If Bitcoin became the world (Reserve) currency

[Spaceman_Spiff]

I wasn't speculating when it would become the worlds currency, I was simply speculating when we take the next factor of 10 climb up the ladder to 0.1% of m3

I am not an expert, but m3 seems like a bad money supply to compare with to me.  Then you assume bitcoins couldn't be used in loans etc. (which they already are).

+1 I'm not an expert too, but M3 and even M2 won't do, because they are the mix of existing money (MB) with promise of money - term and saving deposits i.e. money that bank have lended to somebody else. To compare apples with apples we should compare 21M of bitcoins with MB. Which is much smaller than M3.

You are assuming that banking functions would disappear completely, I doubt that very much.  Mortgages etc will still very much be around, so which particular components of M3 or 2 do you think will not be applicable to a bitcoin denominated economy?

Quite to the contrary, this is your assumption, because you are saying that bitcoins 21M are all there is to "bitcoin's M3", thereby saying the loans fraction is essentially 0.  It would be much wiser to compare bitcoin's 21M coins to the USD MB in my opinion.

[zby]

When a thread such as this one appears - this is always a bearish sign.

[howardb]

I wasn't speculating when it would become the worlds currency, I was simply speculating when we take the next factor of 10 climb up the ladder to 0.1% of m3

I am not an expert, but m3 seems like a bad money supply to compare with to me.  Then you assume bitcoins couldn't be used in loans etc. (which they already are).

+1 I'm not an expert too, but M3 and even M2 won't do, because they are the mix of existing money (MB) with promise of money - term and saving deposits i.e. money that bank have lended to somebody else. To compare apples with apples we should compare 21M of bitcoins with MB. Which is much smaller than M3.

You are assuming that banking functions would disappear completely, I doubt that very much.  Mortgages etc will still very much be around, so which particular components of M3 or 2 do you think will not be applicable to a bitcoin denominated economy?

Quite to the contrary, this is your assumption, because you are saying that bitcoins 21M are all there is to "bitcoin's M3", thereby saying the loans fraction is essentially 0.  It would be much wiser to compare bitcoin's 21M coins to the USD MB in my opinion.

ok, we have probably moved beyond the envelope of my meagre economics understanding, to the degree that i'm not sure we are even having the same discussion. I'm arguing that the ledger debt portion of current m3 (lets call it unreal money) will still be around to some degree (minus fractional banking loans of course), just denominated in BTC. Oh I get it! so the 'unreal money' portion is not really divisible into the BTC21mm until it's called up/satisfied because it doesnt increase demand on the BTC pool to deliver it. Yeah makes total sense now, thanks

I'll drop a recalc in with MB, unless any budding economists have a better argument?

Edit: So it looks like MB is a harder number to pin down, but $9 trillion seems to be a consensus. So original calc is theoretically oversized by a factor of 10.

Transition
100% = (Money Base)9,000,000,000,000/21,000,000 = $428,571 = BTC1

Of course that deosn't account for the earlier argument about sudden changes causing large potential overshoots.

[Wary]

I wasn't speculating when it would become the worlds currency, I was simply speculating when we take the next factor of 10 climb up the ladder to 0.1% of m3

I am not an expert, but m3 seems like a bad money supply to compare with to me.  Then you assume bitcoins couldn't be used in loans etc. (which they already are).

+1 I'm not an expert too, but M3 and even M2 won't do, because they are the mix of existing money (MB) with promise of money - term and saving deposits i.e. money that bank have lended to somebody else. To compare apples with apples we should compare 21M of bitcoins with MB. Which is much smaller than M3.

You are assuming that banking functions would disappear completely, I doubt that very much.  Mortgages etc will still very much be around, so which particular components of M3 or 2 do you think will not be applicable to a bitcoin denominated economy?

I don't. But if BTC will be used for fractional reserve banking, there would be much more of them than 21M, because you can promise any amount of bitcoins.

