Loans in BTC

[malykii]

Say BTC does become the currency that people rely on.  How would a loan system work?  I would imagine people would still need to take out loans for large purchases, such as cars and houses.

Without a credit system how does something like that play out?  Would credit cards in BTC exist, and you still received a credit score that allowed you to take out money for a house?  The fluctuation of the BTC price definitely makes it difficult for that model to work. 

I am all about Bitcoins, but I can't seem to wrap my head around this part of society that exists, and is still required with our current mentality.

Not sure if this is the right location for this, but I figured this would be a good place to start.

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[AliceWonder]

bitcoin is not the right currency for loans.

I don't know if another alt currency would work or not, but any bitcoin loans would have to take place outside the blockchain and be done by contract.

I don't want BTC to replace fiat anyway, but rather compliment it.

[deggen]

The price of housing is artificially high because of the whole credit industry.

Before mortgages, you'd have people building their own houses on land they claimed as their own. A homestead. So I think in an ideal world we'd go back to that sort of thing, or something completely new.

https://www.youtube.com/watch?v=Y4WmDoYJhnk

I certainly don't want loans in bitcoin, unless they're non-interest loans - that's where the monetary oppression in the world comes from.

[Tron]

What is wrong with loans?

It isn't loans that got us (US) in trouble.   It was the unbridled emission of credit to unqualified borrowers.  In our current fractional reserve system, each loan creates more money.  Even the fractional reserve lending isn't what got us in trouble, although it was a contributing factor allowing additional leverage that we're still hiding and unwinding.

A bitcoin loan should include interest, which is just the risk adjusted time value of money.  The borrower would need to qualify and have a way to pay back the loan.  The inability for borrowers to pay back the loans, combined with the leverage added to the system, combined with the ratings agencies being co-opted by the banks to hide the risk is what led to the near-failure of our financial system.  I'm not convinced the problems have been solved.

What bitcoin brings to the table is a algorithmic check and balance which prevents fractional reserve banking.  You can't lend $10 for every $1 deposited.  You could lend 5 BTC for every 5 BTC saved and the incentive to do so would be an interest rate commensurate with the risk of the borrower defaulting.  If our banking system had run on a one-to-one ratio of depositors to borrowers, and proper credit checks, there wouldn't have been a problem.

I'm a proponent of Bitcoin precisely because the problems have not been solved, but rather cleverly papered over and hidden.

[twiifm]

deflation is terrible for loans.  If you borrow 1 BTC and have to pay back 1.25 BTC (due to interest) plus the price of house goes down due to deflation.  You'll always be losing money.  Its only good for the lenders

[theonewhowaskazu]

deflation is terrible for loans.  If you borrow 1 BTC and have to pay back 1.25 BTC (due to interest) plus the price of house goes down due to deflation.  You'll always be losing money.  Its only good for the lenders

Loans by definition must always lose money...

Lol

Anyway, if you're borrowing BTC, when the exchange rate settles, the interest rates will likely be lower than if the currency was constantly being inflated. It won't be 0%, but it will likely be quite low.

[odolvlobo]

Say BTC does become the currency that people rely on.  How would a loan system work?  I would imagine people would still need to take out loans for large purchases, such as cars and houses.
Without a credit system how does something like that play out?  Would credit cards in BTC exist, and you still received a credit score that allowed you to take out money for a house?  The fluctuation of the BTC price definitely makes it difficult for that model to work. 

If Bitcoin becomes the currency that people depend on, then a credit industry will appear. It is probably safe to assume that Bitcoin cannot become mainstream with one.

What bitcoin brings to the table is a algorithmic check and balance which prevents fractional reserve banking.  You can't lend $10 for every $1 deposited.  You could lend 5 BTC for every 5 BTC saved and the incentive to do so would be an interest rate commensurate with the risk of the borrower defaulting.  If our banking system had run on a one-to-one ratio of depositors to borrowers, and proper credit checks, there wouldn't have been a problem.

There is no reason why fractional reserve banking could not be done with bitcoins. After all, it existed when the U.S. was on the Gold Standard.

[tmobileguy]

There is no reason why fractional reserve banking could not be done with bitcoins. After all, it existed when the U.S. was on the Gold Standard.

It can't be done with bitcoin, because you cannot produce more bitcoins like you can dollar bills...And when the banks have to fufill the loan, they will have to send actual bitcoins to fund the loan....

The reason it was done with gold was because instead ofsending people actual bars of gold, they were sending them a bond that stated that they owned this much gold in return but were overselling the bonds compared to what they had in reserves....

