Topic: Bitcoins interest rates possible? (Read 6550 times)

Yes interest rates with bitcoins are possible, you could have a bitcoin bank.
Having a bitcoin bank would require some sort of guarantee that you get paid back, and as such there is a risk involved.

The difference with bitcoins assuming a risk of 0, with very little interest you could make a profit, unlike inflationary currencies were you have to cover for inflation, but in real life the risk is not 0, so some interest would be needed for a loan otherwise you would have loses.

"bitcoin codes": addressed above, post #66
withdrawals/cheques: if there are more withdrawals than reserves and the bank can't lend money from other banks (it usually can), the bank is insolvent.

this is part of what happened in 2008. illiquid outstanding loans/assets, interbank lending dried up and bank runs started to happen, until govts stepped in.

I posted a critique of your suggestion that 100 Btc deposited in one bank could be lent and result in 200 Btc deing deposited in banks.


You have not addressed my critique, but instead injected concpets of "central bank money/21 million coins" and a 1000 USD contract. Are you going to address my critique of your sugguestion which is as follows:

"Let us say that: a bank accepts deposits and receive 1000 Btc from various depositors. They give loans, but owing to the fact that they do not have Btc or rather the codes that Btc are made up from, they can never lend more than 1000 Btc. If the bank lends 1000 Btc no depositor can withdraw any Btc; which means that 1000 Btc equals 1000 Btc and not 2000 Btc.

Let us say that the depositors did recieve checks amounting to 900 Btc (100 Btc kept as a reserve). Business A receives a check of the sum 200 Btc. Naturally, Business A wants to withdraw the amount from the bank with immediate effect; business A has many liabilties in USD. If the bank has already lent 1000 Btc 900 Btc it cannot pay out the sum of 200 Btc which the check holder is claiming."

I am saying that there is no possible way in any kind of viable banking operation that fractional reserve could be implemented; and that due to this circumstance, there is no possible way that 100 Btc deposited in a bank account could by any means equal 200 Btc in bank deposits.

I don't know what you're confusing, I only guessed. you're confusing _something_ because you're drawing the wrong conclusion.


value relative to what? to USD? to goods?
doesn't matter at all for banking.

You introduced the "central bank money/21 million coins" theme, not me, and I am not confused by the concepts. Yes, of course a Btc bank could in theory operate on a fractional reserve basis, but they would be bankrupt within days of writing checks, unless they injected new capital and bought Btc to meet liabilites, making it a very unprofitable business.

Say you sign a contract with me today owing me 1000 Btc, and at the date of maturity, Btc have appreciated in value 25%, the monetary debt value is higher. Of course, if the value decreased the monetary debt value would be lower. No business proprietor would accept a check from a Btc bank which operates on a fractional reserve scheme, rendering it impossible to operate such a bank in practice.

Anyone seriously interested in this topic should familiarize themselves with a whole lot of Steve Keen's research.

I'm sorry, I don't know how else to explain it. you're getting it wrong. I think you're confusing "central bank money/21 million coins" with money. bank deposits are money (by any reasonable) definition, the bank doesn't need to have all the "bitcoin codes" in order to have deposits on its books. they simply owe someone 1000 BTC.

I can sign a contract today I owe you 1000 BTC without having ANY coins. if I was a bank and those deposits were in a checking account under your name, that would be considered part of the money supply.

So, since a bitcoin bank can't do fractional reserve banking.

And since they can't do anything I can't already do as far as bitcoin transfers are concerned.

What exactly is a Bitcoin Bank going to 'do' for me?

Wiki is actually not entirely correct in its explanation:

"When a deposit of central bank money is made at a commercial bank, the central bank money is removed from circulation and added to the commercial banks' reserves (it is no longer counted as part of m1 money supply). Simultaneously, an equal amount of new commercial bank money is created in the form of bank deposits. When a loan is made by the commercial bank (which keeps only a fraction of the central bank money as reserves), using the central bank money from the commercial bank's reserves, the m1 money supply expands by the size of the loan.[2] This process is called deposit multiplication."

"An equal amount of new commercial bank money is created" and "a loan made by the commercial bank...which keeps only a fraction of the central bank money as reserves" does not equate. If a fraction of central bank money is kept as a reserve, loans of commercial money of a sum higher than the central bank money equals "deposit multiplication". I.e. central bank money of a value of 1000 USD back commercial bank money of a value of 9000 USD (or any arbitrary sum).

