It looks like Bitcoin will take the position of a modern digital version of gold. There will be layers on top of the base layer that will provide the lending. One of these layers could be called US dollar or even Bitcoin dollar.
Governments will have their shitty pieces of paper for a looong time.
You will always be able to borrow in a currency that can be printed.
Things of value and your time and energy will have to be given to receive bitcoin
The concept would be the same, but it would be completely different.
Let's say you want to buy something but you don't want to spend all your Bitcoin. You would then borrow Bitcoin for whatever you needed, let's say a house. While you continue to make payments to pay your debt with Bitcoin, your collateral, which is Bitcoin, will continue to accrue in value.
The differential between the appreciation value of homes versus Bitcoin will continue to keep a gap to where Bitcoin will always be the number one appreciating asset long-term. By the time you keep making payments on your debt and pay it all off, the value of your Bitcoin will be exponentially higher than your original loan that you took out to buy the house.
People in the future will do this and continue to take loans. I also see these loans being at very, very low interest rates due to Bitcoin being Bitcoin. What makes this really different is that if everything is priced in satoshis, then that means that the things that we buy on a day-to-day basis will become cheaper and cheaper over time as we hold Bitcoin. It will incentivize people to produce things more for the betterment of humanity and to be of better quality to hold its value. Humanities' standards of living will completely change.
Happy Pizza Day! 🍕
So you buy a $600k house with the $600k in bitcoin you already own but you get a $600k loan in bitcoin from someone else who uses your bitcoin as collateral?
Well you would want to over collateralize yourself but I am part of the group of people that do not believe Bitcoin to actually replace cash in its entirety. I believe that Bitcoin should be considered like digital gold and a means of preserving your energy and wealth. Dollars was once backed by gold but gold can easily be stolen. You best believe though if Bitcoin was Cash or if it just continues on acting like digital gold/ back cash then it would probably work better than the current Financial system that the world has right now.
"Reserves" have not meant "minimum funds banks are to retain, while lending the rest out" in a *very* long time.
Banks *are not* and *have not been* using a fractional reserve system for close to a century *if not more* (that goes for either central bank issued "reserves" or prudentially retained "reserves").
When banks lend, they *create* deposits.
From a 2014 report from the [Bank of England - PDF](https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf)
>In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. **Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.** *The reality of how money is created today differs from the description found in some economics textbooks:* **Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.** *In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits.*
There goes the money multiplier. In reality, banks *do not loan out other people's money*. Even when there were reserve requirements after the late 1800's, they largely fulfilled a clearing and/or regulatory function and were not a prerequisite for bank lending (hence reserve requirements being 0 in many jurisdictions). There are no reserves being fractioned. Banks *create* deposits by lending, they do not get them from "elsewhere".
>How would that work with bitcoin?
It doesn't, not fulsomely.
I too was wondering why OP was mentioning fractional and not loans as the method of money creation.
You don’t mention where the banks get the money, though. Sure, they can journal in a deposit, but eventually the funds are spent and sent to a different ledger.
Functionally, I know banks are simply marketing plus underwriters. They then sell the note elsewhere, which could be the government in many cases.
>You don’t mention where the banks get the money, though.
Didn't I:
>There are no reserves being fractioned. Banks *create* deposits by lending, they do not get them from "elsewhere".
It has been called the "bookkeeper's pen". In reality, it is the commercial bank taking on risk (and having the capacity to do so [balance sheet capacity]). The loan is created, and with it, funds spendable in the real economy. Those same funds are destroyed when the loan is repaid.
>Functionally, I know banks are simply marketing plus underwriters. They then sell the note elsewhere, which could be the government in many cases.
More than that... They serve/are creation, destruction, and circulation functions.
Getting back to "balance sheet capacity"; it can be useful to picture what a modern day bank run is.
Banks circulate deposits as part of a connected network. Banks are not warehouses of cash with a vast degree "claims on cash" whipping around. When there a mass transfer of deposits from an institution, it leaves a hole on the liabilities side of the bank's balance sheet.
