Would you deposit bitcoins into a bank that would guarantee your money?

[assbowser]

Hi all,

I'm new to the forum and new to the idea of Bitcoins in general. I must admit that I have some reservations about the currency (I'm hoping to eventually be swayed), but at this point I'm really excited about its potential upside if it takes off.

As someone who has just gotten into this though, I see two big problems (among others) that are stalling Bitcoin's adoption: the lack of businesses using it, and the lack of a system to get back stolen funds. As to the theft problem, I'm seeing a lot of forum posts relating to encrypting and protecting your wallet, but none of them actually guarantee that your cash is safe and reiumburse your money if its stolen like a regular fiat currency bank would, which is a problem when you have large holdings like that poor guy who lost 500 grand worth of bitcoin.

So some of my friends and I were toying with an idea: what if someone made a service that would let you deposit your bitcoins and would actually insure it in case of theft? Would that be something that would interest the Bitcoin community (especially if it would pay interest)? And what if, somewhere down the line, this bank figured out a way actually make bitcoin-denominated loans somewhere down the line (I know that's waaay easier said than done, especially having to figure out a way to get past the inherent anonymity problem of bitcoinss )

[99bitcoins]

first of all, how long do you plan on stinking sticking around with that username  

anyway, welcome!

[BkkCoins]

A bank would have no interest in doing that as they have no opportunity to use fractional reserves to multiply the effect of your deposit. ie. no leverage. There is only downside for them. You would have to pay them to hold your money.

[berkes]

I voted yes, however:

I, myself, am quite confident in securing my online machines. But my house is not that safe. For example: I leave my attic-windows open on hot nights, sometimes forget to lock the balcony door etc. If Bitcoin gets popular enough for people to really target it, lists with geo-data belonging to wallets with lots of cache will get out there. Stealing a laptop is easy and "known technology". And even if the HDD is encrypted, you can be fsked.

But even then, others in my surrounding are by far not that security aware. "MyMom" would certainly not know how to secure her computer enough to safely keep her savings on it. If bitcoin at some point reaches these masses, where people trade and keep substantial wallets, professional, trusted organisations will have to step in to do that securing for them. Companies that live and thrive by trust are banks (I know, I know) and as such are good candidates for offering e.g. online heavily encrypted mountable drives to store your wallet. I see a great potential for such organisations there. If they were not dinosaurs that move rather slow

[Crystal Excursion]

"They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety."
Benjamin Franklin.
 
And...
       
Bitcoin is a Deflationary Currency, It does not fit the conventional models... 

[Archie]

I voted only if the bank would give out loans in bitcoins. Maybe it would be profitable to buy rigs with loaned money.

[berkes]

Would you put your gold in a bank?

I would put my gold in a place that offers physical security. A vault that protects against fire and break-ins. If you prefer to call such a place a bank then: yes, I would put my gold in a bank.
And if that storageplace offers some basic insurance on top of it, in the form of a (backed up) guarantee that I can come in at any moment and pick up my gold, then: certainly.

[assbowser]

Thanks for the replies and feedback so far. A few observations in response to several of the posts:

Nope. I think they are worth more stored offline nice and safe.

I think of them as digital gold. Would you put your gold in a bank?

I'd argue that safety would be one of the biggest advantages of having a bank that would guarantee your deposits. That way if something like this (http://forum.bitcoin.org/index.php?topic=16457.0) happened, you wouldn't be out 500 grand.

As for this quote:

A bank would have no interest in doing that as they have no opportunity to use fractional reserves to multiply the effect of your deposit. ie. no leverage. There is only downside for them. You would have to pay them to hold your money.

I'd ask why couldn't use fractional reserves (ie: loaning out bitcoins) and make a profit that way (if, as earlier mentioned, one could figure out a way to ensure that people would pay back their loans)? And even if you didn't do that, I'd argue that there is an inherent value in having access to a large quantity of bitcoins that could lead to monetization opportunities. Hell, if enough people use the bank, one could even make a decent amount of money of advertising alone. Also, something like this would be worthwhile in my opinion, having a bank is also worthwhile just as a way to add legitimacy and stability to bitcoins that could pave the way to larger-scale adoption by the general public.

