Is credit possible with Bitcoin? Explain.

[weisoq]

I didn't vote in the poll because there wasn't an option for "Yes, but with very different results than in the fiat world".  As far as countryfree's comment that you could still get a mortage with bitcoin banks - yes, this is probably true.  But forget about the 3% interest rates that you're seeing today (at least in the states), or even 5%.  It'd probably be at least 15%. 

Would credit be possible with bitcoin?  Yes, but it'd be more difficult, and therefore likely much more expensive in terms of interest rates.

But why would it be more expensive? Bitcoin's nature is deflationary (after the initial inflation period), so it would make sense for bitcoin denominated interest rates to be lower than fiat rates, because the interest rate does not have to overcome the inflation rate.

a deflationary nature implies a high real rate of interest

Depends on how strong the deflation is. If we are deflating at 1%, then anything with a real rate of return over 1% will still give a positive nominal return rate.

Contrast this to inflating currencies: If you are only inflating at 1%, then something with a real loss of 0.5% will still give a positive nominal return rate.

Depends how strong? Of course. Quite arbitrary examples but nonetheless I'm not sure you mean what you wrote, as you've just outlined why a borrower or anyone conducting business on a credit basis wouldn't choose to use bitcoin when alternatives exist. Or why if they did choose to use bitcoin the lender or other party to a transaction would be acting irrationally in their business, assessment of value and fees. Unless you're referring to commoditisation, which is not the same thing and perhaps the problem.

[halfawake]

I didn't vote in the poll because there wasn't an option for "Yes, but with very different results than in the fiat world".  As far as countryfree's comment that you could still get a mortage with bitcoin banks - yes, this is probably true.  But forget about the 3% interest rates that you're seeing today (at least in the states), or even 5%.  It'd probably be at least 15%. 

Would credit be possible with bitcoin?  Yes, but it'd be more difficult, and therefore likely much more expensive in terms of interest rates.

But why would it be more expensive? Bitcoin's nature is deflationary (after the initial inflation period), so it would make sense for bitcoin denominated interest rates to be lower than fiat rates, because the interest rate does not have to overcome the inflation rate.

Because there's probably no such thing as fractional reserve banking with bitcoin, unlike fiat currencies.  So this means that even though bitcoin is deflationary, banks cannot lend out 90% of their bitcoin deposits like they can with dollars and expect to remain solvent.  I suppose it's possible that bitcoin's deflationary nature would counteract this if it's a high enough amount of deflation, it really remains to be seen.

[bitcoinbear]

I didn't vote in the poll because there wasn't an option for "Yes, but with very different results than in the fiat world".  As far as countryfree's comment that you could still get a mortage with bitcoin banks - yes, this is probably true.  But forget about the 3% interest rates that you're seeing today (at least in the states), or even 5%.  It'd probably be at least 15%. 

Would credit be possible with bitcoin?  Yes, but it'd be more difficult, and therefore likely much more expensive in terms of interest rates.

But why would it be more expensive? Bitcoin's nature is deflationary (after the initial inflation period), so it would make sense for bitcoin denominated interest rates to be lower than fiat rates, because the interest rate does not have to overcome the inflation rate.

Because there's probably no such thing as fractional reserve banking with bitcoin, unlike fiat currencies.  So this means that even though bitcoin is deflationary, banks cannot lend out 90% of their bitcoin deposits like they can with dollars and expect to remain solvent.  I suppose it's possible that bitcoin's deflationary nature would counteract this if it's a high enough amount of deflation, it really remains to be seen.

Have you read this thread? Yes, fractional reserve lending is possible with bitcoins. I take in deposits of 1000 bitcoins, and I lend out 900 of them, leaving a reserve of 1 tenth. Hey look, that's a fraction that I am keeping as reserve! Why is this so hard for people to grasp? There is nothing about bitcoin that stops fractional reserve lending. Now, as long as I can manage things so that depositors are not withdrawing more than the 100 bitcoins I have left, I can remain perfectly solvent. As has been mentioned, you can do things like certificates of deposit, where people agree not to make withdrawals within the time period so they can get the desired interest rate.

[keelba]

I take in deposits of 1000 bitcoins, and I lend out 900 of them, leaving a reserve of 1 tenth. Hey look, that's a fraction that I am keeping as reserve!

Your fractions are backwards to how fractional reserve banking is done today. In your example, you only lend out a fraction of what you have in deposits. In common practice today, banks only take in a fraction in deposits of what they actually lend out.

[justusranvier]

Your fractions are backwards to how fractional reserve banking is done today. In your example, you only lend out a fraction of what you have in deposits. In common practice today, banks only take in a fraction in deposits of what they actually lend out.

Banks lend out a fraction of what they have in deposits, but because when these loans get spent they are deposited back into a bank, the system as a whole ends up having more debt money than base money.

