasing power has also coincided with very high volatility.  This is all to be expected.  Naturally bitcoins were worth essentially nothing when the system was new and untested.  And naturally they'll be worth a huge amount if and when Bitcoin becomes massively successful.  That implies some "growing pains" (although I haven't personally found the experience to be too painful).  So of course people are reluctant to borrow bitcoins for investment purposes.  Of course it makes more sense to borrow fiat and buy bitcoins if you're trying to raise capital for a new business that requires a bitcoin bankroll.  (The principal reason for borrowing BTC over fiat that I can see is if you want to short bitcoins.)  Again, the regular inflationary economy is the dominant economic force, and it's still encouraging too much investment and consumption.  Bitcoin is currently acting as a (still very tiny) safety valve that's encouraging some actual SAVINGS to partially offset the fiat economy's destructive tendencies.  I don't know about you, but I'm excited as hell about the deferred purchasing power I'm holding in my bitcoin wallet.  But if and when bitcoin becomes the dominant currency, it won't need to operate as a "safety valve" anymore.  The volatility and deflation (in terms of purchasing power) will be much slower and more predictable.  The real question is whether THAT economy will encourage the "correct" level of investment / savings.  I think it might.  But I don't have an economics degree. (I do, however, dabble in bitcoinomics.)

[anu]

But why on earth would anyone borrow Bitcoins at present when you can get a Fiat loan for interest that's lower than inflation?

Prissily, not a good idea to borrow Bitcoin's at the moment, unless you can sucker someone into lending them and default.
But I think the point was you can lend and borrow any amount it is not limited by the total supply. (and it has been tested despite the risk)  

Seems a waste of time to empirically test the obvious. The question is only: Is Bitcoin the cheapest way to borrow money. At present, the answer is NO. A few years down the road, when Bitcoin is in the 4-digits and value increase is in the single digits - and inflation in the FIAT world is deep in the 2-digits, the situation will change because nobody will give you a FIAT loan if inflation can at any time get into the 3-digits or higher unless you pay outrageous interest.