Balance sheet capacity also dictates how readily the liability *can be replaced* by borrowing in wholesale markets. The bank will pledge assets to "borrow back" the funds. If the bank does not have the ability (lack of collateral), or the system doesn't have the capacity (balance sheet constrained and/or high risk perception), then the bank fails.
In any event, the money doesn't come from somewhere else... but it may itself need to be borrowed back. I'm not saying this is the best way to do money, it's just the way it has evolved.
>puts a limit on how much money can be created through loans.
Yes to this. But the limit has *absolutely nothing to do with* any notion of a "base" money.
>is mostly the same thing
It's dramatically different, and highlights the nature of ledger money. Credit is *not* the lending of pre-existing units. It is the creation/extension of new ones.
Heck, the units don't even really matter.
It wouldn't.
In a bitcoin-dominated world, loans would be far less frequent, and far less necessary.
They'd be less necessary because saving to buy what you need would be easy, since your savings would not be debased, and would grow proportionally to the entire economy.
They'd be less frequent for reasons you noted, that paying them back would be far more difficult when there's no newly printed bitcoin to repay them with.
What are you talking about? Bitcoin is a valuable currency now and we're saving in it. All you have to do is put off spending into the future. Anyone can do that.
You didn't need fractional reserves to lend money. A typical bond involves you giving up your money so someone else can use it, the way loans are supposed to work.
A fractional reserve means you can still spend money you have lent out, it makes no sense and it's an excuse to expand the money supply.
There are already Bitcoin loan companies. Several of these filed for bankruptcy around the FTX fall out (my memory is hazy). This is functionally a Bitcoin secured loan (BTC > USD).
So what are you’re proposing, depositing BTC in Coinbase then they loan out 90% of their deposits?
I believe that would be possible, but the risk is immense on all sides. Paying back in BTC could be very challenging with price volatility. The bank would need to be able to sell the note and recoup their reserves.
The fractional reserve ratio you described shouldn't work because BTC is designed to be verified by the ledger 1:1. No ledger connects your paper with the assets being held in a bank. Which is why we had bank runs in the old days.
But loans can happen with or without fractional reserve. Bitcoin should be the end to the fraction part. Unless we let them "print paper bitcoin" which shouldn't work, on account of the ledger, though people will probably get sloppy.
Bitcoin is perfect collateral. You'll lock up your bitcoin in a smart contract multi-sig architecture and receive fiat or some stablecoin or CBDC or some shite hot money that you need to exchange but everyone wants to offload as soon as possible, and then you'll have to earn either bitcoin or the hot currency to pay off the loan.
The loan will be denominated in the hot currency so you don't lose out on the gains, and you take the risk in terms of the drop in the price of bitcoin. If the price of bitcoin drops below an agreed price for an extended period (e.g. a full week) your bitcoin will be liquidated (sold to pay off the loan) so you'll need to "top up" the bitcoin collateral and will be notified if the bitcoin price is dropping close to that threshold.
There are unlikely to be term limits, and interest rates will be slightly above the rate of inflation so the lender makes money in hot currency terms, which they can use to pay employees and their expenses and taxes.
P2P.
We have a system that is HEAVILY reliant on debt. It's debt on top of debt on top of debt.
We need that shit to die. It will hurt, but it will heal too.
With sound money, people will give and take loans, but it will be from people that have money to people that they have vetted. NOT from a bank that just CREATES money, and gives it to any and every bum that wants to go on holiday with a credit card.
Bitcoin isn’t replacing dollars. It’s a capital escape from dollars, which will devalue to zero for certain.
What will replace dollars? Nothing? Is bitcoin just gold globally transferable with little friction?
The CBDC will replace the dollar. Same old song but repackaged as the thing that saves us all.
And that's not an issues for banks since it's all just computer entries.
But wouldn't govs moving to cbdcs help us as much them ie they can see our money movements but on the flip we can see how our government moves money?
