Bitcoin major fail - doesn't allow credit creation (aka deflationary currency)

[bobitza]

Hey guys, I'm almost sold on BTC, but here's something that I can't get over it: the fact that BTC does not allow some sort of controlled credit creation.

I believe you heard this argument before and if you can explain it to me or point me in the right direction I would appreciate it.

The issue that I see with Bitcoin is that it doesn't allow credit creation. (and no, loans are not the same thing, they are just a redirect of the capital from other purposes)

Before telling me how credit is bad and this has doomed our current system, I would like to tell you that I do share that idea on credit is bad for ... consumption! You shouldn't consume more that you produce and if you want to consume more, well, go produce more money (aka get another job or a raise). Or start saving for that new car model and buy it when you have enough money. Just like the balanced budget that our governments are trying to achieve.

However, credit as capital investment into production is something good. If there is no credit, basically a company that produces goods and services which wants to expand, it would have to start saving those money and in one, two whatever how many years would have enough money to buy that new warehouse, land or equipment. Well, that sucks; I don't think we'll progress too fast with this approach.

There is also a blur line between credit for consumption and credit for production especially when the consumer and the company both default on the loan. Those money would be "lost" no matter their initial purpose.

Bitcoin tries to solve this problem with a simple answer: no credit whatsoever. This becomes obvious especially after the 21 mil Bitcoins are mined.

So how can Bitcoin have a future if it is a deflationary currency with a set in stone number of coins? After 21 mil BTCs are mined even loans are not the answer because there is no money created to cover the interest. If everybody start making loans with interest, there will soon be not enough BTCs in circulation to cover the interest, not to mention the principal. Maybe loans at 0% since the currency appreciates itself and the appreciation is like an interest? Well, why take the risk to loan the money at 0% and not just keep it in your wallet with no risk of losing them. They'll appreciate there with no problem.

That's the big fail I see in Bitcoin. Please convince me that I'm wrong.

[helloworld]

Just because there are only 21 million actual bitcoins, doesn't mean the bitcoin economy is restricted to that amount.

I think Joel Katz is good at explaining this, although I'm not sure if he'll bother since he has done so many times on this forum already.

For example, it is entirely possible to accrue a legitimate debt greater than 21 million BTC, and furthermore it is possible to be able to repay such a debt.

[ArticMine]

There is nothing preventing fractional reserve banking and credit, based on Bitcoin, just as in the past it was done, based on gold.

[bobitza]

There is nothing preventing fractional reserve banking and credit, based on Bitcoin, just as in the past it was done, based on gold.

Wouldn't having a fixed amount pretty much prevent that? It's not like I can give you some BTCs if I don't actually have them in my wallet.dat file.

Or you're talking about the creation of some paper IOUs that have BTC value? Err, isn't that creating a new currency then? Let's call it USD It's like going back to the flawed system that we have now.

[bb113]

Growth isn't necessarily always a good thing... look at everyone complaining about global warming, etc. If the company really is a good investment they will find investors.

[nobbynobbynoob]

Or you're talking about the creation of some paper IOUs that have BTC value? Err, isn't that creating a new currency then? Let's call it USD It's like going back to the flawed system that we have now.

Indeed, fractional-reserve bankster paper did seem to make sense 100+ years ago on the basis that gold was (is) heavy and awkward to move around. Today, however, paper is not easier to shift than BTC so that logic largely no longer applies. Nonetheless, theoretically there is no reason why people couldn't agree to trade BTC promissory notes if they really wanted to.

[justusranvier]

Is it too much to ask for people who think they've discovered a major, obvious flaw in Bitcoin to maybe search the forum and see if there aren't already a billion threads discussing this very thing?

Maybe, just maybe, you aren't the only person bright enough to come up with the same question.

[bobitza]

Is it too much to ask for people who think they've discovered a major, obvious flaw in Bitcoin to maybe search the forum and see if there aren't already a billion threads discussing this very thing?

Maybe, just maybe, you aren't the only person bright enough to come up with the same question.

Yeah, I know. Don't we all hate when noobs just go out and create new topics on existing info?

I found a couple of threads (i.e. the deflationary one right here, in this section) but they were only "side talking" about the credit option needed or not. And this forum is huge, with a lots of topics that have for example deflationary as the searched keyword in them. I can't possible read them all. Sorry. I had to take a shot at creating a new one laser targeted on what I strongly feel is a drawback of Bitcoin.

If you already found/bookmarked topics that talk about the same thing, do share. Thanks.

[FreeMoney]

Oh snap, we overlooked this major fail. Wrap it up guys.

[bobitza]

Oh snap, we overlooked this major fail. Wrap it up guys.

Lol.

Now seriously, can we not turn almost every thread here on mockery?

[beckspace]

Hey guys, I'm almost sold on BTC, but here's something that I can't get over it: the fact that BTC does not allow some sort of controlled credit creation.

If you want credit, YOU have to create something (a good promisse to pay back), not the issuer.

[thebaron]

Just because there are only 21 million actual bitcoins, doesn't mean the bitcoin economy is restricted to that amount.

