Money creation system - is bitcoin creation resistant?

[Tytanowy Janusz]

We all know that we currently have 17 mil btc in circulation and there won't be more than 21 mil of them. Limited supply make it has a deflationary nature and that builds its long term value. But is it actually true? Is bitcoin creation resistant? To answer that question lets see how money are being multiplayed in tradition monetary system and if bitcoin is resistant to that ... or how to make it resistant in the future.

Money creation in traditional banking system: You can skip this part if you know what money creation is.

https://en.wikipedia.org/wiki/Money_creation - Its very well explained here. But i will try to short it in simple words.

None from us is withdrawing money from bank accounts. We are only using small part of them by paying with credit cards but it's the same as transferring money from bank to bank, sometimes its just change in the records of one bank. It is creating a situation in which we are using our moneys but bank still holds similar amount of funds. That's why Fractional-reserve was made. If bank is working processing thousands transaction a day while holding almost the same amount of founds than why not use part of them storing in reserves only amount that might be needed.

"Fractional-reserve banking is the common practice by commercial banks of accepting deposits, and making loans or investments, while holding reserves at least equal to a fraction of the bank's deposit liabilities. Reserves are held as currency in the bank, or as balances in the bank's accounts at the central bank. Fractional-reserve banking is the current form of banking practiced in most countries worldwide." - wikipedia

Good example is better than the best explanation... imagine this situation:
I deposited 1000$ into bank with 10% Fractional-reserve system. Bank deposited 100$ into reserves and give 900$ in a loan to Peter. He bought TV set and transfer 900$ to AGD shop bank account. Bank accepted 900$ deposit and again store 90$ and AGAIN give 810$ in a loan to John. John bought new phone and transfer 810 $ to store bank account. Bank accepted 810$ deposit and again store 81$ and give 729$ to Mike in a loan. And again and again untill there is nothing to borrow. At the and, out of 1000$ banks created 9 000$. Its in 10% fractional-reserve system. In most countries mandatory reserves are around 3-5% (do your own math here ) ... and its legal !

Can bitcoin be affected by that?

Big part of all bitcoins are stored in crypto exchanges wallets. Daytraders are buying and selling coins every day but storing them on exchanges (amount of founds stored in exchanges are not changing, only records are being changed - whose coins are whose). Part of hodlers are storing coins on exchanges (not knowing how to store them safely). Crypto exchanges knows exactly how many coins they have and how many of them are needed for everyday withdrawals and which are never being used. That's why they are transferring part of founds into cold wallet and never withdraw. That's similar to banks situation and that's makes me think that exchanges may apply fractional-reserve system too.

Good example is better than the best explanation... imagine this situation:
Crypto exchange knowing a fact that (f.e.) 80% of their users founds are never being withdrawed they can create sell orders on market equal to 300% of their users founds. Where the hell 300% came from? lets put that into numbers.
Crypto exchange store 100 000 users bitcoins. Knowing a fact that 20% of users founds is enough to cover everyday withdrawals they know that they can create in their books 300 000 btc and sell to their users who came with fiat to buy btc (all users together has 400 000 btc now - in exchange books, 20% - 100 000 is needed to cover every day withdrawals). That way crypto exchange created extra 300 000 btc. Don't get me wrong. They are not true bitcoins which can be stored on blockchain and transferred to wallet. Those are bitcoins created in exchanges books into investors, storing founds on crypto exchanges, hands that thinks that they have real bitcoin. What if they know that only 5% is needed for everyday withdrawals? Do your own math . In worst case if they will sell too much they can dump altcoins to cover lack of liquidity on their on any other exchange. Why Mt-gox even said that it was hacked. Why didnt it start to work in fractial-reserve system covering loss from profit from fees? Maybe it wasn't hacked. Maybe mt gox set minimal reseves too low and it has to lie that it was hacked (https://en.wikipedia.org/wiki/Mt._Gox).