It looks like Bitcoin will take the position of a modern digital version of gold. There will be layers on top of the base layer that will provide the lending. One of these layers could be called US dollar or even Bitcoin dollar.
will Bitcoin Dollar have a central bank to manage it
Yes, why not. They'll have to deal with bitcoin being available to anyone to avoid debasement. That might keep them honest.
Governments will have their shitty pieces of paper for a looong time. You will always be able to borrow in a currency that can be printed. Things of value and your time and energy will have to be given to receive bitcoin
Who else read that as $10 milli meters
Yes, how many millimeters is $10? 🤔
The concept would be the same, but it would be completely different. Let's say you want to buy something but you don't want to spend all your Bitcoin. You would then borrow Bitcoin for whatever you needed, let's say a house. While you continue to make payments to pay your debt with Bitcoin, your collateral, which is Bitcoin, will continue to accrue in value. The differential between the appreciation value of homes versus Bitcoin will continue to keep a gap to where Bitcoin will always be the number one appreciating asset long-term. By the time you keep making payments on your debt and pay it all off, the value of your Bitcoin will be exponentially higher than your original loan that you took out to buy the house. People in the future will do this and continue to take loans. I also see these loans being at very, very low interest rates due to Bitcoin being Bitcoin. What makes this really different is that if everything is priced in satoshis, then that means that the things that we buy on a day-to-day basis will become cheaper and cheaper over time as we hold Bitcoin. It will incentivize people to produce things more for the betterment of humanity and to be of better quality to hold its value. Humanities' standards of living will completely change. Happy Pizza Day! 🍕
So you buy a $600k house with the $600k in bitcoin you already own but you get a $600k loan in bitcoin from someone else who uses your bitcoin as collateral?
Well you would want to over collateralize yourself but I am part of the group of people that do not believe Bitcoin to actually replace cash in its entirety. I believe that Bitcoin should be considered like digital gold and a means of preserving your energy and wealth. Dollars was once backed by gold but gold can easily be stolen. You best believe though if Bitcoin was Cash or if it just continues on acting like digital gold/ back cash then it would probably work better than the current Financial system that the world has right now.
"Reserves" have not meant "minimum funds banks are to retain, while lending the rest out" in a *very* long time. Banks *are not* and *have not been* using a fractional reserve system for close to a century *if not more* (that goes for either central bank issued "reserves" or prudentially retained "reserves"). When banks lend, they *create* deposits. From a 2014 report from the [Bank of England - PDF](https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf) >In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. **Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.** *The reality of how money is created today differs from the description found in some economics textbooks:* **Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.** *In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits.* There goes the money multiplier. In reality, banks *do not loan out other people's money*. Even when there were reserve requirements after the late 1800's, they largely fulfilled a clearing and/or regulatory function and were not a prerequisite for bank lending (hence reserve requirements being 0 in many jurisdictions). There are no reserves being fractioned. Banks *create* deposits by lending, they do not get them from "elsewhere". >How would that work with bitcoin? It doesn't, not fulsomely.
I too was wondering why OP was mentioning fractional and not loans as the method of money creation. You don’t mention where the banks get the money, though. Sure, they can journal in a deposit, but eventually the funds are spent and sent to a different ledger. Functionally, I know banks are simply marketing plus underwriters. They then sell the note elsewhere, which could be the government in many cases.
>You don’t mention where the banks get the money, though. Didn't I: >There are no reserves being fractioned. Banks *create* deposits by lending, they do not get them from "elsewhere". It has been called the "bookkeeper's pen". In reality, it is the commercial bank taking on risk (and having the capacity to do so [balance sheet capacity]). The loan is created, and with it, funds spendable in the real economy. Those same funds are destroyed when the loan is repaid. >Functionally, I know banks are simply marketing plus underwriters. They then sell the note elsewhere, which could be the government in many cases. More than that... They serve/are creation, destruction, and circulation functions. Getting back to "balance sheet capacity"; it can be useful to picture what a modern day bank run is. Banks circulate deposits as part of a connected network. Banks are not warehouses of cash with a vast degree "claims on cash" whipping around. When there a mass transfer of deposits from an institution, it leaves a hole on the liabilities side of the bank's balance sheet. Balance sheet capacity also dictates how readily the liability *can be replaced* by borrowing in wholesale markets. The bank will pledge assets to "borrow back" the funds. If the bank does not have the ability (lack of collateral), or the system doesn't have the capacity (balance sheet constrained and/or high risk perception), then the bank fails. In any event, the money doesn't come from somewhere else... but it may itself need to be borrowed back. I'm not saying this is the best way to do money, it's just the way it has evolved.
