Topic: Credit creation on a Bitcoin standard (Read 237 times)

Bitcoin for global commerce? Intriguing and potent. USD, EUR, and RMB have been juggernauts on the global scene. So why not Bitcoin? A decentralized, boundary-free, and secure digital currency? But, isnt it limiting to see Bitcoin merely as a tool? As a forward-thinker, I push you to envision more! Sure, Bitcoin' market capacity isn't there yet, but "yet" is the keyword!

Revolutionary tech doesnt follow a linear adoption path but an explosive one. Remember the web in the 90s? Cell phones in the early 2000s? Cant we predict Bitcoin hitting the 10 trillion dollar milestone sooner? Your viewpoint rests on the old economic wisdom. Isnt it high time to discard the past and seize blockchain technology and cryptocurrencies?

The credit system will be the same as when there was a cold standard. You can only lend what you have and most likely nothing more. The only thing possible is to lend with paper bitcoins, but you may only be able to sell them at a deep discount! Actually paper bitcoin already exists, just Google it.

Credit is created in the Bitcoin standard by working differently than traditional fiat-based systems. Whereas the decentralized currency and the limited supply of Bitcoins as per the Bitcoin standard will be a notable change in credit creation. Without a central bank controlling the money supply, credit expansion will primarily rely on the creation of peer-to-peer platforms and the DeFi protocol. Smart contracts and block chain technology make the Bitcoin standard credit to make the process transparent and even reduce the need for intermediaries to automate the lending process.

It is difficult for the Bitcoin standard to be a standard in the current circumstances. We are talking about an asset that needs to have a market capacity of at least 10 trillion dollars or more than 600 thousand dollars for each currency, which is something that if it happens, it may need more than 50 years, so in the short term we can Seeing Bitcoin as a tool for international trade, as it can be used alongside a basket of transactions to conduct trading between countries that may not want to use gold or the dollar and will be an alternative to currencies such as the yuan, which will not be suitable as an alternative to the dollar, but Bitcoin will not be a new standard at the present time.

I suppose it's possible to create credits out of not yet mined BTC. But the core problem of crypto credits is legislative uncertainty. BTC can't be used for any financial transactions which operate with non-existing assets.

it's worth noting that under a fully reserved system, banks would still be able to create credit, but only up to the amount of reserves they hold. This means that credit creation would be limited by the amount of bitcoins held in reserve, but it wouldn't necessarily mean a complete halt to credit creation or economic growth.

It's also possible that under a Bitcoin standard, alternative lending mechanisms could emerge that don't rely on fractional reserve banking, such as peer-to-peer lending or asset-backed lending. These alternative mechanisms could help fill the gap left by reduced credit creation from traditional banks.

Overall, the impact of a Bitcoin standard on credit creation and economic growth is complex and would likely depend on a variety of factors. While a fully reserved system would limit credit creation, it's possible that alternative mechanisms could emerge to fill the gap, and a fixed money supply could help prevent inflation and promote more stable economic growth.

An answer to your question could be that together with bitcoin many other cryptocurrencies can be created and which can be useful for the purpose of creating a multiplier for credit: the multiplier will not be the reserve but the trust in the system and in the individual projects.

It's really a big vision for Bitcoin to link it with economic growth. But if Bitcoin becomes generally adopted and is made legal tender in all of the country, its value cannot remain what it is now, so the higher the demand with limited supply, the higher the value.


Back in the 1940s, the purchasing power of dollars was really high, but with steady inflation, the value of the purchasing power of $1000 is now $21,4800, which is just a mess for a bank note.

If Bitcoin becomes a global currency, then what we should expect is deflation on Bitcoin, which can make credit creation more easier and would not affect the economic growth.

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https://tools.carboncollective.co/inflation/us/1940/1000/

Depends to the lender, on how much they've got and that's going to be the limited amount that they can lend.

I'm not good at explaining about it but since you've mentioned economic growth and expansion, you're seem to be visioning quite big thing on this one. I'm only thinking how it can be done by commoners like me and you and there have been greater explanations about it from Hal and tcb.