If banks are allowed to loan out 90% of their deposits, the banking system will end up with a 10:1 ratio of loans to currency.

http://market-ticker.org/akcs-www?post=163423

[bitcoinbear]

Your fractions are backwards to how fractional reserve banking is done today. In your example, you only lend out a fraction of what you have in deposits. In common practice today, banks only take in a fraction in deposits of what they actually lend out.

Banks lend out a fraction of what they have in deposits, but because when these loans get spent they are deposited back into a bank, the system as a whole ends up having more debt money than base money.

If banks are allowed to loan out 90% of their deposits, the banking system will end up with a 10:1 ratio of loans to currency.

http://market-ticker.org/akcs-www?post=163423

To elaborate on this, I take in deposit of 1000 btc. I then lend 900 btc to Al so he can buy a boat from Bob. Bob then deposits the 900 btc into my bank, so I now have 1900 deposits and 900 loans, and 1000 on hand. So now I can lend out another 810 btc to Cal who wants a boat too, he sends the BTC to Bob who deposits it in his account. Now I have 2710 in deposits, 1710 in loans and 1000 btc on hand. This cycle repeats until I get up to about 10000 btc in deposits, and I still have the same 1000 btc as my reserve, with 9000 btc loaned out.

I take in deposits of 1000 bitcoins, and I lend out 900 of them, leaving a reserve of 1 tenth. Hey look, that's a fraction that I am keeping as reserve!

Your fractions are backwards to how fractional reserve banking is done today. In your example, you only lend out a fraction of what you have in deposits. In common practice today, banks only take in a fraction in deposits of what they actually lend out.

Does it matter which order they happen in? Obviously you can't send somebody bitcoins you do not have yet, but once you lend them out they can circle back to you through the economy and you can lend them out again, so either way you can end up with the same fractional reserve arrangement.

[AliceWonder]

However, then Ripple came along. If it gains mass acceptance

Except Ripple can't be trusted because it is closed source, centrally controlled, and they lie about it on their home page.

One could aruge that fractional reserve banking is not possible with Bitcoin, but for an entirely different reason than the internet crazies would. Banks are required to keep a fraction of deposits in assets. But with Bitcoin, no such enforcements are in place. So if you think of banking as something regulated and enforced, the answer would be no.

You could start a Bitcoin bank and claim that you would guarantee a fractional reserve, but if there is no regulation there isn't really any legal standing to this claim. It would be a bank in name only. You could start a Bitcoin bank and spend every penny of your customers desposits while still pretending that all bank accounts are full (which would indeed be a scam).

You can disclose your public address so how much you actually keep in reserve can be determined by anyone via the blockchain, no?

[herzmeister]

However, then Ripple came along. If it gains mass acceptance

Except Ripple can't be trusted because it is closed source, centrally controlled, and they lie about it on their home page.

I know about the controversy, but a) most people out there don't care, and b) the point I made doesn't have much to do with the current implementation at ripple.com, same would be true if we had a more decentralized one that builds upon Open Transactions + BitMessage or with Colored Coins or whatever. As soon as we have a network that allows to conveniently transfer promises or IOUs and that catches on, the cat is out of the bag, pandora's box is open once again and fractional reserve bitcoining will be made easy.

[mgio]

One could aruge that fractional reserve banking is not possible with Bitcoin, but for an entirely different reason than the internet crazies would. Banks are required to keep a fraction of deposits in assets. But with Bitcoin, no such enforcements are in place. So if you think of banking as something regulated and enforced, the answer would be no.

You could start a Bitcoin bank and claim that you would guarantee a fractional reserve, but if there is no regulation there isn't really any legal standing to this claim. It would be a bank in name only. You could start a Bitcoin bank and spend every penny of your customers desposits while still pretending that all bank accounts are full (which would indeed be a scam).

Just because it is bitcoin, doesn't mean contracts are unenforceable.

Fractional reserve banking is very possible, and even likely with bitcoin.

It's easy for a bank to prove it owns coins since the transaction register is public knowledge!

The bank only has to sign a document with the private key of it's wallet to prove they own that wallet and you can go and verify that they have the bitcoins they say they do in that wallet.

It's even more transparent than current banking.

[jdbtracker]

Contracts are insanely enforceable with Bitcoin, the Bitcoin API is extremely flexible. You need a programmer and a accountant to convert the written contract into hard code then you realize, just like transactions the contracts are unstoppable once they are let loose... just wait till you had to refinance... ooh, painful.

[elebit]

Just because it is bitcoin, doesn't mean contracts are unenforceable.

Contracts would be completely useless to accomplish regulation.

It's easy for a bank to prove it owns coins since the transaction register is public knowledge!

In theory, yes. But in practice, why would you want to do that?