But there are obviously many, many challenges to implementing this, and I'm just thinking out loud at this stage. Any further observations and remarks are welcome.

Cheers

[BkkCoins]

Fractional reserve implies they have the ability to "create" money out of thin air. Something they cannot do with Bitcoins (and one of the reasons many people philosophically like them).

A bank can create up to around 9-10x as much money as deposited to loan out as set by the reserve rules in place at any time. The higher amount they loan multiplies the actual return from whatever the interest rate is to X times that rate. In the case of Bitcoins they would be limited to only 1x the deposits - so would they prefer to loan fiat currency or Bitcoins?

[Crystal Excursion]

Thanks for the replies and feedback so far. A few observations in response to several of the posts:

Nope. I think they are worth more stored offline nice and safe.

I think of them as digital gold. Would you put your gold in a bank?

I'd argue that safety would be one of the biggest advantages of having a bank that would guarantee your deposits. That way if something like this (http://forum.bitcoin.org/index.php?topic=16457.0) happened, you wouldn't be out 500 grand.

As for this quote:

A bank would have no interest in doing that as they have no opportunity to use fractional reserves to multiply the effect of your deposit. ie. no leverage. There is only downside for them. You would have to pay them to hold your money.

I'd ask why couldn't use fractional reserves (ie: loaning out bitcoins) and make a profit that way (if, as earlier mentioned, one could figure out a way to ensure that people would pay back their loans)? And even if you didn't do that, I'd argue that there is an inherent value in having access to a large quantity of bitcoins that could lead to monetization opportunities. Hell, if enough people use the bank, one could even make a decent amount of money of advertising alone. Also, something like this would be worthwhile in my opinion, having a bank is also worthwhile just as a way to add legitimacy and stability to bitcoins that could pave the way to larger-scale adoption by the general public.

But there are obviously many, many challenges to implementing this, and I'm just thinking out loud at this stage. Any further observations and remarks are welcome.

Cheers

Dude, You just got to come out of the "Cave"... http://www.youtube.com/watch?v=69F7GhASOdM Relax... Let Your eyes adjust to what you see... You keep trying to apply what you "Think You Know" to something you have Yet to See Clearly.

[JoelKatz]

I'd ask why couldn't use fractional reserves (ie: loaning out bitcoins) and make a profit that way (if, as earlier mentioned, one could figure out a way to ensure that people would pay back their loans)?

Because the currency is too unstable. There's always a risk the currency could jump up a large amount in a day, thus causing a significant fraction of your loans not to be paid back. This would mean your 'guarantee' wouldn't be worth the paper it was printed on.

The only way, for now, to do a fractional reserve with bitcoins is with offseting shorts. You can't do it by loaning the coins out. (And you would have to put interest clamps on. For example, if you deposit BTC worth $100 USD, and BTC doubles in a week, you can't get $200 USD worth of BTC. They may not even be available at any price.)

And even if you didn't do that, I'd argue that there is an inherent value in having access to a large quantity of bitcoins that could lead to monetization opportunities. Hell, if enough people use the bank, one could even make a decent amount of money of advertising alone. Also, something like this would be worthwhile in my opinion, having a bank is also worthwhile just as a way to add legitimacy and stability to bitcoins that could pave the way to larger-scale adoption by the general public.

There's no advertising revenue in the world that will keep you solvent if bitcoins shoot up 35% before you can buy enough of them. (Even if you react instantly, there's no guarantee you'll be able to buy enough.)

That idea is a non-starter for now. Again, unless you're willing to accept interest clamps (may have to pay you back in USD, may not be able to give you 100% of the increase in BTC value) and if you can find enough people willing to sell BTC short.