Is Fractional Reserve banking possible with Bitcoin?

[Zarathustra]

My thought is this: since fractional reserve banking basically creates money out of nothing,

It does not create money "out of nothing". Repeating the same false statement over and over again does not make it true.
The money that's finally created during the process of lending is created out of the opportunity value of the lent money.

What's the opportunity value of a $300,000 mortgage? The house increasing in value I would guess would be your answer.

The opportunity value is precisely what you make of it.
It's derived from time preference, and roughly opposite to opportunity cost.
It's very difficult, if not impossible to calculate, that's why we rely on the market to determine said value.
http://en.wikipedia.org/wiki/Time_preference
http://en.wikipedia.org/wiki/Opportunity_cost
For your specific mortgage, well, how much interest do you pay? That's the opportunity value as determined by the market (with some regulation, risk-management, administration, marketing costs etc. factored in).

Okay, but do you think that can go on forever?

No.

So opportunity value is just an empty term you just made up and is still 'nothing'.

Google finds a few (tens of thousands) hits for the term "opportunity value", but admittedly, it's more a buzz today, whereas the term "opportunity cost", which describes (not exactly) the opposite, is much more common and well-defined.

So the money is still in essence being created out of nothing and then lent out,

I'll have to repeat myself here. Money is not created out of nothing.
Just because you don't understand how it comes into existence doesn't make it magic.
The process of money creation is well understood, there is not substantial controversy about it amongst economists.

it's an evil scheme especially if you consider the macroeconomic consequences and I'm sure you know that already. If not you should get your head out of the sand and look around.

You may find that "scheme" evil, but it made the rise of the middle classes possible at the end of the middle ages.
It powered the progress of modern society towards individual liberty and democracy.

I fail to see "evil" in that.

Everything correct in your statement, except the last sentence. Collectivism with indebted people (society) is always evil and against the nature of human being. There is no individual liberty in a democracy. Individualism in a collectivist society, where you are enforced to pay protection money to the mafia (church and state) and where you are ruled and terrorised by the hypercollective and its representatives, is also against the nature of human being. Natural human being is a life in non-patriarchal, non-monogamous, self-sufficient communities, beyond the state, beyond debt, and therefore beyond business and money. Pairing families and harem families are unnatural slave constructs (famulus = house slave), originally constructed by the mafia (church and state) for the purpose of paying protection money, which began about 10'000 years ago.

[1715393225]

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[1715393225]

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[al.matic]

A Ponzi scheme is evil (it is a crime in fact). Fraction Reserve Banking is just a fancy name for a Ponzi scheme.

[Zarathustra]

A Ponzi scheme is evil (it is a crime in fact). Fraction Reserve Banking is just a fancy name for a Ponzi scheme.

Civilization (=society, collectivism, organized violence) is a ponzy scheme from the beginning. Fractional Reserve Banking is only the logical effect of it and it is as old as the Civilization.

[gbianchi]

I think there is an important inflationary effect due to exchanges fractional-reserve,
I started this topic about: https://bitcointalk.org/index.php?topic=945881.0

[jonny1000]

Yes it is possible and likely.  However Bitcoin has some properties which make it more resilient to a fractional reserve system than other forms of money.  I will try to explain below:

The core characteristic of the traditional banking system, is banks’ ability to expand the level of credit in the economy, by creating new loans and increasing deposits. This is a core driver of modern economies and a key reason for financial regulation. There is a risk banks lend out too much money in a credit boom and thus a safety net may be required to bail out the banks. In the context of Bitcoin, it is important to understand the reason banks have the ability to expand credit, which is because users treat bank deposits in the same way as cash, enabling banks to expand loans and therefore deposits, at will. People treat banks deposits this way for perfectly reasonable and logical reasons, in fact banks deposits have some significant advantages over cash, which I will try to explain below. Many of these advantages either don't apply or only partially apply in Bitcoin. There is no conspiracy or master manipulation by the financial elites; it’s very much a product of the nature and characteristics of most forms of money that bank deposits are simply better than cash.

Bitcoin has at least five properties (listed below) which provide some level of natural resilience against credit expansion, which traditional money does not have. This does not mean there cannot be a few dominant Bitcoin banking institutions engaging in credit expansion, it merely means Bitcoin may be more resilient to this than more traditional forms of money.

1. Security

Keeping money on deposits in financial institutions, increases security relative to keeping large physical cash balances at home

Bitcoin can allow a high level of security, whilst the user maintains direct control of the money without using third party financial intermediaries

2. Convenience

Using the banking system, it is possible to send money effectively over the internet or by phone, for example. If physical cash is used, then a slow, inefficient, insecure physical transfer must take place

Bitcoin can allow users to efficiently transmit money over the internet or even phone, whilst maintaining direct control of the money and without using third party financial intermediaries

3. Easy to exit

In the traditional banking system, withdrawing physical cash from a financial institution is a long administrative process which takes time

Bitcoin can allow users to withdraw money from deposit taking institutions quickly, which may encourage banks to ensure they have adequate money in reserve at all times

4. Auditability

Traditional banks offer the ability to track and monitor all transactions, which can help prevent fraud and improve accountability. This is important to many businesses and physical cash cannot offer this

Bitcoin’s blockchain can allow users to effectively audit all transactions, without using third party financial intermediaries

5. "Hybrid banking" models (perhaps the most significant)

In traditional banking models there are only two fundamental choices, 1. Physical cash which provides full user control of the money, and 2. Money on deposit at a financial institution

Bitcoin allows a wider spectrum of deposit and security models, resulting in a more complex credit expansionary dynamic

Please see some examples below of "hybrid banking" models:

• Full user control of the money, where only the user holds the private key. e.g. Bitcoin Core, Blockchain.info
• 2 of 2 multi signature wallets, such that both the user and financial intermediary must sign a transaction e.g. Greenaddress.it
• 1 of 2 multi signature wallets, such that either the user or the financial intermediary must sign a transaction
• 2 of 3 multi signature wallets, such that two of the user, a hash of the users password and the financial intermediary must sign a transaction e.g. Coinbase Vault
• n of m multi signature wallets, such that…
• Hierarchical deterministic wallets, such that a root private key can generate branches of junior private keys…
• Hierarchical deterministic multisignature wallets, such that...
• Traditional banking model e.g. Circle, Coinbase

[ulhaq]

No, fractional reserve banking is not possible with bitcoin. I am not clear why anyone thinks it is possible.

An example of fractional reserve banking:
Bob makes a $10000 deposit and is the only customer at a bank.
The bank lends out $9000 to Alice.
Bob returns and asks for the $10000 back. The bank gives him the full $10000.

At this point in time there is $190 in circulation from an initial total of $100. Yes, the $90 to Alice is a loan and needs to be repaid. But at this point in time there is still $190 in circulation.

With bitcoin:
Bob makes a 1 bitcoin deposit and is the only customer at a bank.
The bank lends out 0.9 bitcoins to Alice.
Bob returns and asks for the 1 bitcoin back. The bank can only give him 0.1 bitcoin back.

Whether or not Bob thinks (before returning to the bank) that he has 1 bitcoin deposited, and what the bank shows on its balance is immaterial. The amount of money in circulation never exceeds 1 bitcoin. This is a very different situation to what is described above.

Persons are referring to the latter case as an example of fractional reserve banking with bitcoin, which it is not.

[pogiparin]

I think this will be an impossible feat to achieve given the fact that the price of bitcoin is constantly fluctuating. Let say a "bitcoin bank" would get a reserve of the total supply of bitcoins in the world. If the prices go down drastically, that reserve would have no value at all. Banks would then have to close down since there is no money that would be circulated.