          ---------------------------------------------------
         | Real              | Fractional                                  |
----------------------------------------------------------
|  $    | MB (money)    |   M3 (money + promise of money)  |
|-----|---------------|-----------------------------------
|  BTC   | 21M (BTC)         |   ??   (BTC + promise of BTC)               |
----------------------------------------------------------

So I'm talking just of comparing apples with apples.  MB with 21MBTC or M3 with (21MBTC + promise BTC). But since we can't tell how much of fractional banking be used with bitcoins, it's better to use the first option, i.e. divide MB to 21M.  After all $428,571 for bitcoin isn't that bad  

EDIT: adjusting the table.

[Raystonn]

Code:

           |---------------------------------------------------------|
           | Real                | Fractional                        |
|----------|---------------------|-----------------------------------|
|  $       | MB (money)          |   M3 (money + promise of money)   |
|----------|---------------------|-----------------------------------|
|  [btc]   | 21M ([btc])         |   ??   ([btc] + promise of [btc]) |
|----------|---------------------|-----------------------------------|

FTFY

[Skele]

If bitcoin becomes a world reserve currency then its ok but dont try to ally it with fractionals systems.. is the last thing we want in bitcoin, debt , crisis and useless monetary system

[Wary]

Code:

           |---------------------------------------------------------|
           | Real                | Fractional                        |
|----------|---------------------|-----------------------------------|
|  $       | MB (money)          |   M3 (money + promise of money)   |
|----------|---------------------|-----------------------------------|
|  [btc]   | 21M ([btc])         |   ??   ([btc] + promise of [btc]) |
|----------|---------------------|-----------------------------------|

FTFY

Thanks. Pity  that BTC symbol isn't displayed this way.

[howardb]

If bitcoin becomes a world reserve currency then its ok but dont try to ally it with fractionals systems.. is the last thing we want in bitcoin, debt , crisis and useless monetary system

No reason why BTC based fractional banking would not work in the new world order. The primary difference would be that if a bank could not deliver on it's obligations, it would be out of business, no government to print up a few more notes out of the ether. So I think in practice fractional reserve banking would happen (because it's good business to gear up from a banks point of view), but at a very low/sensible fraction 1/2->1/4 range. not the 1/10->1/20
banks are currently running at worldwide.

Also, since traditional 'current account' retail model of banking would be out of the window, then deposits would most likely be based on interest baring savings accounts with controlled withdrawal lockins, so the whole banking model would be less volatile because there are no current accounts to 'have a run on' and scaled down.

[rocks]

If bitcoin becomes a world reserve currency then its ok but dont try to ally it with fractionals systems.. is the last thing we want in bitcoin, debt , crisis and useless monetary system

No reason why BTC based fractional banking would not work in the new world order. The primary difference would be that if a bank could not deliver on it's obligations, it would be out of business, no government to print up a few more notes out of the ether. So I think in practice fractional reserve banking would happen (because it's good business to gear up from a banks point of view), but at a very low/sensible fraction 1/2->1/4 range. not the 1/10->1/20
banks are currently running at worldwide.

Also, since traditional 'current account' retail model of banking would be out of the window, then deposits would most likely be based on interest baring savings accounts with controlled withdrawal lockins, so the whole banking model would be less volatile because there are no current accounts to 'have a run on' and scaled down.

This is exactly right.

It is the FED's printing press, and only the FED's printing press, that enables banks to operate at the 1/10 to 1/30 ratios we see today. The reason is markets do not worry about a bank running out of capital because the FED can and will provide "liquidity" on demand.

If a bank operates at 1/30 and runs out of core capital, the bank can swap assets as collateral for dollar funds at face value with the FED. Because of this, banks could run on infinite leverage and it is only regulation which limits them. The system is designed to enable the FED to stop any and all bank runs in their tracks, and as a result there are no bank runs.

In a sense the leverage reported is just an fictitious accounting trick and is not real since the FED can and has simply created money "on demand" as needed for liquidity. If the FED took this away, every single bank would go under within 24 hours. That is exactly what happened to Bear Sterns in '08, the FED decided they needed to make an example of one IB that went too far, selected Bear and said they would not back them further, and Bear was bankrupt in hours.


Under a sound money system banks by necessity keep leverage less than 1/2, because otherwise they could not stop a run since there is no FED to provide "on demand" "liquidity". This was the banking system pre-FED. This would be the banking system under bitcoin. Leverage would be very low and fractional used money would be in line with base bitcoin money.

