Can bitcoin fill the void in a bank run?

[Trader Steve]

Reading the following article and got to thinking how those of us holding bitcoin and bullion (vs. bank deposits) would be in pretty good shape should the following event happen:

What An American Bank Run Would Look Like

http://www.zerohedge.com/article/what-american-bank-run-would-look

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Can bitcoin fill the void in a bank run?

No.
It cant do nothing to prevent the difficulties of a bank run while it is happening.
Things went wrong long before that.

[cypherdoc]

Reading the following article and got to thinking how those of us holding bitcoin and bullion (vs. bank deposits) would be in pretty good shape should the following event happen:

What An American Bank Run Would Look Like

http://www.zerohedge.com/article/what-american-bank-run-would-look

nice reference Steve.

this is actually the crux of the debate about what will happen to the USD in the next crisis (which just might happen to be upon us). 

in 2007-09 i shorted the broad stock mkt correctly but my call on commodities was incorrect as i thought gold, silver, and PM stocks would rise.  not so.  we had an outright deflationary wave that almost took out the entire US economy and the USD and UST's paradoxically rallied.  this only lasted about 6-8 mo and is an episode we have rarely seen in US history.  this was very educational for me and i think we may be on the precipice of another deflationary wave which will be longer and deeper than 2008.  this goes against all conventional wisdom but if you read this article carefully and understand what its saying, the USD will rise once again and not stop until all the bad debt is washed out.

my fear for Bitcoin is that it gets taken down as well since one could argue it is an inflationary reaction to all the quantitative easing we've had the last 3 yrs.  i fear this even more a network protocol break.

[OgNasty]

my fear for Bitcoin is that it gets taken down as well since one could argue it is an inflationary reaction to all the quantitative easing we've had the last 3 yrs.  i fear this even more a network protocol break.

My fear as well.  However, in the event things get even worse, I'd like to be as diversified as possible.  BTC is just another layer of diversification for me.  Fortuntely, a vast majority of my wealth isn't in BTC so if things getting better with the global economy is the worst case scenario for BTC, I guess I can deal with that.

[Bitcoin_Silver_Supply]

my fear for Bitcoin is that it gets taken down as well since one could argue it is an inflationary reaction to all the quantitative easing we've had the last 3 yrs.  i fear this even more a network protocol break.

My fear as well.  However, in the event things get even worse, I'd like to be as diversified as possible.  BTC is just another layer of diversification for me.  Fortuntely, a vast majority of my wealth isn't in BTC so if things getting better with the global economy is the worst case scenario for BTC, I guess I can deal with that.

BTCs value would undoubtedly not be this high (or previously in the 30s) if not for the weakness of the global economy. That said, it seems like a turnaround is a long ways away. Whatever happens, diversification is always the best bet and a lot of people seem to forget this when excited about a new opportunity.

[Trader Steve]

@cypherdoc: Yes, I too was amazed to see the the USD and Treasuries soar while gold and silver plummeted during the '08 crisis but the next time around (as alluded to in the article) it would be the dollar itself that gets broken. It wouldn't be its' own "safe-haven".

I see how there could be demand for physical dollars but the reason there would be a demand is so that people could get out of them and convert them into a stronger currency. So what I see, in the scenario described in the article, is that the physical dollar would still drop against all other currencies (otherwise there wouldn't be a bank run in the first place) but the digital dollars would drop dramatically more in value.

A recent example is Argentina during the debt default of 2000. The peso lost 60% +/- against the dollar. There was still a huge demand for physical pesos but the banks simply closed while the value of the peso continued to drop. Physical cash virtually disappeared and people had to resort to barter if they didn't have US dollars or pesos to trade with.

So this time around the dollar wouldn't be the "safe haven", it would be what everyone is trying to get out of. Because of this I can see bitcoin and precious metals rising significantly as the new "barterable items of choice" since most Americans don't hold other currencies (at least in Argentina a lot of people held US dollars). But I could be missing something.

[99Percent]

A bank run like the ones that happened pre-fed days are not likely to happen, because the Fed backs all banks 100%. If people start withdrawing cash like crazy from their bank accounts, the Fed simply orders cash to be printed as it is necessary. Of course people would be holding on to pieces of paper with nothing to actually back it up.

