Bitcoins will never exceed 21 million, except via Fractional-reserve Bankin !!!

[fixxi.net]

Quote taken from
https://en.bitcoin.it/wiki/Controlled_Currency_Supply

While the number of bitcoins in existence will never exceed 21 million, the money supply of bitcoins can exceed 21 million due to Fractional-reserve Banking.

Fractional banking is known as the primary cause for the projected collapse of the Money System . Can someone explain how this practice has place with bitcoin ?

I want to understand Bitcoin fully before I embrace it as a REAL alternative to private banking.

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[Stephen Gornick]

Quote taken from
https://en.bitcoin.it/wiki/Controlled_Currency_Supply

While the number of bitcoins in existence will never exceed 21 million, the money supply of bitcoins can exceed 21 million due to Fractional-reserve Banking.

Fractional banking is known as the primary cause for the projected collapse of the Money System . Can someone explain how this practice has place with bitcoin ?

I want to understand Bitcoin fully before I embrace it as a REAL alternative to private banking.

Fractional banking where the guarantee of a government backstop creates a moral hazard is what is the cause for the projected collapse of the Money System.

Fractional banking where the capital invested is what is at risk can function.   And yes, depositors do take a bit of risk as well, though a "One dollar of capital" policy instituted (and policed, on a nightly basis) essentially eliminates the risk to the depositor.

 - http://en.bitcoin.it/wiki/Fractional_Reserve_Banking_and_Bitcoin

[Foxpup]

Bitcoin is not an alternative to private banking, it is an alternative to fiat money. Private banks and fractional reserve banking will still exist with Bitcoin - in fact, existing private banks could start accepting Bitcoin deposits and making Bitcoin loans right now if they wanted to. The just don't want to because there's no government to bail them out at the taxpayer's expense if things go wrong. For this reason, banks and other institutions dealing with Bitcoin will be far less likely to take unnecessary risks with other people's money, and that's a good thing.

[fixxi.net]

Bitcoin is not an alternative to private banking, it is an alternative to fiat money. Private banks and fractional reserve banking will still exist with Bitcoin - in fact, existing private banks could start accepting Bitcoin deposits and making Bitcoin loans right now if they wanted to. The just don't want to because there's no government to bail them out at the taxpayer's expense if things go wrong. For this reason, banks and other institutions dealing with Bitcoin will be far less likely to take unnecessary risks with other people's money, and that's a good thing.

Hi I appreciate further clarifying.

I see so Bitcoin is more like a competing currency rather than new money model.

So bitcoin creators want to rely eventually on existing banks to lend Bitcoin as basically a new currency ?

I thought bitcoin was deeper than just another currency using the existing model ? Maybe I am missing key advantages of bitcoin over existing currency creation method , but I am still learning. It is little disappointing if Bitcoin is just another currency as then why just not use existing ones ?


Quote From this

y so doing, they have helped Bitcoin become what it is now and what it will be in the future (hopefully, a ubiquitous decentralized digital currency). It is only fair they will reap the benefits of their successful investment.

How is exactly Bitcoin "decentralized" ? You speak of existing Banks creating Bitcoin out of no where similarly to the existing model. That would mean centralized Bitcoin creation at selected existing  Banks. Also seems like in the Bitcoin model the creators of Bitcoin or existing Banks will act the equivalent of  "central banks" as individuals will not be able to do that eventually... except for the existing "developing" state with the lottery.

Futher from ( https://en.bitcoin.it/wiki/FAQ#How_are_new_Bitcoins_created.3F ) seems like at the moment bitcoin is being created through a "lottery" and those having most PCs participating are most likely to have more coins. However this "lottery"  is a temporary mechanism as the main goal is to get existing Banks( or new specialized Bitcoin Bank ) issue these coins similarly to existing currencies ? Yes / No ?

If banks will create Bitcoins out of nowhere do you plan for  an option to increase the Bitcoin supply beyond 21 million in the future when banks have adopted Bticoin and now need more Bitcoins to meet demand for new coins, similarly to the existing money model ? Yes ?

[Stephen Gornick]

If banks will create Bitcoins out of nowhere do you plan for  an option to increase the Bitcoin supply beyond 21 million in the future when banks have adopted Bticoin and now need more Bitcoins to meet demand for new coins, similarly to the existing money model ? Yes ?