I'm not saying it's a magic bean either, it's a question to those who think bitcoin will take over the entire financial system. Our current system can facilitate credit, which enables people/businesses to borrow money and grow/expand, this is what I mean by credit creation

I don't understand what you mean by credit creation, and for me, it was not design to be like that. It could be monetary system for now, but it doesn't mean you can just loan and lend bitcoin from someone.


It's not the limiting factor of bitcoin though, it can grow by itself and again it's not like a magic bean that will solve every problem of a countries as far as economic and financials. We can buy and invest on bitcoin and hold and wait for the right time to sell to make profits, simply as that.

I think this is where I am at as well, thank you

Credit also requires a legal framework and identification. You can of course have this but it isn't built into Bitcoin. These are things that would have to be created outside the system and applied to people's bitcoin holdings.

Bitcoin itself doesn't deal with IDs, it doesn't deal with legal issues, and it is a scarce resource so you can't do fractional banking with it.

Any credit system developed that involves Bitcoin would really just be the normal fiat credit system underneath and then that money would just be put toward Bitcoin. Like if a bank took people's Bitcoin they could loan out cash based on Bitcoin's value, but if the price of bitcoin went up and people came looking to withdraw their Bitcoin the bank would have to get some newly printed money to meet their obligations. It simply wouldn't work.

Same thought here.  Bitcoin is created to remove the third party on the transaction scene and this credit system needs third parties that directly oppose the core intention of Bitcoin.  So I don't think that Credit creation can be implemented on a Bitcoin standard.  This kind of plan needs variation and that variation surely will fail in terms of Bitcoin standards.


Precisely and I think the majority of lenders will not lend money to strangers.  That alone shows that this kind of method will badly fail.


But this move does not conform with Bitcoin standards, IMO.

Hal Finney predicted a credit system and fractional banking using bitcoin, long ago.


This is a possibility,  and the banking system may find a away to adapt itself and how it works using bitcoin.

Just like what happened with gold when people were afraid to keep their gold and put it with trusted people.
These trusted people started lending that gold, and then they began lending gold that they did not own, and so on until the person fails to fulfill the credit requirements.
The same thing applies to the central platforms, where those platforms lend you money, and suddenly everything disappears.

Whenever people leave their money with a second party, the easier it is to get easy money from lending.

This actually is a one of the great criticism which traditional economists do on bitcoin. According to the traditional economics for economic growth there has to be an inflationary setup where new credit and new money is continuously being created in the economy. Bitcoin hinders it by capping a limit on that which would mean money would eventually get dearer instead of getting cheaper and people would eventually keep on hoarding money itself than spending it leading to a deflationary spiral situation and collapse of economy. But honestly, practically this might be very difficult from what we have in theory so I would like to see the idea in practice for sure.

due to decentralized Bitcoin, it seems that what you are trying to achieve in this thread is not possible. it will not be like fiat which is managed by a bank. It is possible that when this is implemented some local exchanges in your country can make important initiatives and policies regarding this issue. and of course, cooperate with government agencies.
maybe when the bank in your country is willing to manage some of the adopted Bitcoins.

Yes the concept of credit and fractional banking has been a key idea to expand the world economy by allowing banks to lend money they don't actually have, while also making the global economy far riskier through massive debt accumulation and lack of reserves.


With Bitcoin there can be no credit system like that because you can't have fractional banking on Bitcoin. I mean I suppose you COULD start this kind of system but it would quickly collapse as soon as the first economic crisis happened because nobody can just print more bitcoin to make up for what was lent out instead of held in reserve.


The fractional reserve credit economy only works with currencies that are weak and can be printed at will.

Bitcoin should be seen not as a replacement for fiat, but as a new option, an 'escape hatch' as some people call it. Fiat will continue to exist and the world's economic system will continue on as before using fractional banking and printing money and credit, but Bitcoin gives people a way to escape that system when needed. With Bitcoin you can actually save in currency rather than being forced to take on risk through investments. And with Bitcoin you can be sovereign over your savings without needing to hoard a large amount of physical cash which would be very risky.