[cypherdoc]

Nice discussion going on

Fiat is an IOY for product it has no real value and should be rare and hard to obtain for it to work as an IOY.
The value of fiat is based on work that must be exerted to obtain it. (going to work)
The problem is that the supply is not limited thus creating inflation.
If fiat loses value you can get less product for it and visa versa.

The same can be said for bitcoin, it can also be an IOY for product. The same applies, it is rare and hard to obtain for it to work as an IOY.
The value of bitcoin is based on work that must be exerted to obtain it. (mining)
For bitcoin the value is truly limited and deflation will occur.
If bitcoin loses value you can get less product for it and visa versa.

etc. same applies for gold


Why can Bitcoin be an ideal reserve currency?

quote wikipedia "
A reserve currency (or anchor currency) is a currency that is held in significant quantities by governments and institutions as part of their foreign exchange reserves, and that is commonly used in international transactions. Persons who live in a country that issues a reserve currency can purchase imports and borrow across borders more cheaply than persons in other nations because they need not exchange their currency to do so. According to economists such as Valéry Giscard d'Estaing, a former French Minister of Finance and president, a reserve currency gets certain benefits called the exorbitant privilege.[1]
"

Bitcoin has sufficient quantities.
Bitcoin has international transactions.
Bitcoin makes nobody an issuer, all are equal.
Bitcoin can be trusted since nobody controls it.

The only problem is that bitcoin is not equaly distributed and thus wealth is not equally distributed. But then again neither is gold.

theoretically it will proportionally get more distributed as the price rises.

[cypherdoc]

If bitcoin becomes a world reserve currency then its ok but dont try to ally it with fractionals systems.. is the last thing we want in bitcoin, debt , crisis and useless monetary system

No reason why BTC based fractional banking would not work in the new world order. The primary difference would be that if a bank could not deliver on it's obligations, it would be out of business, no government to print up a few more notes out of the ether. So I think in practice fractional reserve banking would happen (because it's good business to gear up from a banks point of view), but at a very low/sensible fraction 1/2->1/4 range. not the 1/10->1/20
banks are currently running at worldwide.

Also, since traditional 'current account' retail model of banking would be out of the window, then deposits would most likely be based on interest baring savings accounts with controlled withdrawal lockins, so the whole banking model would be less volatile because there are no current accounts to 'have a run on' and scaled down.

This is exactly right.

It is the FED's printing press, and only the FED's printing press, that enables banks to operate at the 1/10 to 1/30 ratios we see today. The reason is markets do not worry about a bank running out of capital because the FED can and will provide "liquidity" on demand.

If a bank operates at 1/30 and runs out of core capital, the bank can swap assets as collateral for dollar funds at face value with the FED. Because of this, banks could run on infinite leverage and it is only regulation which limits them. The system is designed to enable the FED to stop any and all bank runs in their tracks, and as a result there are no bank runs.

In a sense the leverage reported is just an fictitious accounting trick and is not real since the FED can and has simply created money "on demand" as needed for liquidity. If the FED took this away, every single bank would go under within 24 hours. That is exactly what happened to Bear Sterns in '08, the FED decided they needed to make an example of one IB that went too far, selected Bear and said they would not back them further, and Bear was bankrupt in hours.


Under a sound money system banks by necessity keep leverage less than 1/2, because otherwise they could not stop a run since there is no FED to provide "on demand" "liquidity". This was the banking system pre-FED. This would be the banking system under bitcoin. Leverage would be very low and fractional used money would be in line with base bitcoin money.

i think Bitcoin can be fractionally reserved but by preserving the fiat USD system as an overlay, just like it was supposed to be pre 1971.  levels below 10:1 seem reasonable to me.

this would be the least disruptive of a transition for the world on an ongoing basis and settlements could occur nightly.

of course, this would require a huge revaluation of BTC upwards to fill the huge debt hole the world has created.  this is the strategy many gold bugs have hoped for gold.

[rocks]

This is exactly right.

It is the FED's printing press, and only the FED's printing press, that enables banks to operate at the 1/10 to 1/30 ratios we see today. The reason is markets do not worry about a bank running out of capital because the FED can and will provide "liquidity" on demand.