That applies also to every crypto not only bitcoin and not only exchanges can do that. Every company that stores your coin on their wallet can do that.

How to fight against bitcoin creation?

After I realized this I've started to search for a way to fight against coins creation. I found "proof of keys" initiative that encourage crypto society to withdraw all coins from exchanges in 3 of January every year to make crypto exchanges show us that they actually have our coins - they were not hacked and they are not working in fractional-reserve system. I think that it's the most important initiative in all crypto word. It's the only way for us to know that there is no 200 mil bitcoin in system (20 mil real and 180 mil fake bitcoins in exchanges books) and bitcoin is not similar to fiat (can be printed). The second way for that is to force on exchanges creating huge exel file in which every users founds will be written so everyone could check if his record is not faked and if sum of users founds is similar to hot and cold wallets exchange founds. But its more like a dream that will never happend.  We need to know that storing coins on exchanges is not only risky (they can be hacked) but doing that we are allowing exchanges to dump them decrissing prices. Storing bitcoin on exchanges or any other third part company wallet dumps and destroys bitcoin.

[3acaga]

Of course, I am sure that the exchanges will create clone-bitcoins and so that we can prevent it - this is a great way to display all bitcoins on January 3. But imagine what commission will be on January 3 in a transaction ...
The goal of Bitcoin is independence and this is not how it does not coincide with the requirements for exchanges about their responsibility for financial fraud.

[Naida_BR]

So you are saying that the traditional money creation system is worthy and you want to bring it in a decentralized ecosystem?

No advantage stems from the bank money creation. It does only create bigger liabilities and debt. I see no reason to implement this feature to the currenct ecosystem.

[raven7886]

Really interesting perspective. Good work OP!

I am already aware (and got chances to know from an exchange operator itself) that exchanges are misusing our funds for their own trading purposes but never thought about how it will impact for dumping bitcoin's price itself. I am personally following and keep suggesting not to keep cryptos in exchange but for the reason of hacking scare, but never got time to think in your perspective even after hearing about those misusing.

We all keep suspecting those mtgox treasury team for continuous dumps but the actual culprits might be exchange operators and web wallet providers (recently got chances to see coinbase's inventory maintenance tx, and lost sleep for 2 days).

Probably now many people may come out with their researches on why bitcoin is exactly following the dump sequences from 2014/2015.

[Tytanowy Janusz]

So you are saying that the traditional money creation system is worthy and you want to bring it in a decentralized ecosystem?

No advantage stems from the bank money creation. It does only create bigger liabilities and debt. I see no reason to implement this feature to the currenct ecosystem.

No my friend. I'm saying that it is possible that it is already happening in crypto and i'm saying that we need to find strategy how to fight with it.

I am already aware (and got chances to know from an exchange operator itself) that exchanges are misusing our funds for their own trading purposes but never thought about how it will impact for dumping bitcoin's price itself. I am personally following and keep suggesting not to keep cryptos in exchange but for the reason of hacking scare, but never got time to think in your perspective even after hearing about those misusing.

Thats for sharing this. It confirms my thoughts that holding coins on exchange harms not only individuals who do that but whole crypto society.

[Crypdon]

From the mt gox scam we know that the exchange owners use our funds to invest for their own purposes. Fiat exchanges like coinbase and gemini have enough bitcoins in cold storage and cash that we pay in to cover any major dumps. They must be using any spare for investing

[timerland]

We all know that we currently have 17 mil btc in circulation and there won't be more than 21 mil of them. Limited supply make it has a deflationary nature and that builds its long term value. But is it actually true? Is bitcoin creation resistant? To answer that question lets see how money are being multiplayed in tradition monetary system and if bitcoin is resistant to that ... or how to make it resistant in the future.

Money creation in traditional banking system: You can skip this part if you know what money creation is.

https://en.wikipedia.org/wiki/Money_creation - Its very well explained here. But i will try to short it in simple words.