[herzmeister]

Contracts are insanely enforceable with Bitcoin, the Bitcoin API is extremely flexible.

where's the police.kickDoorOpen(), court.initiateProcedure(), and judge.sendToPrison() functions? 

[jonsi]

If Bitcoin became widely adopted, it could (and probably would) function exactly like any currently popular fiat currency. (Dollars Euros Pounds Etc.)

There's no real functional difference except that there wouldn't be a government that could print more money, therefore I see no logical reason that credit and banking would not work the exact same way it does currently.

With banks currently, if, say, $1000 was deposited with a fractional reserve of %10, the bank would then loan out $900 of that same $1000 to other people.

All you have to do with is replace the above $ with BTC and you have the exact same system using Bitcoins. There's no reason this couldn't work with banks, credit card companies, loan agencies etc.

Now if you were to question whether it's likely to happen currently, that's another question, but once the price stabilizes and adoption becomes high, I guarantee you'll see Bitcoin banks and credit agencies.

It's not right. Actually right now if you deposit 1000$ the bank can loan 9000$... so it's not the same with BTC.

[Lohoris]

It's not right. Actually right now if you deposit 1000$ the bank can loan 9000$... so it's not the same with BTC.

Uh? No, cash is cash is cash.
As long as people want to hold actual real banknotes, banks can't "just create money".
What you are talking about is fractional reserve banking, which can be done with bitcoin too, as long as people accept money on a bank account instead of the actual bitcoins in your address.

Either you compare bitcoins with actual real cash you can hold in your hand, or you compare virtual dollars sitting in a bank with virtual bitcoins sitting in a bank.

No difference.

[jonsi]

Ha ha, you're wrong. Actually money are created from thin air. In the early stages people have won in court in fact.

[Razick]

I didn't vote in the poll because there wasn't an option for "Yes, but with very different results than in the fiat world".  As far as countryfree's comment that you could still get a mortage with bitcoin banks - yes, this is probably true.  But forget about the 3% interest rates that you're seeing today (at least in the states), or even 5%.  It'd probably be at least 15%. 

Would credit be possible with bitcoin?  Yes, but it'd be more difficult, and therefore likely much more expensive in terms of interest rates.

But why would it be more expensive? Bitcoin's nature is deflationary (after the initial inflation period), so it would make sense for bitcoin denominated interest rates to be lower than fiat rates, because the interest rate does not have to overcome the inflation rate.

Because there's probably no such thing as fractional reserve banking with bitcoin, unlike fiat currencies.  So this means that even though bitcoin is deflationary, banks cannot lend out 90% of their bitcoin deposits like they can with dollars and expect to remain solvent.  I suppose it's possible that bitcoin's deflationary nature would counteract this if it's a high enough amount of deflation, it really remains to be seen.

Why? I really don't see how Bitcoin is any different than cash here.

[Matthew N. Wright]

If you're looking for bitcoin credit, look to Ripple or BTCJam. Both have different approaches to the same thing.

[xxjs]

It's not right. Actually right now if you deposit 1000$ the bank can loan 9000$... so it's not the same with BTC.

Uh? No, cash is cash is cash.
As long as people want to hold actual real banknotes, banks can't "just create money".
What you are talking about is fractional reserve banking, which can be done with bitcoin too, as long as people accept money on a bank account instead of the actual bitcoins in your address.

Either you compare bitcoins with actual real cash you can hold in your hand, or you compare virtual dollars sitting in a bank with virtual bitcoins sitting in a bank.

No difference.

Two differences. There could be no government depositor insurance, as the govenment would not have the money. People would only save in safe banks. There would be no money printing or QE, meaning the so called bank reserves of today would have to be replaced by equity. I suspect fractional banking would be possible, but less relevant.

[Lohoris]

Ha ha, you're wrong. Actually money are created from thin air. In the early stages people have won in court in fact.

Either you didn't write what I wrote, or I wasn't clear (sorry).

I'll restate: either you compare real bitcoins with real cash you can hold in your hand, or you compare bitcoins "in a bank" with cash "in a bank".
You are comparing "real bitcoins" vs "cash in a bank", which obviously make no fucking sense.

There could be no government depositor insurance, as the govenment would not have the money. People would only save in safe banks.

Wrong: nothing prevents governments from acquiring bitcoins.

There would be no money printing or QE, meaning the so called bank reserves of today would have to be replaced by equity. I suspect fractional banking would be possible, but less relevant.

This is correct.

[xxjs]

There could be no government depositor insurance, as the govenment would not have the money. People would only save in safe banks.

Wrong: nothing prevents governments from acquiring bitcoins.

They could, but not in the current fashion. If you exclude money printing and loans, governments run erormous deficits. There is not enough tax money for saving up to future bank runs.