[Brewins]

I think same way than the loan system in the fiat world: a central autority that will borrow the bitcoins. You can also pay and give back the dollar equivalent of bitcoins, so one could avoid the fall in prices and etc.

What bitcoin brings to the table is a algorithmic check and balance which prevents fractional reserve banking.  You can't lend $10 for every $1 deposited.  You could lend 5 BTC for every 5 BTC saved and the incentive to do so would be an interest rate commensurate with the risk of the borrower defaulting.  If our banking system had run on a one-to-one ratio of depositors to borrowers, and proper credit checks, there wouldn't have been a problem.

There is no reason why fractional reserve banking could not be done with bitcoins. After all, it existed when the U.S. was on the Gold Standard.
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You will need to deliver the bitcoins.And you can't create bitcoins at your own will.

Would be the same as using gold as coin, instead of backing your coins with gold.

[hollowframe]

deflation is terrible for loans.  If you borrow 1 BTC and have to pay back 1.25 BTC (due to interest) plus the price of house goes down due to deflation.  You'll always be losing money.  Its only good for the lenders

Loans by definition must always lose money...

Lol

Anyway, if you're borrowing BTC, when the exchange rate settles, the interest rates will likely be lower than if the currency was constantly being inflated. It won't be 0%, but it will likely be quite low.

Loans do not always lose money, but when the price of the unit of measure goes up it hurts the borrower and helps the lender in terms of fiat.

Generally speaking it is not a good idea to borrow in bitcoin unless you plan on using your borrowed funds to pay for some income generating asset that will generate bitcoins.

[theonewhowaskazu]

deflation is terrible for loans.  If you borrow 1 BTC and have to pay back 1.25 BTC (due to interest) plus the price of house goes down due to deflation.  You'll always be losing money.  Its only good for the lenders

Loans by definition must always lose money...

Lol

Anyway, if you're borrowing BTC, when the exchange rate settles, the interest rates will likely be lower than if the currency was constantly being inflated. It won't be 0%, but it will likely be quite low.

Loans do not always lose money, but when the price of the unit of measure goes up it hurts the borrower and helps the lender in terms of fiat.

Generally speaking it is not a good idea to borrow in bitcoin unless you plan on using your borrowed funds to pay for some income generating asset that will generate bitcoins.

Why would you lend money if you don't make money by doing it? You could just save the money in your wallet.

In order for it to make you money, someone has to pay. That person is the borrower.

Thus borrowing always loses money.

Maybe there's something worth that loss of money, thus making the loan worth it, but that doesn't change the fact that loans always lose money. Whether thats though high interest rates, or a combination of low interest rates and deflation, is irrelevant.

[deggen]

Perhaps the credit industry would turn into more of a private investment.

Eg. Someone would loan you 10BTC to start your business, and instead of interest on that loan (because interest cannot exist in a bitcoin system - fractional reserve impossible as stated above) they'd agree on a % of your profit, up to 150% of their original investment. Or whatever.

I think this is what's happening already with crypto 2.0 decentralized exchanges and asset issuance.

Personal loans need to stop anyway. If people can't afford to buy cars then no one will buy them and someone will eventually come to market with a cheaper car which everyone can afford. The current credit system just insures money flows to the top even when the poorest can't realistically afford what the big companies are selling.

[twiifm]

deflation is terrible for loans.  If you borrow 1 BTC and have to pay back 1.25 BTC (due to interest) plus the price of house goes down due to deflation.  You'll always be losing money.  Its only good for the lenders

Loans by definition must always lose money...

Lol

Anyway, if you're borrowing BTC, when the exchange rate settles, the interest rates will likely be lower than if the currency was constantly being inflated. It won't be 0%, but it will likely be quite low.

The loan has interest on it but you expect the underlying asset (purchased by loan) to rise in value

[odolvlobo]

There is no reason why fractional reserve banking could not be done with bitcoins. After all, it existed when the U.S. was on the Gold Standard.

It can't be done with bitcoin, because you cannot produce more bitcoins like you can dollar bills...And when the banks have to fufill the loan, they will have to send actual bitcoins to fund the loan....

Person A deposits 100 BTC. The bank A loans 90 BTC to person B.
Person B deposits 90 BTC. The bank B loans 81 BTC to person C.
Person C deposits 81 BTC. The bank C loans 72 BTC to person D.
Person D deposits 72 BTC. ...