None from us is withdrawing money from bank accounts. We are only using small part of them by paying with credit cards but it's the same as transferring money from bank to bank, sometimes its just change in the records of one bank. It is creating a situation in which we are using our moneys but bank still holds similar amount of funds. That's why Fractional-reserve was made. If bank is working processing thousands transaction a day while holding almost the same amount of founds than why not use part of them storing in reserves only amount that might be needed.

"Fractional-reserve banking is the common practice by commercial banks of accepting deposits, and making loans or investments, while holding reserves at least equal to a fraction of the bank's deposit liabilities. Reserves are held as currency in the bank, or as balances in the bank's accounts at the central bank. Fractional-reserve banking is the current form of banking practiced in most countries worldwide." - wikipedia

Good example is better than the best explanation... imagine this situation:
I deposited 1000$ into bank with 10% Fractional-reserve system. Bank deposited 100$ into reserves and give 900$ in a loan to Peter. He bought TV set and transfer 900$ to AGD shop bank account. Bank accepted 900$ deposit and again store 90$ and AGAIN give 810$ in a loan to John. John bought new phone and transfer 810 $ to store bank account. Bank accepted 810$ deposit and again store 81$ and give 729$ to Mike in a loan. And again and again untill there is nothing to borrow. At the and, out of 1000$ banks created 9 000$. Its in 10% fractional-reserve system. In most countries mandatory reserves are around 3-5% (do your own math here ) ... and its legal !

Can bitcoin be affected by that?

Big part of all bitcoins are stored in crypto exchanges wallets. Daytraders are buying and selling coins every day but storing them on exchanges (amount of founds stored in exchanges are not changing, only records are being changed - whose coins are whose). Part of hodlers are storing coins on exchanges (not knowing how to store them safely). Crypto exchanges knows exactly how many coins they have and how many of them are needed for everyday withdrawals and which are never being used. That's why they are transferring part of founds into cold wallet and never withdraw. That's similar to banks situation and that's makes me think that exchanges may apply fractional-reserve system too.

Good example is better than the best explanation... imagine this situation:
Crypto exchange knowing a fact that (f.e.) 80% of their users founds are never being withdrawed they can create sell orders on market equal to 300% of their users founds. Where the hell 300% came from? lets put that into numbers.
Crypto exchange store 100 000 users bitcoins. Knowing a fact that 20% of users founds is enough to cover everyday withdrawals they know that they can create in their books 300 000 btc and sell to their users who came with fiat to buy btc (all users together has 400 000 btc now - in exchange books, 20% - 100 000 is needed to cover every day withdrawals). That way crypto exchange created extra 300 000 btc. Don't get me wrong. They are not true bitcoins which can be stored on blockchain and transferred to wallet. Those are bitcoins created in exchanges books into investors, storing founds on crypto exchanges, hands that thinks that they have real bitcoin. What if they know that only 5% is needed for everyday withdrawals? Do your own math . In worst case if they will sell too much they can dump altcoins to cover lack of liquidity on their on any other exchange. Why Mt-gox even said that it was hacked. Why didnt it start to work in fractial-reserve system covering loss from profit from fees? Maybe it wasn't hacked. Maybe mt gox set minimal reseves too low and it has to lie that it was hacked (https://en.wikipedia.org/wiki/Mt._Gox).

That applies also to every crypto not only bitcoin and not only exchanges can do that. Every company that stores your coin on their wallet can do that.

How to fight against bitcoin creation?

After I realized this I've started to search for a way to fight against coins creation. I found "proof of keys" initiative that encourage crypto society to withdraw all coins from exchanges in 3 of January every year to make crypto exchanges show us that they actually have our coins - they were not hacked and they are not working in fractional-reserve system. I think that it's the most important initiative in all crypto word. It's the only way for us to know that there is no 200 mil bitcoin in system (20 mil real and 180 mil fake bitcoins in exchanges books) and bitcoin is not similar to fiat (can be printed). The second way for that is to force on exchanges creating huge exel file in which every users founds will be written so everyone could check if his record is not faked and if sum of users founds is similar to hot and cold wallets exchange founds. But its more like a dream that will never happend.  We need to know that storing coins on exchanges is not only risky (they can be hacked) but doing that we are allowing exchanges to dump them decrissing prices. Storing bitcoin on exchanges or any other third part company wallet dumps and destroys bitcoin.