[Trader Steve]

A bank run like the ones that happened pre-fed days are not likely to happen, because the Fed backs all banks 100%. If people start withdrawing cash like crazy from their bank accounts, the Fed simply orders cash to be printed as it is necessary. Of course people would be holding on to pieces of paper with nothing to actually back it up.

Yes, but the point is that they don't have that much physical cash on hand to meet the demand. Cranking up the printing presses requires some lead time. During that interim period banks would likely shut down and barter would be order of the day. But I could be wrong...

[Trader Steve]

@cypherdoc: Yes, I too was amazed to see the the USD and Treasuries soar while gold and silver plummeted during the '08 crisis but the next time around (as alluded to in the article) it would be the dollar itself that gets broken. It wouldn't be its' own "safe-haven".

I see how there could be demand for physical dollars but the reason there would be a demand is so that people could get out of them and convert them into a stronger currency. So what I see, in the scenario described in the article, is that the physical dollar would still drop against all other currencies (otherwise there wouldn't be a bank run in the first place) but the digital dollars would drop dramatically more in value.

A recent example is Argentina during the debt default of 2000. The peso lost 60% +/- against the dollar. There was still a huge demand for physical pesos but the banks simply closed while the value of the peso continued to drop. Physical cash virtually disappeared and people had to resort to barter if they didn't have US dollars or pesos to trade with.

So this time around the dollar wouldn't be the "safe haven", it would be what everyone is trying to get out of. Because of this I can see bitcoin and precious metals rising significantly as the new "barterable items of choice" since most Americans don't hold other currencies (at least in Argentina a lot of people held US dollars). But I could be missing something.

A good argument could be made for bitcoin appreciating dramatically more than precious metals because it can be traded across space and time electronically. Physical gold and silver couldn't do this. Simply put, bitcoin is easier to carry, protect and trade with. It is arguably a better medium of exchange when compared to physical gold and silver.

[Anduril]

Can bitcoin fill the void in a bank run?

No. Next question? 

[Trader Steve]

@cypherdoc: Yes, I too was amazed to see the the USD and Treasuries soar while gold and silver plummeted during the '08 crisis but the next time around (as alluded to in the article) it would be the dollar itself that gets broken. It wouldn't be its' own "safe-haven".

I see how there could be demand for physical dollars but the reason there would be a demand is so that people could get out of them and convert them into a stronger currency. So what I see, in the scenario described in the article, is that the physical dollar would still drop against all other currencies (otherwise there wouldn't be a bank run in the first place) but the digital dollars would drop dramatically more in value.

A recent example is Argentina during the debt default of 2000. The peso lost 60% +/- against the dollar. There was still a huge demand for physical pesos but the banks simply closed while the value of the peso continued to drop. Physical cash virtually disappeared and people had to resort to barter if they didn't have US dollars or pesos to trade with.

So this time around the dollar wouldn't be the "safe haven", it would be what everyone is trying to get out of. Because of this I can see bitcoin and precious metals rising significantly as the new "barterable items of choice" since most Americans don't hold other currencies (at least in Argentina a lot of people held US dollars). But I could be missing something.

The following articles illustrate this point:

A Run on the United States Government
http://lewrockwell.com/rozeff/rozeff359.html

and

John Williams Exclusive - US Dollar Selling and Hyperinflation
http://preview.tinyurl.com/5wxbger

[ctoon6]

AHHHHH, don't lie to these people that FRN is not backed by anything. it is backed by none other than guns.

and a bank run would collapse if there was enough cash either way, if everyone had got their cash, there would be hyperinflation, and if people didn't get their money, you might even see some small scale revolution. I wish, but that is probably far from likely because most in the US are pussies, and i can say that because i am in the US.

[billyjoeallen]

In a bank run, the fractional reserve lending money multiplier works in reverse.  Money disappears and goes to money heaven. There is a mad scramble for cash as in dollars to meet existing obligations. Prices plummet.

The best technology in this scenario is Ripple, which increases the credit part of the money supply.  http://ripple-project.org/
Ripple CAN be used with bitcoin.