If a bank operates at 1/30 and runs out of core capital, the bank can swap assets as collateral for dollar funds at face value with the FED. Because of this, banks could run on infinite leverage and it is only regulation which limits them. The system is designed to enable the FED to stop any and all bank runs in their tracks, and as a result there are no bank runs.

In a sense the leverage reported is just an fictitious accounting trick and is not real since the FED can and has simply created money "on demand" as needed for liquidity. If the FED took this away, every single bank would go under within 24 hours. That is exactly what happened to Bear Sterns in '08, the FED decided they needed to make an example of one IB that went too far, selected Bear and said they would not back them further, and Bear was bankrupt in hours.


Under a sound money system banks by necessity keep leverage less than 1/2, because otherwise they could not stop a run since there is no FED to provide "on demand" "liquidity". This was the banking system pre-FED. This would be the banking system under bitcoin. Leverage would be very low and fractional used money would be in line with base bitcoin money.

i think Bitcoin can be fractionally reserved but by preserving the fiat USD system as an overlay, just like it was supposed to be pre 1971.  levels below 10:1 seem reasonable to me.

this would be the least disruptive of a transition for the world on an ongoing basis and settlements could occur nightly.

of course, this would require a huge revaluation of BTC upwards to fill the huge debt hole the world has created.  this is the strategy many gold bugs have hoped for gold.

Bitcoin can be fractionally reserved, and will be. But we will see ratios closer to the ratios we saw on the gold standard which were closer to 2:1. Ratios around 10:1 are just not possible with there is no printing press to guarantee on demand liquidity.

For example even as recently as the 80s banks needed 20% capital for a 5:1 ratio. This was after 70 years of the FED existing. When there was talk of lowering the requirement below 20% several FED members commented that going past 20% was a red line, meaning beyond that the system was just not sound.

Entities will most definitely fractionally lend bitcoin, that is normal. But the market will learn without a bailout entity to not trust any but the most conservative lenders.

Yes, this is the vision of the gold bugs. What the gold bugs are missing (and I used to be one) is gold was used as money because it was the best construct humanity had access to that fulfilled all the properties of money. Bitcoin however can do better and the gold bug vision just might be realized in bitcoin.

[PirateHatForTea]

I tend to agree more with rocks' vision than cypherdocs.

But I wonder, why would anyone want to borrow in a deflationary currency when there are loans available in an inflationary one? I think this will be another limiting factor on the fractionalization of BTC, and perhaps the same reason why fractionalization was limited when (indirectly) tied to gold?

[cypherdoc]

I tend to agree more with rocks' vision than cypherdocs.

But I wonder, why would anyone want to borrow in a deflationary currency when there are loans available in an inflationary one? I think this will be another limiting factor on the fractionalization of BTC, and perhaps the same reason why fractionalization was limited when (indirectly) tied to gold?

they wouldn't which is why i make the argument i do.

borrowing would be more acceptable in the fiat system even tho the underlying reserve could be in Bitcoin.  we've already had decades of history where we know this works prior to the 1971 depeg.

[PirateHatForTea]

Hey cypher can you explain what you mean as I don't think I understand. I thought you were arguing that we'd see 10:1 BTC-promises to RealBTC ratios in a fractional reserve BTC system.

[cypherdoc]

Hey cypher can you explain what you mean as I don't think I understand. I thought you were arguing that we'd see 10:1 BTC-promises to RealBTC ratios in a fractional reserve BTC system.

i'm arguing that the least disruptive way for Bitcoin to mesh with the existing monetary system is for it to assume the function that gold did prior to 1971; as backing for the world reserve currency USD system. 

[TERA]

If Bitcoin was used as world resurve currency, it wouldn't even operate due to scalability issues. It would be too many transactions per block and might crash and the blockchain would grow to many terabytes or petabytes, not able to fit anything let alone be used by an end user. Large centralized corporate server farms would be needed to access the network and provide services to end users which would completely defeat the purpose. People would be hacking into apple, google, bitcoin distributions sites, and dns servers all the time to distribute infected wallets/apps that steal users private keys. Then someone would crack EC and steal all of the world's money.   And of course it would be banned by governments long before any of this was able to happen.