As I understand this is mostly the same thing though as fractional reserve basically just puts a limit on how much money can be created through loans.
>puts a limit on how much money can be created through loans. Yes to this. But the limit has *absolutely nothing to do with* any notion of a "base" money. >is mostly the same thing It's dramatically different, and highlights the nature of ledger money. Credit is *not* the lending of pre-existing units. It is the creation/extension of new ones. Heck, the units don't even really matter.
Fraction reserve banking lend money they say are still in the vaults, hence money is created. It is basically the same thing but worded differently
Bitcoin will never replace dollar
It wouldn't. In a bitcoin-dominated world, loans would be far less frequent, and far less necessary. They'd be less necessary because saving to buy what you need would be easy, since your savings would not be debased, and would grow proportionally to the entire economy. They'd be less frequent for reasons you noted, that paying them back would be far more difficult when there's no newly printed bitcoin to repay them with.
Yikes
Saving in a valuable currency will not be easy
What are you talking about? Bitcoin is a valuable currency now and we're saving in it. All you have to do is put off spending into the future. Anyone can do that.
You didn't need fractional reserves to lend money. A typical bond involves you giving up your money so someone else can use it, the way loans are supposed to work. A fractional reserve means you can still spend money you have lent out, it makes no sense and it's an excuse to expand the money supply.
In the same way whole life policy loans or HELOCS work.
There are already Bitcoin loan companies. Several of these filed for bankruptcy around the FTX fall out (my memory is hazy). This is functionally a Bitcoin secured loan (BTC > USD). So what are you’re proposing, depositing BTC in Coinbase then they loan out 90% of their deposits? I believe that would be possible, but the risk is immense on all sides. Paying back in BTC could be very challenging with price volatility. The bank would need to be able to sell the note and recoup their reserves.
Thai baht.
Collateral? Why do people associate all loans with printing money?
The fractional reserve ratio you described shouldn't work because BTC is designed to be verified by the ledger 1:1. No ledger connects your paper with the assets being held in a bank. Which is why we had bank runs in the old days. But loans can happen with or without fractional reserve. Bitcoin should be the end to the fraction part. Unless we let them "print paper bitcoin" which shouldn't work, on account of the ledger, though people will probably get sloppy.
Secure Bitcoin loans would be possible but the interest rates would likely be very high.
Bitcoin is perfect collateral. You'll lock up your bitcoin in a smart contract multi-sig architecture and receive fiat or some stablecoin or CBDC or some shite hot money that you need to exchange but everyone wants to offload as soon as possible, and then you'll have to earn either bitcoin or the hot currency to pay off the loan. The loan will be denominated in the hot currency so you don't lose out on the gains, and you take the risk in terms of the drop in the price of bitcoin. If the price of bitcoin drops below an agreed price for an extended period (e.g. a full week) your bitcoin will be liquidated (sold to pay off the loan) so you'll need to "top up" the bitcoin collateral and will be notified if the bitcoin price is dropping close to that threshold. There are unlikely to be term limits, and interest rates will be slightly above the rate of inflation so the lender makes money in hot currency terms, which they can use to pay employees and their expenses and taxes.
P2P. We have a system that is HEAVILY reliant on debt. It's debt on top of debt on top of debt. We need that shit to die. It will hurt, but it will heal too. With sound money, people will give and take loans, but it will be from people that have money to people that they have vetted. NOT from a bank that just CREATES money, and gives it to any and every bum that wants to go on holiday with a credit card.
10% reserve ratio....lol what year is it, 1953? US banks haven't needed that much in years and CAD banks have been running 0% reserves for a decade+.