The traditional role of fractioal reserve banking is thus as follows:

A central bank deposits of 1000 FED USD at a commercial bank; 9000 USD is created at the commercial bank.

A Btc bank cannot operate on the same basis due to my previous example:

"Let us say that: a bank accepts deposits and receive 1000 Btc from various depositors. They give loans, but owing to the fact that they do not have Btc or rather the codes that Btc are made up from, they can never lend more than 1000 Btc. If the bank lends 1000 Btc no depositor can withdraw any Btc; which means that 1000 Btc equals 1000 Btc and not 2000 Btc.

Let us say that the depositors did recieve checks amounting to 900 Btc (100 Btc kept as a reserve). Business A receives a check of the sum 200 Btc. Naturally, Business A wants to withdraw the amount from the bank with immediate effect; business A has many liabilties in USD. If the bank has already lent 1000 Btc 900 Btc it cannot pay out the sum of 200 Btc which the check holder is claiming."

yes

there is no need to make it even more complicated and introduce interest rates in your scenario.
if my post wasnt intelligible read this: http://en.wikipedia.org/wiki/Fractional-reserve_banking#Example_of_deposit_multiplication

replace "central bank money" with "21 million coins" there and you'll have what a bitcoin bank can do.

The proprietor of www.flexcoin.com posted this in a differetn thread (http://forum.bitcoin.org/index.php?topic=21615.0;all)


It is, at least to me, unclear how flexcoin will use deposited Btc.

We will find out... check it out, the first bitcoin bank: www.flexcoin.com

I am not quite sure that I understand how a Bitcoin bank would operate. I am under the assumption that banks would lend Bitcoins and not USD; if this assuption is wrong, the following excercise is not valid.

Let us say that: a bank accepts deposits and receive 1000 Btc from various depositors. They give loans, but owing to the fact that they do not have Btc or rather the codes that Btc are made up from, they can never lend more than 1000 Btc. If the bank lends 1000 Btc no depositor can withdraw any Btc; which means that 1000 Btc equals 1000 Btc and not 2000 Btc.

Let us say that the depositors did recieve checks amounting to 900 Btc (100 Btc kept as a reserve). Business A receives a check of the sum 200 Btc. Naturally, Business A wants to withdraw the amount from the bank with immediate effect; business A has many liabilties in USD. If the bank has already lent 1000 Btc 900 Btc it cannot pay out the sum of 200 Btc which the check holder is claiming.

A more "sound" business model would be to loan 700 Btc which leaves 300 Btc for immediate withdrawal. In this case the bank could earn e.g. 6% on loans, equalling 42 Btc, while paying e.g. 3% on deposits, equalling 30 Btc, and earn 12 Btc. However, at no point would the monetary supply deviate from the monetary base.

Even with a reserve (not fractional) of 300 USD, it would not be possible to write checks amounting to 1000 USD with the depositors (which would in effect render the reserves "fractional") as business A would wipe out 67% of its reserves with a 200 Btc withdrawal, after which only a very small amount of depositors or other holders of checks could withdraw Btc.

If the Bank instead makes loans in USD, although being extremely risky due to fluctuating Btc value, the bank could lend 1700 USD (today's Btc price being 17 USD), or even 5000 USD, and any depositor could still withdraw Bitcoins. However, no sane person would operate such a bank as if Btc value were to rise to 25 USD, and all depositors wanted to withdraw the 1000 Btc deposited, the bank must purchase Btc for a sum of 2500 USD (or more), whereas the interest on the 1700 USD would only amount to 102 USD (with a lendning rate at 6%).

this is fractional reserve banking with a reserve rate of 0 %, so in a strict sense you're right, it is "no reserve banking".

the are many different measurements of money supply. the money supply you're thinking about is the 21 million coins, aka the "monetary base". you're right that bank lending does not increase the monetary base.
but bank lending doesnt increase the monetary base of current fiat monetary systems either.

so if someone says "banks create/print money" he is talking about a definition of money supply that includes bank deposits (usually M1 - M3 definitions).
the answer to that is: bitcoin banks would, too.

no difference.

Discussion about the evils of interest or usury aside, it seems that just for the system to scale we need to have supernodes in the network. I can see that people could see these as providing some of the equivalent facilities of banks, such as itermediating large transactions. Naturally the source code for a supernode would have to be open and tamper proofed with cryptography.