[Rassah]

A bank run like the ones that happened pre-fed days are not likely to happen, because the Fed backs all banks 100%. If people start withdrawing cash like crazy from their bank accounts, the Fed simply orders cash to be printed as it is necessary. Of course people would be holding on to pieces of paper with nothing to actually back it up.

Yes, but the point is that they don't have that much physical cash on hand to meet the demand. Cranking up the printing presses requires some lead time. During that interim period banks would likely shut down and barter would be order of the day. But I could be wrong...

Wait, I thought FDIC, or federal deposit insurance, that banks actually pay premiums into, is where the money to cover bank runs comes from, not newly printer dollars?

[buttcoin]

You're taking your advice from an article writen by "Tyler Durden"?

[ctoon6]

A bank run like the ones that happened pre-fed days are not likely to happen, because the Fed backs all banks 100%. If people start withdrawing cash like crazy from their bank accounts, the Fed simply orders cash to be printed as it is necessary. Of course people would be holding on to pieces of paper with nothing to actually back it up.

Yes, but the point is that they don't have that much physical cash on hand to meet the demand. Cranking up the printing presses requires some lead time. During that interim period banks would likely shut down and barter would be order of the day. But I could be wrong...

Wait, I thought FDIC, or federal deposit insurance, that banks actually pay premiums into, is where the money to cover bank runs comes from, not newly printer dollars?

FDIC covers the consumer from loss, not the bank. however if there was ever a very serious problem the federal reserve will funnel cash directly into the banks, likely causing hyperinflation.

[Steve]

Wait, I thought FDIC, or federal deposit insurance, that banks actually pay premiums into, is where the money to cover bank runs comes from, not newly printer dollars?

It doesn't cover a bank run, it covers deposits in the event of insolvency (which can help prevent bank runs).  The banks do pay an insurance premium and the FDIC uses that insurance fund to cover deposits and resolve failed banks, however the fund, as of the end of 2010 had a negative balance of about $7.3bln (it was over $20bln in the red at the end of 2009).  Shortly after the 2008 crisis they had to raise the premiums they charge banks to cover the shortfall.  Note: the FDIC itself is backed by the US gov't, so when the fund runs a negative balance, they are basically just expanding the money supply.

[billyjoeallen]

You're taking your advice from an article writen by "Tyler Durden"?

Zerohedge is the best econoblog on the Web, IMHO- certainly the most subversive. The blog owner uses a psudonym to promote free speech, the same way the authors of The Federalist Papers did.

Zerohedge is the Wikileaks of Wall Street.

[FreeMoney]

Because of the FDIC the next bank run will be different. It won't be a mad dash to get dollars, we can get those for sure. It'll be a dash to get value for our dollars. There is and can be no guarantee on that. I suspect people who have no more room for cans of beans and toilet paper will try to get some of their wealth through the crisis in gold and bitcoin.

[billyjoeallen]

Because of the FDIC the next bank run will be different. It won't be a mad dash to get dollars, we can get those for sure. It'll be a dash to get value for our dollars. There is and can be no guarantee on that. I suspect people who have no more room for cans of beans and toilet paper will try to get some of their wealth through the crisis in gold and bitcoin.

The FDIC has almost no money. The banks that fail every Friday like clockwork have depleted the insurance fund completely. Sheila Bair is operating off of a 500 billion line of credit with Treasury, which will not be nearly enough to prevent a bank run should a TBTF go down.  Increasing that line of credit literally requires an act of congress, meaning it wouldn't happen in time to do any good. Besides, Treasury is Broke too.


Bank runs are always, always deflationary, but the big financial crisis may not be a bank run. It depends on how much liquidity the FED provides. Too much and the ship alters course from Japan to Zimbabwe.

[Martin P. Hellwig]

Am I missing the point or do I not understand your question?
What do you actually mean by filling the void? As I interpret it as: All fiat currencies have gone to smithereens and people lost all value in it and need to start again from scratch, perhaps by using bitcoin? Yes of course in that scenario bitcoin can fill the void, as can seashells, garden peas and whatever else you can convince other people to accept for trading.

