the effects of fractional reserve on bitcoins value

[adpinbr]

An economist made the following claim: if bitcoin where to become successful and liquid and big enough of a market cap, than financial firms will start to develop derivatives, options, securities and so forth (even the ability to short was condemned negative). These derivatives will reduce the value of bitcoin in a similar fashion that fractional reserve inflates the money supply. Do you think this is true? Does it matter if bitcoins value stems from transactions or as a store of value?

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[Mike Christ]

This is what has happened to gold and silver over the course of history; if people allow institutions to give them Bitcoin I.O.U.s, they should have every expectation of those I.O.U.s to inevitably no longer represent Bitcoin.

There is a very good reason why we want a chronicle of mankind.  The simplest solution to this problem is, of course, to not accept anything that isn't really Bitcoin.  If we choose to ignore past mistakes, so we will experience them again, and would we deserve the following pain.

[adpinbr]

I'm all about revolution and redefining the monetary system. But from an investment POV do you think that this implies that even if bitcoin goes mainstream we won't see 5-7 digit bitcoins?

[Mike Christ]

I'm all about revolution and redefining the monetary system. But from an investment POV do you think that this implies that even if bitcoin goes mainstream we won't see 5-7 digit bitcoins?

If we follow the timeline long enough, Bitcoin hits a singularity with the dollar (as does anything valued in the dollar) in which no amount of dollars will buy a Bitcoin.  No fiat currency has ever survived throughout history; the dollar is not the exception.

So it's hard to answer your question; yes and no.  Yes, Bitcoin will inevitably be worth a trillion dollars; no, because a hundred dollars, at that point, possibly might not buy a loaf of bread.  From an investment standpoint, keeping a majority of your wealth in gold or Bitcoin can never be a bad thing; gold is trusted globally as the de facto money, while Bitcoin, so long as it doesn't hit a major snag, will likely exhibit the same properties.

[User705]

There's nothing wrong with derivatives options or securities on top of bitcoin.  What is good is that with bitcoin bad operators get exposed and punished faster since you can't paper over the bad decisions.

[Jumpy]

Sure, the market would be giving a bit on price, but the upside is pretty enormous.

In my opinion, the key would be to insure the deposits in a nominal amount of fiat. For example, the insuring entity (whether a company or the government) will insure deposits of BTC up to 70 USD/BTC. This number would have to be revisable periodically to keep it below the actual value of Bitcoin, but it would serve to give people a safer place to put their bitcoins to keep up with inflation via interest. It would also solve a lot of issues with capitalizing projects via bitcoin (buh-bye BTCJam).

Alas, this is only my wet dream. It's unlikely to happen in an acceptably regulated fashion.

I think I'll write a blog on this tonight. Share your ideas to help me.

[justusranvier]

I'll never accept fractionally-reserved promises to deliver bitcoins in lieu of actual bitcoins.

I might pause from time to time to observe a moment of silence to honour the losses of those who do.

[djalexr]

one of the reasons fractional reserve became accepted as an idea was because of the impracticality of lugging all this gold, coins etc. around with you - when there was somebody supposedly trustworthy giving you a piece of paper you could use instead.

As bitcoins don't have this practical disadvantage, you would be unwise to trust anyone giving you a piece of paper, rather than you just looking after your own private key. That way you can be sure your bitcoins definitely exist as you can see them on the blockchain.

[Jabbatheslutt]

Ewww, I certainly hope fractional reserve never makes it to bitcoin :/

[mirelo]

one of the reasons fractional reserve became accepted as an idea was because of the impracticality of lugging all this gold, coins etc. around with you - when there was somebody supposedly trustworthy giving you a piece of paper you could use instead.

As bitcoins don't have this practical disadvantage, you would be unwise to trust anyone giving you a piece of paper, rather than you just looking after your own private key. That way you can be sure your bitcoins definitely exist as you can see them on the blockchain.

You hit the nail on the head: it is as if bitcoin were its own monetary "proxy," by being the representation of its private-key self in its own public-key self. Bitcoin is what I call a monetary metarepresentation, or metamoney: no Bitcoin proxy could offer any advantage that Bitcoin does not already offer all by itself.

[crumbs]

I'll never accept fractionally-reserved promises to deliver bitcoins in lieu of actual bitcoins.
...

In other words, you don't buy bitcoin-denominated securities, don't deal in any way with bitcoin-denominated debt (loans), and don't do anything other than directly exchange goods for bitcoin.  Limiting, but possible, i suppose.

[lonelyminer (Peter Šurda)]

In other words, you don't buy bitcoin-denominated securities, don't deal in any way with bitcoin-denominated debt (loans), and don't do anything other than directly exchange goods for bitcoin.  Limiting, but possible, i suppose.

You mistake trading with a financial asset and viewing that financial asset as equivalent to money (or in this case, Bitcoin). These are two separate issues. People buy stocks, for example, but they don't view them as money, even though they are liquid. So stocks are not a part of the money supply (either of fiat money or of Bitcoin). As I explain in my master's thesis, Bitcoin-denominated debt probably wouldn't be viewed as equivalent to Bitcoin, because it does not decrease transaction costs. Even full reserve deposits, such as those on the exchanges, are not viewed as equivalent.

[mirelo]

I'll never accept fractionally-reserved promises to deliver bitcoins in lieu of actual bitcoins.
...

In other words, you don't buy bitcoin-denominated securities, don't deal in any way with bitcoin-denominated debt (loans), and don't do anything other than directly exchange goods for bitcoin.  Limiting, but possible, i suppose.

