Thank you for your reply.

Even if there was a fractional reserve in this example i would not have a problem with it. Fractional reserve banking is not the problem with bitcoins, it has been done with precious metals since the middle ages.

My problem with this example is the following:
Bitcoins are highly deflationary. Let's assume 20% deflation in bitcoins and 0% interest that you have to pay to the bank. This means you borrow 100BTC at the beginning of the year and have to pay back 100BTC at the end of the year. By the end of the year, these 100BTC will be worth 20% more than at the beginning. To make up for this 20% difference, the debtor needs a return on investment of at least 20% for his business. If the debtor also has to pay interest, the required return on investment would be even higher. This makes it impossible for many debtors to use borrowed capital and thus makes many businesses economically unfeasible.

20% deflation is a rather conservative estimate of bitcoin deflation. This is the reason why bitcoin banks can't earn money by lending out capital, which makes it impossible for them to pay interest to depositors.


alexk

Ok, you can continue making up your own definitions. According to http://en.wikipedia.org/wiki/Loan credit card debt is an unsecured loan, which i already pointed out. This will be my last post regarding this subject, i'm not here to argue about definitions.

If you can show me a way how a bitcoin bank can pay
1. interest to its depositors or
2. earn money by lending
i will be happy to continue with the discussion.


alexk

Ok, i think i understand now. You are mistaking credit cards for consumer credit. These are not the same. Consumer credit means, that someone has to pay for a product at a later point in time and is charged interest in return. Credit card debt is a loan, which also costs interest.


alexk

I don't see anything in that wikipedia article supporting your argument. Can you point it out please?

http://en.wikipedia.org/wiki/Loan

According to this article though, credit card debt is an unsecured loan.


The discussion if a credit card debt is a loan or not is irrelevant to my first argument anyway. A Bitcoin Bank can not give out interest at all, because there is no way it can profitably lend money in huge amounts to debtors. So there is no financial incentive to put your Bitcoins in a Bitcoin Bank and i think this prevents Bitcoin Banks from having any success, as long as the bitcoin money supply scheme stays deflationary.


alexk

So credit cards are not loan business?

I think a bitcoin bank can not work.

A bank earns money by collecting money from depositors and offering them interest in return. The bank uses this money as a fractional reserve, and lends more money to creditors and expects interest in return. The interest for the depositors is being paid for by the interest of the creditors.

In a strongly deflationary environment it's not easy for the creditor to pay back the loan, because by the time the credit falls due for payment the money is already worth more. For the creditor to be able to pay a positive interest rate, his business needs an roi > deflation rate. Many businesses will not be able to provide this when the deflation rate becomes high. Then lending out money for a bitcoin bank will hardly be possible which also makes paying interest to depositors hardly possible.

So, in my opinion, there is no incentive to put bitcoins in a bitcoin bank.

If bitcoins had a stable value, this problem would not exist.


alexk

Thank you for your reply.

In my opinion, a fractional reserve banking system for bitcoin, that creates money by credit, would be possible in principle. It would not be practical though. Because of the constant deflation in bitcoins, a business would need to have an roi > deflation rate, to be able to pay a positive interest rate to the bank. Many businesses will not be able to generate that kind of roi. This further emphasizes the need for a currency with a stable value.

I don't think satoshi had the agenda of having a nice annual increase for his fortune. The system for generating bitcoins in place right now seems sensible to "start up" a bitcoin economy.

If I understand ripple correctly, it's not a currency, so it's hard to compare ripple with bitcoin. I would prefer to keep the discussion in this forum to bitcoins, but thank you for the link.


alexk

Thanks for your advice, even though i didn't ask for it.

I'm not expecting anyone to change the system of how bitcoins are generated, right now. I was just giving my opinion of what I would do, I think forums are a place to discuss opinions. I sense that you don't like my idea but that's fine with me. If you like, you can point out what you don't like about my idea and we can discuss that.

The point of my post was to find other people which share my opinion, that a currency should have a stable value. Several people together might be able to create a new bitcoin network with different rules, then we can let the people decide which currency they choose.


alexk

Yes, i'm new in this forum. I don't know why you get the impression that i'm joking.


alexk

Stable prices are important for a new currency to be accepted widely as a tender, which means a new currency should have a stable value. The reason for this is, that money is not only used as a medium of exchange or storage of purchasing power, but also to measure the value of goods and services. Deflation might not be a problem in this context if it is only a few percent, but it gets difficult to compare the value of things when deflation gets too high.

Currently, the supply of bitcoins is increasing, and it will keep increasing asymptotically until 21 million bitcoins are reached. This means, bitcoins would have an approximately stable value if the bitcoin economy would also be increasing asymptotically and stop growing when 21 million bitcoins are reached. The way I see it is, that the bitcoin economy is growing much faster than the money supply which leads to higher and higher prices for bitcoins, one can verify that by taking a look at mtgox. Also I think it's impractical for the bitcoin economy to stop growing when 21 million bitcoins are reached.

My suggestion for keeping the value of bitcoins stable is to change the number of bitcoins generated per block dynamically and link it to some average of the number of transactions that took place.

If you take a look at http://en.wikipedia.org/wiki/Equation_of_exchange, you can see the identity that "money supply" * "velocity of money" equals "price level" * "transactions". To keep the price level (and the value of the currency) stable money supply should increase with the number of transactions, assuming that the velocity of money stays the same.

A great thing about bitcoins is, that the  number of transactions can be calculated exactly from the solved blocks and i believe, also the velocity of money (please correct me if i'm wrong). Traditionally, to use the equation of exchange economists had to use the crude approximation that "price level" * "transactions" equals GDP. This means, that supply of bitcoins can be adjusted exactly to the demand of bitcoins, which in turn means that bitcoins could be the first currency completely free of inflation or deflation, in other words have an absolutely stable value.

I'm looking for people which share a similar interest in bitcoins. Please PM me.


alexk