In any other scenario, it would be the same question as; Can pesos fill the void in a bank run?

[CurbsideProphet]

Because of the FDIC the next bank run will be different. It won't be a mad dash to get dollars, we can get those for sure. It'll be a dash to get value for our dollars. There is and can be no guarantee on that. I suspect people who have no more room for cans of beans and toilet paper will try to get some of their wealth through the crisis in gold and bitcoin.

The FDIC has almost no money. The banks that fail every Friday like clockwork have depleted the insurance fund completely. Sheila Bair is operating off of a 500 billion line of credit with Treasury, which will not be nearly enough to prevent a bank run should a TBTF go down.  Increasing that line of credit literally requires an act of congress, meaning it wouldn't happen in time to do any good. Besides, Treasury is Broke too.


Bank runs are always, always deflationary, but the big financial crisis may not be a bank run. It depends on how much liquidity the FED provides. Too much and the ship alters course from Japan to Zimbabwe.

Failing banks have had their deposits purchased by other financial institutions.  They're not depleting the FDIC fund.  The only issue with the FDIC is it's reserves are only a fraction of their outstanding obligations so a widespread bank run would deplete the fund.  But the banks currently failing right now are not doing anything to those reserves.

[FreeMoney]

Because of the FDIC the next bank run will be different. It won't be a mad dash to get dollars, we can get those for sure. It'll be a dash to get value for our dollars. There is and can be no guarantee on that. I suspect people who have no more room for cans of beans and toilet paper will try to get some of their wealth through the crisis in gold and bitcoin.

The FDIC has almost no money. The banks that fail every Friday like clockwork have depleted the insurance fund completely. Sheila Bair is operating off of a 500 billion line of credit with Treasury, which will not be nearly enough to prevent a bank run should a TBTF go down.  Increasing that line of credit literally requires an act of congress, meaning it wouldn't happen in time to do any good. Besides, Treasury is Broke too.


Bank runs are always, always deflationary, but the big financial crisis may not be a bank run. It depends on how much liquidity the FED provides. Too much and the ship alters course from Japan to Zimbabwe.

Congress doesn't do fast trillion dollar bailouts? Since when?

Deflationary bank runs are for real money. You can say that what is coming won't be technically a bank run, I guess I would agree, but it sure as hell won't be deflationary.

[billyjoeallen]

Because of the FDIC the next bank run will be different. It won't be a mad dash to get dollars, we can get those for sure. It'll be a dash to get value for our dollars. There is and can be no guarantee on that. I suspect people who have no more room for cans of beans and toilet paper will try to get some of their wealth through the crisis in gold and bitcoin.

The FDIC has almost no money. The banks that fail every Friday like clockwork have depleted the insurance fund completely. Sheila Bair is operating off of a 500 billion line of credit with Treasury, which will not be nearly enough to prevent a bank run should a TBTF go down.  Increasing that line of credit literally requires an act of congress, meaning it wouldn't happen in time to do any good. Besides, Treasury is Broke too.


Bank runs are always, always deflationary, but the big financial crisis may not be a bank run. It depends on how much liquidity the FED provides. Too much and the ship alters course from Japan to Zimbabwe.

Failing banks have had their deposits purchased by other financial institutions.  They're not depleting the FDIC fund.  The only issue with the FDIC is it's reserves are only a fraction of their outstanding obligations so a widespread bank run would deplete the fund.  But the banks currently failing right now are not doing anything to those reserves.

The banks have more liabilities than assets, which is why they get taken closed down by the FDIC in the first place. Yes, other banks buy the deposits, AFTER the FDIC adds enough cash to make the purchase worthwhile.  You really should read the press releases that detail how much the bank failure costs the fund.

More info at calculatedrisk.com

[cypherdoc]

More info at calculatedrisk.com

one of my favorite websites altho CR has been way more bullish than i have been.

[cypherdoc]

You're taking your advice from an article writen by "Tyler Durden"?

Zerohedge is the best econoblog on the Web, IMHO- certainly the most subversive. The blog owner uses a psudonym to promote free speech, the same way the authors of The Federalist Papers did.

Zerohedge is the Wikileaks of Wall Street.

