Topic: Doubt about Bitcoin's growth potential - page 2. (Read 6583 times)

With something like Bitcoin, this is very difficult to pull off. Bitcoin is form-invariant, i.e. can exist in almost any form. Any medium able to store 64 bytes of data can act as a native Bitcoin form. Furthermore, the acceptance of a credit instrument is burdened with counterparty risk and, for banks, the issuance is accompanied by the costs of maintaining reserves, and these need to be shifted over to the users. Neither of these exist when using specie, and they constitute a hurdle that a credit instrument needs to overcome to decrease transaction costs over specie.

There is a difference between credit and circulation credit, i.e. credit instruments that circulate as media of exchange. The latter, by definition, involves a counterparty risk.

I consider bitcoin to be a monetary superset of gold, since it has gold's properties (but better) plus convenient electronic transactability... So, it has two ways to become valuable: by servicing the store-of-value market-needs that gold currently covers, and/or via its transactional properties. It doesn't have to replace an existing major currency to be successful (valuable) long-term. Discussed more here: https://bitcointalksearch.org/topic/does-much-of-golds-market-cap-eventually-go-to-bitcoin-100065

Why does it need to replace the current debt system in order to be be a success?  They can run in parallell.  You dont have to have one or the other!  I think that the adption of bitcoin is a better measure of its success rather than the demise of the current system.

This is me talking (C.H.)... and I have to point you to Gresham's Law:

http://en.wikipedia.org/wiki/Gresham's_law

"When a government compulsorily overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation."

so, if Bitcoin's are "good money" there maybe a totally opposite effect to the "expected" ... humans are just so puny and inferior to their "own" Government's!  

I truly hope Bitcoin's insurgence will be one time when Gresham is proven wrong!

An ePaper system can be created, which would decrease transaction costs as well.  

Even in the current day economy the instrument that most investment banks create don't have more than 2 parties entering the transaction as long as the two parties are comfortable taking on the credit risk.  However the two parties being large financial institutions, they allow the credit risk to cascade further into the economy.  Bitcoin is not immune to this effect.  

If the existing debt is not replaced, it must be written-off. This act will set a precedent to the creation of more debt.


In case of dual currency systems both currencies are still taxed, and they are within the control of a single gov't.  Given that Bitcoin is a "perfect" way to evade taxes, it's growth is likely to be curbed by unwilling governments.  In his opinion it makes it very difficult to co-exist as a major currency.

As the "paper system" would not decrease transaction costs, it would not be accepted by market participants as a substitute for native Bitcoin. Acceptance is a prerequisite for both credit expansion, and a removal of backing ("fiatisation" of commodities). This is a critical difference between gold and Bitcoin.

This is pretty much the case in point, it is what my friend is trying to say!

Unfortunately, no.  Just like the gold standard, a paper money system was created with gold as backing, and as gold backing was made redundant at a point.  It's equally plausible to create a paper system with 25 million bitcoins and get rid of Bitcoin backing at some point.  But the question here is whether Bitcoin can get to that stage. (?) 

Fair point.    But for Bitcoin to be successful, it should be widely accepted.  The point being contested is whether the gov'ts would even allow Bitcoin to grow given they control the nations' laws and armies.  Just like bitTorrent exists but cannot/have not eliminated copyrights.

Bitcoin can be used to create credit as long as two parties agree on terms with Bitcoin amount as notional.

I and my friend agree... but what does that mean for it's growth potential?  So (he asks) why even have a new currency, if Bitcoin was supposed to get rid of the current hyper-inflationary system.  It is not really fulfilling its purpose, it is just staying there.  Right?

How do you see that happening, how do you see Bitcoin forcing all the debt that is currently in the system to get defaulted?

The idea that Bitcoin will force the "repudiation and/or dissolution of governments" is a far-fetched notion.  They still have the ability to "make laws" at will, and to their own preservation. 

I would say that most people depositing into traditional banks do not think of themselves as investors, or at least they don't think of their checking account as an investment.

There is a duration mismatch problem that is fundamental.  If a bank loans out money for a 30 year mortgage, but people want their money back sooner, the bank is screwed.  The bank is "good for it", but can't pay out today.  The modern solution is for a central bank to be able to create money out of thin air and lend it to the bank.

Since a bitcoin bank can't create money out of thin air, it always faces the possibility of a run.  Bitcoin banks could band together with an agreement to loan each other bitcoins as needed, and this would mitigate the problem during isolated or limited bank runs, but if everyone everywhere gets spooked at the same time, the game is up.

The solution is to be clear on both sides about repayment timelines.  The bank could not use demand deposits for duration loans, and the customers could not ask for early withdrawals on duration deposits.  Clever banks would attempt to mitigate this by creating markets for duration deposits, giving people an option to cash out early by selling the certificate to someone else at a discount (penalty), but it would need to be clearly understood on both sides that this system is not a promise of liquidity, but a last resort.

With Bitcoin, a bank run would look like an attempt to withdraw larger amounts of Bitcoins quickly, rather than queues forming in front of the banks. If there was a problem with withdrawals, people would start complaining in the forum, the news would pick it up and it could escalate very quickly. Even now when the amounts are, on global scale, negligible, it does not even take 24 hours for the word to spread.

The issue of liquidity is not solved at all. FRB works because banks issue short-maturity (even zero maturity) instruments, but the maturity of the loans they issue is higher (can be years). They carry the risk for this difference. If they were forced to liquidate the loans prematurely, they would need to take a cut, and this would result in undercapitalisation. Furthermore, as Taleb for example convincingly argues in The Black Swan, a lot of risk is not correctly modeled.

This is a smaller problem if FRB is merely a method of bringing together investors and creditors. People normally do not expect to withdraw their deposits immediately. If however those instruments are also used as a medium of exchange, people do expect to be able to use them for payment right away, and if this does not work, it has a direct impact on their business or lifestyle, and aggravates the panic. People can't pay rent, food, their suppliers or employees. That's an immediate problem.

What would you rather accept? A Bitcoin backed credit or a real Bitcoin...
Its possible, but with Bitcoin, what you see in your Bitcoin adress belongs to you, and you can look up that the coin is really there in blockexplorer etc. Its not just like some numbers in a bank account.

I don't agree. Bank runs caused by liquidity issues are a solved problem. Bank runs caused by insufficient equity (say due to bad loans) cannot be solved.

All you do is increase the interest rate if a liquidity crisis makes you unable to meet payment demands. Since you have the equity, your debts will be worth at least face value (because the interest rate is above market rate and you have the equity to pay). So your customers who don't want to wait can just sell the for more than they could withdraw for. You take a loss due to the above market interest you have to pay, but you don't harm your customers. (Of course, they have to know and agree to this up front.)

This doesn't help, of course, if you don't have the equity to back your debt. So it solves the problem of everyone withdrawing at once. But it doesn't solve the problem of too many of your loans going bad. (Like the mortgage crisis.)

+1

Fractional reserve lending wouldn't work well with BTC; the banks practising it would quickly fall to bank runs.  See also Rothbard for a discussion of this.

In case someone still thinks otherwise, I'll repeat: It's possible to have fractional reserve banking, credit expansion etc. in Bitcoin. Of course there will never be more than 21 million BTC out there, but there might be a much larger amount of "bitcoin-backed" credit around without trouble. As long as there's enough reserve and there isn't a run on the bank, it will work. Of course it won't make much sense now, but in far future it might.

False.  Money arose from debt, not barter, thousands of years ago.  But not in the way most people think.