[PirateHatForTea]

If Bitcoin was used as world resurve currency, it wouldn't even operate due to scalability issues. It would be too many transactions per block and might crash and the blockchain would grow to many terabytes or petabytes, not able to fit anything let alone be used by an end user. Large centralized corporate server farms would be needed to access the network and provide services to end users which would completely defeat the purpose. People would be hacking into apple, google, bitcoin distributions sites, and dns servers all the time to distribute infected wallets/apps that steal users private keys. Then someone would crack EC and steal all of the world's money.   And of course it would be banned by governments long before any of this was able to happen.

And you wonder why people think you're a bear

This may not be true by the way - being a reserve currency doesn't necessarily mean that transaction volumes need be insanely high. Gold doesn't exactly come with low transaction costs/high velocity but it survived as a reserve currency for a long time. I realise this isn't such a useful example now as technology has moved far forward, but we can envision a world where perhaps Bitcoin is a global reserve currency used of large transfers, fulfilling the settlement/clearing role that central bank reserves now do, and there are lots of sidechains being used for more frequent/consumer-grade transactions. Bitcoin in its current form is already not very good for bricks-and-mortar purchases, so I am hopeful that the dev changes to allow side chains will occur.

But to be honest, I also don't think it likely that BTC ever ends up as the world reserve currency. There are too many structural, technological and political problems along the way.

The limited quantity is one, I know Austrians love this characteristic but most economists don't. As Tera points out, the current transaction limit is another. Finally, I don;t see why the people that really have the power in the current order would ever allow a new order with BTC as a reserve to emerge, and they certainly have the power to stop this outcome (though I think killing Bitcoin is near impossible).

[TERA]

I'm a bull (At present) because long term I think it may end up at $20,000 or so  (that's over 3000% of today's prices) , but I don't think it will become the world reserve currency.

[cypherdoc]

the main problem as i see it is the sustainability of the current fiat system.

with the spread of info the internet has allowed, more and more ppl are aware of the inequities in the business of money production by central banks worldwide and especially here at home by our Fed.  if one is to believe Piketty's work (i do), income inequality is at all time highs as a result and inflation in certain parts of our economy are at ridiculous highs.  as a father of 2 private university students and payer of our families health insurance, i am acutely aware of this.

of course, today's version of our TPTB don't want to change things.  but i think that is more a function of the American TPTB.  elsewhere in the world, i'm seeing an increasing willingness to abandon the USD world reserve currency system with Russia and China being the most visible examples.  so i do think we have a problem that most Americans don't want to acknowledge mainly b/c of our privileged position.

is gold $45 skyrocket today a warning of things to come?  economies always cycle and we are about due for another conflagration as tvbcof likes to say.  depending on how bad this one is will determine alot of what's to come with our monetary system.  assuming Bitcoin's technical worries can be overcome (and this may just be a matter of time vs. a protocol change) along with increasing confidence that it has long term longevity, i don't see any reason why it couldn't become a reserve for the USD system.  if the US wants to stay on top, this may be it's best move to allow this to occur.

technically a reserve currency doesn't have to have a large volume of tx's; only enough to settle international balance of payment deficiencies on a daily basis or even realtime.  this would be a major improvement over using gold where these imbalances were of necessity allowed to build up to unworkable levels culminating with the French calling on Nixon to cough up their gold only to be too late with Nixon saying f*this.  the advantage to the Bitcoin protocol is we could keep 1MB block sizes and the market would drive up the tx fees and tx amounts to levels too high for everyday tx's by individuals.  i know this isn't the vision most Bitcoiner's have and i'm not even sure it's my vision but this scenario would fit with Bitcoin becoming the backing for the current USD system.  the other thing i like about this is that it shouldn't cause a huge disruption to the current system if everything goes well.  but surely the value of Bitcoin would have to rise significantly to be able to back all the USD denominated debt out there plus minus all the derivatives.

the only problem i see is that Bitcoin's distribution curve has not yet completed itself which would be a problem for price volatility.  not sure how to solve that one.