The problem is not having "bitcoin-denominated securities," nor having "bitcoin-denominated debt (loans)": the problem is using securities or debt as money, instead of bitcoins.

The problem with our monetary system is not that it allows for the existence of debt, but rather that it mistakes debt for money by creating money from loans.

[mirelo]

In other words, you don't buy bitcoin-denominated securities, don't deal in any way with bitcoin-denominated debt (loans), and don't do anything other than directly exchange goods for bitcoin.  Limiting, but possible, i suppose.

You mistake trading with a financial asset and viewing that financial asset as equivalent to money (or in this case, Bitcoin). These are two separate issues. People buy stocks, for example, but they don't view them as money, even though they are liquid. So stocks are not a part of the money supply (either of fiat money or of Bitcoin). As I explain in my master's thesis, Bitcoin-denominated debt probably wouldn't be viewed as equivalent to Bitcoin, because it does not decrease transaction costs. Even full reserve deposits, such as those on the exchanges, are not viewed as equivalent.

Could you please provide a link to your work? You can find mine here: http://omniequivalence.com/representational-monetary-identity/.

[justusranvier]

In other words, you don't buy bitcoin-denominated securities, don't deal in any way with bitcoin-denominated debt (loans), and don't do anything other than directly exchange goods for bitcoin.  Limiting, but possible, i suppose.

You mistake trading with a financial asset and viewing that financial asset as equivalent to money (or in this case, Bitcoin). These are two separate issues. People buy stocks, for example, but they don't view them as money, even though they are liquid. So stocks are not a part of the money supply (either of fiat money or of Bitcoin). As I explain in my master's thesis, Bitcoin-denominated debt probably wouldn't be viewed as equivalent to Bitcoin, because it does not decrease transaction costs. Even full reserve deposits, such as those on the exchanges, are not viewed as equivalent.

In general I am highly sceptical of the inherent value of most financial products. We've only ever seen what a financial industry looks like when it it is subsidized and protected from competition by state power.

I suspect that in a Bitcoin world loans would tend to be short duration, relatively expensive, and rare.

I also suspect that securities would also be far less prevalent, as well as hierarchical business structures.

We're living in a world where business and financial markets are organized basically the same way they have been since the mid 19th century. We have better ways of achieving beneficial divisions of labour and deferred consumption now, or at least we'll have an opportunity to experiment with better models once the State monopoly in this area is effectively broken.

[crumbs]

In other words, you don't buy bitcoin-denominated securities, don't deal in any way with bitcoin-denominated debt (loans), and don't do anything other than directly exchange goods for bitcoin.  Limiting, but possible, i suppose.

You mistake trading with a financial asset and viewing that financial asset as equivalent to money (or in this case, Bitcoin). These are two separate issues. People buy stocks, for example, but they don't view them as money, even though they are liquid. So stocks are not a part of the money supply (either of fiat money or of Bitcoin). As I explain in my master's thesis, Bitcoin-denominated debt probably wouldn't be viewed as equivalent to Bitcoin, because it does not decrease transaction costs. Even full reserve deposits, such as those on the exchanges, are not viewed as equivalent.

I'm not sure what the difference is if you invest in bonds (that pay out dividends).  What would constitute accepting a "...fractionally-reserved promises to deliver bitcoins in lieu of actual bitcoins" according to your definition?

[crumbs]

I'll never accept fractionally-reserved promises to deliver bitcoins in lieu of actual bitcoins.
...

In other words, you don't buy bitcoin-denominated securities, don't deal in any way with bitcoin-denominated debt (loans), and don't do anything other than directly exchange goods for bitcoin.  Limiting, but possible, i suppose.

The problem is not having "bitcoin-denominated securities," nor having "bitcoin-denominated debt (loans)": the problem is using securities or debt as money, instead of bitcoins.

The problem with our monetary system is not that it allows for the existence of debt, but rather that it mistakes debt for money by creating money from loans.

I buy a bond issued by a company which lends money for profit.  The company promises to redeem my bond at any time for the full face value, and pays me dividends while i hold the bonds.  I keep all of my coin there & collect "interest," because the bond issuer is 100% trustworthy.
Do i have money or debt & what's the difference?

[Lethn]

The nice thing about Bitcoin is we know exactly how many are out there and we have the blockchain which is an excellent way to prevent fraud and attempts at counterfeiting, if financial companies tried to forge receipts like they do now then they would have to keep it below 21 million, I'd be very surprised if paper money continues to exist in the future, I'm sure they'll attempt it but they'll definitely be found out. The only reason that they got away with doing it to gold/silver was because their methods were kept secret and nobody cared, now everyone's extremely careful about dealing with them.

[crumbs]

The nice thing about Bitcoin is we know exactly how many are out there and we have the blockchain which is an excellent way to prevent fraud and attempts at counterfeiting, if financial companies tried to forge receipts like they do now then they would have to keep it below 21 million, ...

You mean if there are 300000 financial institutions, no single one of them may claim more than 21mil. assets.  I doubt that helps much.

As far as ease of auditing, A & B share a wallet with 1k BTC.  A claims to own 1k BTC, and so does B.  Unless they're audited simultaneously, how do they get caught?  Oh, A & B are banks, BTW, and there's a whole alphabet of other banks doing the same.  They call that shared wallet "line of credit."

[forbun]

They could use signatures to prove that they own the coins at certain address(es). Only one bank can prove ownership of the same coins. We can require that the coins have remained there, at that address, for some amount of time (like 1 year). This can be proven just by looking at the blockchain. And when the coins are spent, we'll know that too.