BTC Debt Instruments & BTC-E

[Kazu]

There is covered debt  - you put 2BTC into bitstamp and (supposedly) they just keep it in their position, dont re-lend or re-spend it. You do whatever, and then it comes out later back to you if they still owe it to you.

There is debt as an investment - you put 2BTC into havelock investments and then your debt instrument will either increase or decrease in value.

There is uncovered debt - You put 2BTC into shadyexchange. This 2BTC they use as funds to support their market-making activities.

I'm not to concerned about covered debt, for obvious reasons. I mean, obviously I am concerned if I'm putting my own Bitcoins in such a situation due to counterparty risk, but in terms of the larger economy im basically fine with it. Worst case scenario: Instawallet. Doesn't really do that much harm to the overall bitcoin situation.

Debt as an investment is something to be careful about, but again im not truly worried about it. Any btc-denominated asset could technically fall into this category, so in a sense the more there is the better. The problem is when this and the next type of debt interact too much.

I'm starting to become really worried about uncovered debt in the BTC economy. Many exchanges could be using this, in both BTC and USD, and really there would be absolutely no way of knowing, and absolutely no reason why they shouldn't do this. The problem with uncovered debt is that it is secretly debt as an investment - only it is indistinguishable from actual BTC (at least, on that exchange). The result is, that the opposite scenario could happen from Gox: Rather than USD being uncovered and thus screwing with exchange rates royally, BTC being uncovered and pushing the rate in the other direction.

Now, here's the thing: The more I look at it, the more I suspect BTC-E might be engaged in these types of practices. As long as you have a euro or russian bank account, its extraordinarily easy to arbitrage with fairly good speed between Bitstamp and BTC-E.

I mean, its no proof by any measure, but this is speculation, right?

[monkeybars]

You could be right. Unless people start doing a BTC run, I don't see us finding out the truth, however. What reasons can you think of that would cause such a run?

[Kazu]

Idk, I guess if the Bitcoin price there started going up suddenly for some reason it could prompt people to want to either exchange their USD to Bitcoin and withdraw the bitcoin, if they cant withdraw their USD because they are from america.

[Birdy]

This is like the little cousin of fractional reserve banking, still problematic though.

[Kazu]

This is like the little cousin of fractional reserve banking, still problematic though.

Its how fractional reserve banking originated, yes? 'What if, rather than charging depositers more for our service, we used their money which we have control over for something, and make money that way?'