Firstly, just because bitcoin has a limited supply doesn't make it deflationary. It is in fact still inflationary since the money supply is still continuously going up, despite at a decreasing rate. Only at the stage where the average amount of bitcoins lost that can't ever be accessed again exceeds the amount of bitcoin created on a daily basis can bitcoin be truly be deflationary.

But what you said is spot on. Fractional reserve on exchanges and the so called "hosted bitcoin wallets" or "bitcoin banks" is a huge issue, and can definitely potentially be an issue in the future when big investment firms open custodial accounts, or if bitcoin denominated banking services become mainstream.

That's why I believe only in onchain bitcoins. Offchain wallets, and coins are completely useless, because you're still relying on a third party to do as you say, and keep your coins safe. They are no different to an IOU that any traditional bank issues you when you deposit funds with them. Using them essentially defeats the trustless nature of bitcoin which is so important.

I don't think that your solution is very viable, though. People simply wouldn't be willing to participate because a) it's a hassle, and fees could be high and b) it is impossible for some people to withdraw from their positions on exchanges on a short notice. When you deposit any funds onto a third party offering off chain transactions, you are taking that risk.

[jseverson]

Very interesting point, and is certainly more than plausible. At this point though, most people who hold a decent value in coins know not to keep them in exchanges for long term storage. I expect this mentality to be even more prevalent in the future, as more people immerse themselves in the community.

The problem is custodial services that target corporations. They'll be keeping more and more coins as financial entities get more interested in the market. Still, Bitcoin is for everyone; it's just ironic that a symbol of freedom can still be used by the financial elite to screw over the little guys lol.

[Whosdaddy]

I actually keep almost all my money in cash, I do not like to keep my money in my bank account since that would help them and I hate them. I have to use a bank and I selected one with a great mobile app that allows me to do anything I want from mobile without going anywhere and at worst I keep it at my account without putting it anywhere but I always keep a marginally small amount (like 50 dollars at most, never higher).

I have to have a bank account in order to withdraw my bitcoins to fiat and than cash out but aside from that I do not use any banks for any banking reasons, I do not even have a credit card. If everyone in the world lived like I lived banks would have so much trouble giving everyone their cash that eventually banks would go bankrupt from not having any money at all and failure to pay people their money.

[Tytanowy Janusz]

Its frightening that, according to poll, everyone who voted, agreed that crypto exchanges are using Fractional-Reserve system. It means that we no longer have maximum of 21 mil bitcoins. I think that this should be spread widely and be beggining of long discussion ended with solution which will help us, crypto society, fight against creating off-chain bitcoins

[hatshepsut93]

Firstly, just because bitcoin has a limited supply doesn't make it deflationary. It is in fact still inflationary since the money supply is still continuously going up, despite at a decreasing rate. Only at the stage where the average amount of bitcoins lost that can't ever be accessed again exceeds the amount of bitcoin created on a daily basis can bitcoin be truly be deflationary.

Bitcoin is very much deflationary, because if we imagine that it has replaced all fiat tomorrow, it would very soon (within a decade) reach the point when the amount of value created by its emission (network rewards) will become lower than the growth of economy, thus resulting in deflation, meaning the decrease general price levels. But since Bitcoin is too small to influence the economy, the most noticeable effect would be Bitcoin's own price increase over time, although this effect can easily be buried beneath volatility, just like it happens with gold.

