2013-09-17 Bitcoin Money Supply and Money Creation

[NewLiberty]

Well written primer, economic focus, not too technical, reasonable conclusions.
http://www.dgcmagazine.com/bitcoin-money-supply-and-money-creation/

Thank you Radoslav Albrecht

[ArticMine]

This article while technically correct from an academic point of view misses a crucial point. In order for a bank to create money by fractional reserve banking there has to be a person who is both creditworthy and willing to borrow. Furthermore the borrower must be willing hold the loan for a significant period of time in order to have an impact in the M1 money supply.

The trouble is that no borrower in their right mind will borrow Bitcoin, a currency that has increased in purchasing power by a factor of 25 in under 6 months only to then "correct" in the "bear" market to "only" 14 times the purchasing power! By the way the real issue here is not volatility but rather the massive unrelenting bull market in Bitcoin driven by the adoption of the currency.  Bitcoin borrowing and lending will only make sense once adoption of Bitcoin has reached close to its saturation level, at that point it will behave a lot like gold does today. In the meantime Bitcoin only makes sense as an equity based form of money and the Bitcoin monetary base will be for all practical purposes effectively equivalent to the entire Bitcoin money supply including M1, M2, M3 etc.

The author's site https://www.bitbond.net/ and concept is in fact so far ahead of its time that it actually at this point in Bitcoin's development highly dangerous to both borrowers and lenders alike..

[NewLiberty]

The trouble is that no borrower in their right mind will borrow Bitcoin

Do you imagine that no one since the advent of Bitcoin could have sold short and made money, or reasonably thought that they could?  There may in fact be borrowers that do so in sound mind.  Maybe you could make some fees through their use of your bitcoin.  

Whether it is ahead of its time or not is up to them, but I'm not even certain they are the first.

https://www.coinlenders.com/feerebate

[ArticMine]

Selling Bitcoin short as a short term speculation or hedge has made money and can make sense in some situations. I am talking about borrowing Bitcoin for six weeks to a year or more https://www.bitbond.net/faq. There have been other examples before. The most famous of course was Trendon Shavers aka pirateat40. What broke pirateat40 in the end was not the 7% a week interest rate (this actually made sense for a period of time in the fall of 2011 when the BTC / USD exchange rate was falling by more than 7% a week) but rather the long term increase in purchasing power of Bitcoin.

[NewLiberty]

Selling Bitcoin short as a short term speculation or hedge has made money and can make sense in some situations. I am talking borrowing Bitcoin for six weeks to a year or more https://www.bitbond.net/faq. There have been other examples before. The most famous of course was Trendon Shavers aka pirateat40. What broke pirateat40 in the end was not the 7% a week interest rate (this actually made sense for a period of time in the fall of 2011 when the BTC / USD exchange rate was falling by more than 7% a week) but rather the long term increase in purchasing power of Bitcoin.

There are many reasons a venture can fail.  We might agree he is venturesome, and bold, with this effort.  I hope not also foolish, and wish him every success.

[StarfishPrime]

This article while technically correct from an academic point of view misses a crucial point. In order for a bank to create money by fractional reserve banking there has to be a person who is both creditworthy and willing to borrow. Furthermore the borrower must be willing hold the loan for a significant period of time in order to have an impact in the M1 money supply.

The trouble is that no borrower in their right mind will borrow Bitcoin, a currency that has increased in purchasing power by a factor of 25 in under 6 months only to then "correct" in the "bear" market to "only" 14 times the purchasing power! By the way the real issue here is not volatility but rather the massive unrelenting bull market in Bitcoin driven by the adoption of the currency.  Bitcoin borrowing and lending will only make sense once adoption of Bitcoin has reached close to its saturation level, at that point it will behave a lot like gold does today. In the meantime Bitcoin only makes sense as an equity based form of money and the Bitcoin monetary base will be for all practical purposes effectively equivalent to the entire Bitcoin money supply including M1, M2, M3 etc.

The author's site https://www.bitbond.net/ and concept is in fact so far ahead of its time that it actually at this point in Bitcoin's development highly dangerous to both borrowers and lenders alike..

^^ +1
Mortgage backed securities are a good example of a significant contributor to USD M1. Would any sane person take out a mortgage denominated in bitcoin?

Cryptocurrencies will likely coexist with fiat currencies for at least several decades.