No.

That's because banks don't create bitcoins out of nowhere.  

It is the Bitcoin miners running software that follows the Bitcoin protocol who are the ones that create Bitcoins from out of nowhere.

If a bank wants to acquire bitcoins to lend out, that bank needs to either raise capital or to mine for them -- just like how you or I would get them.

The Bitcoin protocol allows for one block every 10 minutes.  Currently the miner that solves the block is rewarded with 50 BTC, but soon that will drop to 25 BTC per block.  And four years later, that will drop to 12.5 BTC per block.  And four years after that, 6.25 BTC per block.  And so on, until the reward approaches zero.  At that point, just under 21 million BTC will have been issued.

A miner can try to change the software, e.g., issue 100 BTC per block rather than 50. But that violates the protocol and none of the other nodes will accept the block and other miners would not build on top of that flawed block.

However this "lottery"  is a temporary mechanism as the main goal is to get existing Banks( or new specialized Bitcoin Bank ) issue these coins similarly to existing currencies ? Yes / No ?

A major detail you might be overlooking is that at the time a bitcoin is mined there is very little seigniorage.  If you are GPU mining, you are only doing so profitably if you are located in an area that enjoys lower than average electric rates.  If you are FPGA mining, you are less exposed to the cost of electricity (for now) but you are risking investment by putting money into something that has little value other than for bitcoin mining.

Just like with other commodities, there are markets to obtain bitcoins.  If you want to acquire a lot of gold, you don't need to dig a hole in the ground, you can go to the market and buy gold there.  Bitcoin is no different.  Bitcoins are fungible so it matters not if your bitcoins are freshly mined or acquried from the market.

[Kazimir]

How is exactly Bitcoin "decentralized" ?

There is not one single instance, server, website, organization, company, government, country, or other entity that controls, owns, or influences the bitcoin network or decides how many bitcoins are assigned to who.

It's "the network" of hundreds of thousands of users together, that make up the Bitcoin structure.

You speak of existing Banks creating Bitcoin out of no where similarly to the existing model.

By definition of the protocol, nobody (neither individual users nor banks nor who/whatever) can "create bitcoins out of nowhere". The only way to create bitcoins is mining them. Same rules for everybody.

Also seems like in the Bitcoin model the creators of Bitcoin or existing Banks will act the equivalent of  "central banks" as individuals will not be able to do that eventually...

No, they can't. Not now, not ever. The creators of bitcoin have exactly the same possibilities and limitations (and rules to stick to) as any random bitcoin user.

do you plan for  an option to increase the Bitcoin supply beyond 21 million in the future when banks have adopted Bticoin and now need more Bitcoins to meet demand for new coins, similarly to the existing money model ? Yes ?

Increasing the bitcoin supply beyond 21 million is simply not an option. It's just not possible within the Bitcoin protocol. And since everybody else sticks to the protocol, banks can do all they want - not following the protocol will cause them to be unable to interact with the rest of the world.

By the way, 21 million may seem a low amount for a potential new global economy, but since bitcoins can be divided up to 8 decimal digits (and even more if necessary), there are about 2.1 quadrillion bitcoin units ("satoshis") available. That's going to be sufficient for quite a while.

If banks need more bitcoins to meet whatever demand, they'll have to buy them (from other people who are willing to sell them). Seems to make more sense to me than our current monetary system, where banks can simply create US $ out of thin air!

[justusranvier]

And yes, depositors do take a bit of risk as well, though a "One dollar of capital" policy instituted (and policed, on a nightly basis essentially eliminates the risk to the depositor.

So... what's your name on Tickerforum?

[Fuzzy]

"Fractional-reserve Banking" is designed to fail.

I for one would love to see the Crash of a Fractional Bitcoin Lender, since there is no way to print bitcoins to bail them out.

If anything, the default of a Fractional Bitcoin Lender would increase the value of real Bitcoins.

[Foxpup]

Hi I appreciate further clarifying.

I see so Bitcoin is more like a competing currency rather than new money model.

So bitcoin creators want to rely eventually on existing banks to lend Bitcoin as basically a new currency ?