[Tytanowy Janusz]

Bitcoin is very much deflationary, because if we imagine that it has replaced all fiat tomorrow, it would very soon (within a decade) reach the point when the amount of value created by its emission (network rewards) will become lower than the growth of economy, thus resulting in deflation, meaning the decrease general price levels. But since Bitcoin is too small to influence the economy, the most noticeable effect would be Bitcoin's own price increase over time, although this effect can easily be buried beneath volatility, just like it happens with gold.

There are 2 definitions of deflation. The right one (decrise of supply) and the mass adoption scam one (decrise of average prices). I think that we should use the right one. Saying that bitcoin is deflation coin i mean that soonly it will become due to very low distribution and the amount of bitcoin beeing constantly destroyed due to wrong transfers, lost keys etc.

Perhaps its deflation coin now. We dont know exact number of bitcoins beeing lost each year. I heard that currently 30% of bitcoins are lost.

[1Referee]

I heard that currently 30% of bitcoins are lost.

Lost till they start moving again.

Physical Bitcoins such as Casascius coins can be used as means of exchanges without the coins themselves moving on-chain, and I am pretty certain that a lot of what people consider to be 'lost coins' are actually being used still, but just in form of exchanging private keys, because that's basically what it is.

I created a couple of physical Bitcoins myself for the sole purpose of having value in Bitcoin that I can use in case there is no internet, and obviously to maintain privacy. I like the fact that I can spend coins without anyone (aside from the party I transact with) noticing. We're at the very beginning of tools and technologies that will stimulate the exchange of private keys in a secure manner, so expect it to become more of a thing as time goes by.

[exstasie]

I heard that currently 30% of bitcoins are lost.

Lost till they start moving again.

Physical Bitcoins such as Casascius coins can be used as means of exchanges without the coins themselves moving on-chain, and I am pretty certain that a lot of what people consider to be 'lost coins' are actually being used still, but just in form of exchanging private keys, because that's basically what it is.

I'm a big fan of hawala systems and the general idea of transferring money without actually moving it, e.g. through a network.

I don't know how common it is today, but I think people trading bitcoins as bearer instruments will become very common over time. A little while back, I discovered Opendimes which are little USB sticks that enable exactly that. You can plug it in to check the balance but trade with it offline. To spend, you break the seal and reveal the private key (rendering it un-tradeable afterward). Very cool!

[Tytanowy Janusz]

You are right that its overestimated and some of those "lost bitcoins" will be "found" someday, but no doubt amount of lost bitcoins is constantly incrising. Just imagine what will happend with your bitcoins after you die. Does anyone other knows where and how you store them? What is the password to unlock wallet? Maybye your whife knows that but what if you both die in car accident? This is happening every day. Every day amount of lost bitcoins is increasing.

Offline wallets are interresting. I need to read more about them but i dont see practical usage of transferring money without actually moving it, e.g. through a network.

[kryptqnick]

We all know that we currently have 17 mil btc in circulation and there won't be more than 21 mil of them.

Well, actually, we will have less in circulation, because 4 million btc are burned. But yeah, that's not the point of your story.

None from us is withdrawing money from bank accounts. We are only using small part of them by paying with credit cards but it's the same as transferring money from bank to bank, sometimes its just change in the records of one bank.
In most countries mandatory reserves are around 3-5% (do your own math here ) ... and its legal !

Big part of all bitcoins are stored in crypto exchanges wallets.
Crypto exchange knowing a fact that (f.e.) 80% of their users founds are never being withdrawed they can create sell orders on market equal to 300% of their users funds.

Crypto exchange stores 100 000 users' bitcoins. Knowing for a fact that 20% of funds is enough to cover everyday withdrawals they know that they can create in their books 300 000 btc and sell to their users who came with fiat to buy btc (all users together has 400 000 btc now - in exchange books, 20% - 100 000 is needed to cover every day withdrawals). That way crypto exchange created extra 300 000 btc. Don't get me wrong. They are not true bitcoins which can be stored on blockchain and transferred to wallet. Those are bitcoins created in exchanges books into investors, storing founds on crypto exchanges, hands that thinks that they have real bitcoin.

not only exchanges can do that. Every company that stores your coin on their wallet can do that.
Storing bitcoin on exchanges or any other third part company wallet dumps and destroys bitcoin.