+1

[cypherdoc]

Because of the FDIC the next bank run will be different. It won't be a mad dash to get dollars, we can get those for sure. It'll be a dash to get value for our dollars. There is and can be no guarantee on that. I suspect people who have no more room for cans of beans and toilet paper will try to get some of their wealth through the crisis in gold and bitcoin.

The FDIC has almost no money. The banks that fail every Friday like clockwork have depleted the insurance fund completely. Sheila Bair is operating off of a 500 billion line of credit with Treasury, which will not be nearly enough to prevent a bank run should a TBTF go down.  Increasing that line of credit literally requires an act of congress, meaning it wouldn't happen in time to do any good. Besides, Treasury is Broke too.


Bank runs are always, always deflationary, but the big financial crisis may not be a bank run. It depends on how much liquidity the FED provides. Too much and the ship alters course from Japan to Zimbabwe.

Failing banks have had their deposits purchased by other financial institutions.  They're not depleting the FDIC fund.  The only issue with the FDIC is it's reserves are only a fraction of their outstanding obligations so a widespread bank run would deplete the fund.  But the banks currently failing right now are not doing anything to those reserves.

The banks have more liabilities than assets, which is why they get taken closed down by the FDIC in the first place. Yes, other banks buy the deposits, AFTER the FDIC adds enough cash to make the purchase worthwhile.  You really should read the press releases that detail how much the bank failure costs the fund.

More info at calculatedrisk.com

you're absolutely right but they also guarantee many of the bad loans that get passed on to the new bank owners.

[foggyb]

AHHHHH, don't lie to these people that FRN is not backed by anything. it is backed by none other than guns.

Guns don't kill people.

[CurbsideProphet]

The banks have more liabilities than assets, which is why they get taken closed down by the FDIC in the first place. Yes, other banks buy the deposits, AFTER the FDIC adds enough cash to make the purchase worthwhile.  You really should read the press releases that detail how much the bank failure costs the fund.

More info at calculatedrisk.com

Maybe it's my work browser but your link takes me to some foreclosure website which doesn't look like what you intended to show.

Washington Mutual was the largest bank failure in history but the cost to the agency was zero.  Yes, some of the bank failures cost the Deposit Insurance Fund but in turn all other banks pay higher premiums.  If failures exceed what's available in the DIF, the FDIC has a line of credit with the Treasury it can tap into.  I believe the only time the FDIC tapped into the line was in the early 1990s.

The bank failures we are seeing right now are small, local banks for the most part.  Nothing like what we were seeing ~2008.  Don't get me wrong, I'm not saying the FDIC has the means to cover a systemic bank failure, they don't.  But the current bank failures are not really putting the FDIC in jeopardy.  If that were the case, we'd already see a run on banks.

[cypherdoc]

The banks have more liabilities than assets, which is why they get taken closed down by the FDIC in the first place. Yes, other banks buy the deposits, AFTER the FDIC adds enough cash to make the purchase worthwhile.  You really should read the press releases that detail how much the bank failure costs the fund.

More info at calculatedrisk.com

Maybe it's my work browser but your link takes me to some foreclosure website which doesn't look like what you intended to show.

Washington Mutual was the largest bank failure in history but the cost to the agency was zero.  Yes, some of the bank failures cost the Deposit Insurance Fund but in turn all other banks pay higher premiums.  If failures exceed what's available in the DIF, the FDIC has a line of credit with the Treasury it can tap into.  I believe the only time the FDIC tapped into the line was in the early 1990s.

The bank failures we are seeing right now are small, local banks for the most part.  Nothing like what we were seeing ~2008.  Don't get me wrong, I'm not saying the FDIC has the means to cover a systemic bank failure, they don't.  But the current bank failures are not really putting the FDIC in jeopardy.  If that were the case, we'd already see a run on banks.

http://www.calculatedriskblog.com/

the FDIC has been able to extend and pretend much longer than any of us would have thought.  they really don't have the reserves to have guaranteed everyone's acct up to $250K and some accts have unlimited guarantees.  thats plain ridiculous and they certainly would have to tap Treasury to cover losses in a bank run.  what can't go on forever won't.