I thought bitcoin was deeper than just another currency using the existing model ? Maybe I am missing key advantages of bitcoin over existing currency creation method , but I am still learning. It is little disappointing if Bitcoin is just another currency as then why just not use existing ones ?

While Bitcoin is in many ways just another currency, it differs from fiat money in than no government (or anyone else) can decide to issue more of it, and there is only so much of it that can ever exist. In this respect it is more like commodity money, but unlike commodity money, the number of bitcoins that will ever exist and the rate at which they will be distributed is known in advance, and as a result its value is not subject to supply shocks. These are features which no form of money has ever had before.

Quote From this

y so doing, they have helped Bitcoin become what it is now and what it will be in the future (hopefully, a ubiquitous decentralized digital currency). It is only fair they will reap the benefits of their successful investment.

How is exactly Bitcoin "decentralized" ? You speak of existing Banks creating Bitcoin out of no where similarly to the existing model. That would mean centralized Bitcoin creation at selected existing  Banks.

No. Bitcoins cannot be created by banks (or anyone) out of thin air. When a bank (or anyone else) loans bitcoins to other people, it must already own these bitcoins. What happens is Alice deposits some bitcoins in her bank account, then the bank loans those same bitcoins out to Carol figuring that Carol will pay them back before Alice tries to withdraw her bitcoins. This is basically how fraction reserve banking works already, except in this case if Alice tries to withdraw her money and the bank doesn't have it, there is no way for the government to bail them out, and the bank is instantly bankrupt. Alice will probably be able to eventually get her money from Carol, but whether she does or not, nobody will ever be using that bank ever again. So it is most unlikely that banks will act as irresponsibly with bitcoins as they do with fiat money.

Also seems like in the Bitcoin model the creators of Bitcoin or existing Banks will act the equivalent of  "central banks" as individuals will not be able to do that eventually... except for the existing "developing" state with the lottery.

Futher from ( https://en.bitcoin.it/wiki/FAQ#How_are_new_Bitcoins_created.3F ) seems like at the moment bitcoin is being created through a "lottery" and those having most PCs participating are most likely to have more coins. However this "lottery"  is a temporary mechanism as the main goal is to get existing Banks( or new specialized Bitcoin Bank ) issue these coins similarly to existing currencies ? Yes / No ?

No. Bitcoin mining is not a "lottery", it is actually more like a business. What miners are really doing is verifying transactions and securing the Bitcoin network, and they receive a payment for providing this service. The payment currently consists of "new" coins, however there is only a limited amount of coins that can be created this way, which is why miners also receive transaction fees. Eventually, when the "new" coins run out, the whole network will be supported entirely by transaction fees (the way it should be) and the economy will be a totally closed system (again, the way it should be). The whole "new coins" business is just a way to bootstrap the economy by distributing the initial coins to the people who contribute the most resources to the network, which is the fairest way of doing it.

If banks will create Bitcoins out of nowhere do you plan for  an option to increase the Bitcoin supply beyond 21 million in the future when banks have adopted Bticoin and now need more Bitcoins to meet demand for new coins, similarly to the existing money model ? Yes ?

No. If large-scale adoption by banks increases the demand for bitcoins, no new bitcoins will or even can be created to meet the demand. Instead, the value of individual bitcoins will increase, exactly the same as if it were a scarce commodity like gold.

[Stephen Gornick]

And yes, depositors do take a bit of risk as well, though a "One dollar of capital" policy instituted (and policed, on a nightly basis) essentially eliminates the risk to the depositor.

So... what's your name on Tickerforum?

Heh, well Karl came up with that as a name for it but the concept is pretty basic and nothing new.

[Kazimir]

No. Bitcoin mining is not a "lottery", it is actually more like a business. What miners are really doing is verifying transactions and securing the Bitcoin network, and they receive a payment for providing this service. The payment currently consists of "new" coins, however there is only a limited amount of coins that can be created this way, which is why miners also receive transaction fees. Eventually, when the "new" coins run out, the whole network will be supported entirely by transaction fees (the way it should be) and the economy will be a totally closed system (again, the way it should be). The whole "new coins" business is just a way to bootstrap the economy by distributing the initial coins to the people who contribute the most resources to the network, which is the fairest way of doing it.

Very well explained, sir. People who don't understand the big idea behind this whole mining concept should read this.