Total apparent number of bitcoins in the system: 1000

That's classic fractional reserve banking and it works with dollars, bitcoins, gold, or seashells.

[theonewhowaskazu]

deflation is terrible for loans.  If you borrow 1 BTC and have to pay back 1.25 BTC (due to interest) plus the price of house goes down due to deflation.  You'll always be losing money.  Its only good for the lenders

Loans by definition must always lose money...

Lol

Anyway, if you're borrowing BTC, when the exchange rate settles, the interest rates will likely be lower than if the currency was constantly being inflated. It won't be 0%, but it will likely be quite low.

The loan has interest on it but you expect the underlying asset (purchased by loan) to rise in value

Yes, and BTC doesn't mean that nothing will ever appreciate against it . .

[theonewhowaskazu]

There is no reason why fractional reserve banking could not be done with bitcoins. After all, it existed when the U.S. was on the Gold Standard.

It can't be done with bitcoin, because you cannot produce more bitcoins like you can dollar bills...And when the banks have to fufill the loan, they will have to send actual bitcoins to fund the loan....

Person A deposits 100 BTC. The bank A loans 90 BTC to person B.
Person B deposits 90 BTC. The bank B loans 81 BTC to person C.
Person C deposits 81 BTC. The bank C loans 72 BTC to person D.
Person D deposits 72 BTC. ...

Total apparent number of bitcoins in the system: 1000

That's classic fractional reserve banking and it works with dollars, bitcoins, gold, or seashells.

I think he's saying that the "apparent" number of BTC isn't the same as the "real" number of BTC because BTC isn't a claimcheck on something unprintable, but is itself unprintable. I.e, the fractional reserve isn't built into the currency itself. Sure, I can deposit 100 BTC and the bank loan 90 BTC of it out, but I can't spend that 100 BTC unless the 90 BTC is repaid, or unless someone else deposited another 90 BTC and I requested my withdraw before the bank could lend it out.

Putting it in terms of the terms on the fed's balancesheet...

"Currency in circulation" can't increase
however, you are correct in saying that M2 can increase.

[practicaldreamer]

That's classic fractional reserve banking and it works with dollars, bitcoins, gold, or seashells.

Agreed - except perhaps with the caveat that when it all goes tits up (frb under BTC) and 100,000 x Jo Bloggs' default on their loans, the Govt. won't be able to prop up the banks that made those loans using QE. I guess taxation would still be an option - but would this be enough in the absence of QE ? I dunno.
   IOW - wreckless lending wouldn't be nearly so attractive when the safety net has been taken away.

[malykii]

Thank you for all of the replies. 

I agree with a lot of the sentiment that it would be great to not have loans, but I don't see how we could have a functioning society that is actually growing without some system similar to this.

The alternative in my opinion is complete shift in perception of society, and that isn't going to happen in our lifetimes.

I don't have a solution for this, but it was nice seeing others thoughts on this, which only confirms that there are a lot of unknown variables that still have to run their course.

I do love that this technology is actually bringing positive and constructive thought toward a better future.

[hollowframe]

There is no reason why fractional reserve banking could not be done with bitcoins. After all, it existed when the U.S. was on the Gold Standard.

It can't be done with bitcoin, because you cannot produce more bitcoins like you can dollar bills...And when the banks have to fufill the loan, they will have to send actual bitcoins to fund the loan....

Person A deposits 100 BTC. The bank A loans 90 BTC to person B.
Person B deposits 90 BTC. The bank B loans 81 BTC to person C.
Person C deposits 81 BTC. The bank C loans 72 BTC to person D.
Person D deposits 72 BTC. ...

Total apparent number of bitcoins in the system: 1000

That's classic fractional reserve banking and it works with dollars, bitcoins, gold, or seashells.

I think he's saying that the "apparent" number of BTC isn't the same as the "real" number of BTC because BTC isn't a claimcheck on something unprintable, but is itself unprintable. I.e, the fractional reserve isn't built into the currency itself. Sure, I can deposit 100 BTC and the bank loan 90 BTC of it out, but I can't spend that 100 BTC unless the 90 BTC is repaid, or unless someone else deposited another 90 BTC and I requested my withdraw before the bank could lend it out.

This is also true with fiat banking. As long as people do not withdraw their funds in mass fractional reserves works great. When there are bank runs then depositors will stand to take losses, what prevents bank runs is deposit insurance that protects depositors in the event that a bank becomes insolvent.

[CurbsideProphet]

There's an entire subsection here about loans, you can see how well it works out there.