I really don't think banking is going to dissapear from existence due to bitcoin. This would appear to be a very naive and highly unlikely prediction IMHO. There will always be have and have nots, and some kind of credit hierarchy. However, this could be seen as a great opportunity to forge a future in open and transparent banking that everyone can understand.

In many of the countries in crisis today the banks themselves are still not capable of balancing their own books!! They leveraged things so far out they literally don't know what they have done anymore. http://ftalphaville.ft.com/blog/2010/12/21/444026/anglo-irish-indigestion-off-balance-sheet/

Granted, this is incorrect, however my intention was to show that:


is incorrect, as digits/checks are created out of nothing. As you say, person A can write a check to the grocery store, despite the funds in his account having been transferred to another bank, which means that the check/digits are created "out of nothing". Fractional reserve works in both of these two ways.

That is incorrect. The money supply now includes the 100 USD, which is still circulating, the 100 USD in person A's account and the 100 USD in person B's account. Person A can now pay for their groceries by writing a check, transferring money from their account to the grocery store's account, just as they can pay for their groceries with cash. Bank accounts function like cash, until someone withdraws, at which point money is destroyed.

This "created money" affects the supply of currency just like real hard cash does.

How could a "Bitcoin" bank run a fractional scheme? Person A deposits 100 Btc in Bank X; Bank X loans 95 Btc (5 Btc held as a reserve) to person B, person B buys computer hardware for 50 Btc who puts the proceeds in bank Y, and places the remaining 45 Btc in bank Z. Banks Y and Z can only circulate 95 Btc. As a Btc cannot be used several times simualtaneously the amount of Btc is still 100.

Whereas in a fractional reserve system a bank that recieves 100 USD can loan 950 USD to person B (50 USD held as a reserve), by issuing a check/digital loan, person B buys computer hardware for 500 USD and who put the proceeds in bank Y (either by "checking" or "digitally" - it is only a bookkeeping excersice, no banknotes are transferred) and places the remaining 450 USD in bank Z (maybe he will use the USD to pay wages a his IT firm) By these actions the money supply has increased despite the money base remaining at 100 USD. Fractional reserve cannot exist if the banknotes are transferred with each transaction.

The example you post does not increase the money supply; if person A deposits 100 USD in bank A and it is lent to person B who deposits in is bank B, the money supply is still only 100 USD, and bank A would only earn the interest difference between interest charged to person B subtracted by interest paid to person A. This is not fractional reserve banking.

Is it good to rent a house, when most houses are owned by a tiny percentage of people?  Even though they were built by a majority of people with minerals that are billions of years old?

When you take out a loan, you are just borrowing back from people who did real work that have had their work funnelled to a coke smoking banker who doesn't know how to hammer in a nail.

The exploitation can be in any form, if there are no BTC available you might need to pimp your girl to the fat man, something you can agree on.

Have you considered thinking outside the ridiculous assumptions that hold your paradim together?

PS

I can't spell, its outside my paradise

You deposit 100 bitcoins in my bank. You still have 100 bitcoins, they're just on deposit. I then lend out your 100 bitcoins to Jeff. He now has 100 bitcoins. So the original 100 bitcoins is now 200 bitcoins.

If Jeff owes Jack 20 bitcoins, he can transfer 20 from the 100 he borrowed. If you want to pay Alfred 20 bitcoins, you can transfer 20 bitcoins from your account to Alfred's account. So the bitcoins in your account work just like real bitcoins even though they're not. Of course, when you (or Alfred) withdraw money from the bank or Jeff pays back his loan, the number of bitcoins in circulation is reduced.

Essentially, bitcoins in banks (which are just numbers in a bank's computer) work almost the same as real bitcoins. The effect the supply of bitcoins (for price purposes) almost exactly the same way.

One tendency of bitcoins that may reduce this is that they are easily transferable without help from a bank. One of the main reasons people keep money in banks even for short term use is to make it easily transferable (checking accounts). If this doesn't happen with bitcoins, then the ability of banks to create bitcoins will be much less than it is for dollars. If banks lay their own storage and transfer system on top of bitcoins, to the extent people use that system, banks will be able to create bitcoins.

And, of course, if the currency is unstable (as bitcoins are now) banking won't be possible (except with offsetting shorts, which is very hard to do). So that stops banks from creating bitcoins. But that hopefully will change in the future.