I never really thought about it, but it seems like you are right. However, I just decided to skim Hitbtc's terms of use and I didn't find anything about them using users' funds for their own purposes (the exception is security measures, but that's not what you were talking about). Moreover, when I went though blockchain.info terms, I found quite the opposite:

The Wallet is provided to you exclusively by Blockchain Luxembourg S.A. At no point will Blockchain ever take custody or control over Virtual Currency stored in your Wallet

So perhaps, even though they could write down one balance and actually transfer money elsewhere, they don't do it, because they are not banks and don't want to lose the trust of people.

[Tytanowy Janusz]

I never really thought about it, but it seems like you are right. However, I just decided to skim Hitbtc's terms of use and I didn't find anything about them using users' funds for their own purposes (the exception is security measures, but that's not what you were talking about). Moreover, when I went though blockchain.info terms, I found quite the opposite:

The Wallet is provided to you exclusively by Blockchain Luxembourg S.A. At no point will Blockchain ever take custody or control over Virtual Currency stored in your Wallet

So perhaps, even though they could write down one balance and actually transfer money elsewhere, they don't do it, because they are not banks and don't want to lose the trust of people.

Interesting. I've never checked what's on my exchange addresses. Let's do it now... I've put my bitcoin exchange address into explorer to check if there are my coins. There were 2 deposits (all mine with total amount equal to my deposit balance). Since those deposits I've tripled amount of bitcoins due to trading and daytrading. Where are rest of my bitcoins? I don't know and i don't have any possibility to check it.

Then i realised that actually my bitcoin balance is currently equal to 0 btc because all my bitcoins are into trades. So I have 0 btc na x amount of etherum alts. I put etherum wallet into explorer and its empty. It means that i have someone bitcoins on my exchange address and someone has all my altcoins (if they actually exist). I think exchanges can cheat in this way without loosing trust because its untraceable. And of course they won't put that in terms.


As for the blockchain into wallet. If its possible to check if your ballance is ok by public key on other explorers than I think that its impossible to fake balances and move coins. Thus its impossible for them to function in fractional reserve system.

I encourage you to vote in poll. I'm realy interrested in your opinion.

[Tytanowy Janusz]

I encourage you to vote in poll. I'm very interrested in your opinion. I also created Polish language topic, where there are 3 votes for yes.

https://bitcointalk.org/index.php?topic=5094172.msg49397018#msg49397018

It means that its 7:2 that exchanges are using Fractional-Reserve system what means that most of You agree that there might be more than 21 mil btc.

We also need to remeber that many ICOs are related to crypto banking.

[Tytanowy Janusz]

Just thinking that crypto exchanges might be only small drop in sea of finantial institutions interrested in multiplying bitcoin. There are cryptocurrency banking icos, lending icos and even a big traditional bank might in future accept bitcoin deposits. We need to talk about that as much as possible and awoid storing coins on third party wallets. This destroys one of fundamentian reason for bitcoin to exist.

[poptok1]

I encourage you to vote in poll.
-snip-

To bad you gave us only two choices in the poll, because I simply don't know. It is possible, yet very risky.
Your doubts however are fully justified, lack of transparency and experience with most financial institutions of days past, suggests us that they do. On the other hand, there is no way of having metaphysical certitude that they in fact fractioning crypto.
For all that we know, exchanges will always explain themself with cold storage slogan. You know, for your safety.

Fraction reserve is the cancer of this planet's economic system, when (if at all) this unfair process gets disclosed in the crypto world, an avalanche of dips so huge, like never before awaits us. That's why this proof of keys initiative is so important.
Thanks for sharing the information along with concerning thoughts, awareness of the potential problem must be risen.