I think the fact that Bitcoins are currently actually made up of 100 million Satoshi's  each should be part of the basic introduction to this way of transacting. That means that there are potentially 2100 trillion currency units available. And you can always add more decimal places...

[bb113]

Growth isn't necessarily always a good thing... look at everyone complaining about global warming, etc. If the company really is a good investment they will find investors.

OP I am wondering why you think this is a stupid or uninteresting perspective since you seem to have skipped over it.

[BR0KK]

Maybe the invention of "credit" is a bad thing?

[helloworld]

Just because there are only 21 million actual bitcoins, doesn't mean the bitcoin economy is restricted to that amount.

I think the fact that Bitcoins are currently actually made up of 100 million Satoshi's  each should be part of the basic introduction to this way of transacting. That means that there are potentially 2100 trillion currency units available. And you can always add more decimal places...

True, however what I meant was that it's entirely possible to have a billion-bitcoin economy. Even 1 billion bitcoins worth of economic activity on a daily basis.

[bobitza]

Growth isn't necessarily always a good thing... look at everyone complaining about global warming, etc. If the company really is a good investment they will find investors.

OP I am wondering why you think this is a stupid or uninteresting perspective since you seem to have skipped over it.

Not stupid but it opens another can of worms. So, let's assume growth is a bad thing. Can you separate Growth from Technological evolution? Don't think so. So are we saying that growing a business and making it more efficient is bad? Invention and new products is bad?

Ok, let's look at it from another perspective. Do you want your kids to live better? Also, should all countries on Earth have the 2 kids maximum policy? So that the population on Earth stays the same, so that we don't need extra goods or resources, so that companies just produce the same amount of goods and services, so that there shouldn't be a need for growing and new jobs. With no growth in production and yet a growing number of people that require resources and jobs, we'll end up with social unrest, right?

[FreeMoney]

People want many various things to varying degrees, it is all very complicated. A good way to get those things is from other people. A good way to do that is with an intermediary 'counter' that is durable, easy to transfer, easy to identify. Bitcoin totally fits, unless it turns out that one of the main things most people want is to see a bigger number and not more or better stuff and experiences.

[bb113]

Growth isn't necessarily always a good thing... look at everyone complaining about global warming, etc. If the company really is a good investment they will find investors.

OP I am wondering why you think this is a stupid or uninteresting perspective since you seem to have skipped over it.

Not stupid but it opens another can of worms. So, let's assume growth is a bad thing. Can you separate Growth from Technological evolution? Don't think so. So are we saying that growing a business and making it more efficient is bad? Invention and new products is bad?

Ok, let's look at it from another perspective. Do you want your kids to live better? Also, should all countries on Earth have the 2 kids maximum policy? So that the population on Earth stays the same, so that we don't need extra goods or resources, so that companies just produce the same amount of goods and services, so that there shouldn't be a need for growing and new jobs. With no growth in production and yet a growing number of people that require resources and jobs, we'll end up with social unrest, right?

Does growth cause "technological evolution" or does technological evolution cause growth? Is growing a business always the best way to make it more efficient? Should government policies act to prevent possibly undesirable population growth or should they encourage it? I dunno that whole post is filled with correlation not equal to causation and other fallacies. I'm not sure you have thought these positions through.

[interlagos]

With technological advancements you can do the same with less or you can do better (higher quality) with the same. So it doesn't necessarily mean growth.

Growth was only needed to pay the interest on the money we borrowed. With Bitcoin the economy will start converging to balance instead of growth and that's exactly what we need in the current situation.

[DannyHamilton]

There is nothing preventing fractional reserve banking and credit, based on Bitcoin . . .

Wouldn't having a fixed amount pretty much prevent that? . . .

I'm not sure, and I'm probably going to end up demonstrating my own lack of understanding but...

I've always assumed that when bitcoin reaches mainstream use we will find there are "banks" where you can safely deposit your bitcoin into an insured account.  I figure the main driving force behind this is the average persons lack of ability and motivation to learn to protect their bitcoin from accidental loss and theft.  These accounts will likely find a way to collect a small fee based either on the storage of these coins or on the use of these stored coins.

Assuming this ends up happening, transactions between members of an individual bank will no longer require movement of any bitcoin on the blockchain at all.  The bank will simply credit one account in their own database and debit another.  The entire balance stored by the bank will be safely secured offline in addresses owned by the bank itself.  Furthermore, transactions between banks can wait a predetermined amount of time (perhaps daily?) before the banks settle up their accounts.  So if various members of bank-A send 1,000,000 BTC to members of of bank-B, and other members of bank-B send 1,000,001 BTC to members of bank-A, then at the end of the day bank-B sends 1 BTC via the blockchain and everything else is handled internally by the two banks.

Using this system, wouldn't it be possible for those banks to engage in fractional reserve?  Assuming that the members of the bank are willing to allow fractional reserve in exchange for lower account fees, couldn't the banks potentially loan some percentage of their holdings to business for growth?  Wouldn't this be "credit creation" and allow for the "existence" of more that 21 million BTC?