Bitcoin doesn't replace the national currencies and the banking industry, but it does give every person on the planet the ability to store value in hard money and transact openly with anyone in the world, while also giving people the option to have full sovereignty over their money rather than having to entrust one's money to banks. So Bitcoin doesn't replace anything, but it de-risks people's finances, gives them a financial escape hatch, provides financial sovereignty, and allows people to save/store/grow value with an actual usable currency.

The fiat credit banking system and Bitcoin are two different things and both will continue to exist. Bitcoin is just the world's alternative to the current system, and they each have their own reasons to exist.

Bitcoin Standard would be decentralized p2p (peer to peer) lending. The standard is already in used by several crypto lending platforms
It should also be possible for multiple lenders to pool BitCoins together and lend to big businesses with the p2p method... And probably in a gentlemanly agreement that the borrowers will only be paying the exact amount that's borrowed in fiat equivalent (with/without interest) even if price fluctuate up or down.

IMO, it wouldn't limit economic growth or affect credit creation if Bitcoin is the only global currency. Imagine when 0.001 is worth about $10,000 or more; then you wouldn't need 1 bitcoin, whose price is still $28,000 today. Probably, Bitcoin would have more value and the price would be high, and private individuals who have enough Bitcoin would have the advantage of lending some fraction of their Bitcoin to different business individuals. If the price of bitcoin is so high, and with a supply that is limited and can also contribute to the high value, then people can still collect loans in which a little fraction means a huge amount that could settle the desired project it intend to be used for.

Credit system would be the same as it was when there was a cold standard. You can only lend out what you have and not more. The only thing possible would be to lend out paper bitcoins but you would probably only be able to sell those at a big discount. Actually paper bitcoins do exists already, just Google it.

Making Bitcoin the default in the credit system is reckless because the value of Bitcoin is quite volatile and when it is entered into the credit system it will cause problems for both borrowers and lenders. Moreover, the supply of Bitcoin is very limited and it will not be able to fully serve its customers.

What kind of credit are you talking about? Is it the kind of credit that we take on to pay back in the future? If yes, then Bitcoin is not built for such. 

For credit creation to be successful, one needs to keep enough reserves for that purpose. That's to say, since we have 21,000,000 bitcoins in total supply, part of the 21,000,000 will be reserved separately, which will mainly be for lending only, and the others are to be publicly acquired and held just as they are right now. 

Bitcoin don't have such a feature, and I don't think that could be possible either in the near future. We can only use it as we see fit, and if we ever need credit for Bitcoin, it can be done on an individual contract basis, which will involve lending out one's holdings to another as credit, which will in turn be paid back with a certain agreed-upon percentage of profit.

I don't think Bitcoin can be a good currency when it's about credit or lending system, because lending system mostly need of third party who act as an escrow to make sure the borrower already give a valid collateral to prevent the lender to get scammed.

Since Bitcoin is decentralized, there's no way to retrieve the coins whenever the borrower didn't want to repay the loan.

The current credit system is a creation of the past one or two decades and did not exist as it does now several decades ago. One could argue that we have had more incidences of recession during the early modern and modern economic era than we had in the times without an efficient credit system. Could the dependency of businesses on credit and countries running practically on debt be a creation of the current financial system?

Yes, there would be. Bitcoin has a limited supply and cannot service the current credit system.
But we are considering a situation where Bitcoin is a world currency and not an alternative. It can function as a reserve currency along with its other utilities, but not as the standard financial currency.

- Jay -

Hello, I have bitcoin since 2017 and follow all the various discussions about the future of bitcoin and how it may become the monetary standard one day.

One thing I can't really see an answer to is how credit creation would work on a Bitcoin standard (or gold standard for that matter) as the system would be fully reserved and not fractionally reserved as the current standard is...

Wouldn't this mean there would be a limited amount of credit available to lend out then? Which could then hinder economic/growth expansion? Would be great to get an explanation on this, thank you