Money creation in traditional banking system: You can skip this part if you know what money creation is.
https://en.wikipedia.org/wiki/Money_creation - Its very well explained here. But i will try to short it in simple words.
None from us is withdrawing money from bank accounts. We are only using small part of them by paying with credit cards but it's the same as transferring money from bank to bank, sometimes its just change in the records of one bank. It is creating a situation in which we are using our moneys but bank still holds similar amount of funds. That's why Fractional-reserve was made. If bank is working processing thousands transaction a day while holding almost the same amount of founds than why not use part of them storing in reserves only amount that might be needed.
"Fractional-reserve banking is the common practice by commercial banks of accepting deposits, and making loans or investments, while holding reserves at least equal to a fraction of the bank's deposit liabilities. Reserves are held as currency in the bank, or as balances in the bank's accounts at the central bank. Fractional-reserve banking is the current form of banking practiced in most countries worldwide." - wikipedia
Good example is better than the best explanation... imagine this situation:
I deposited 1000$ into bank with 10% Fractional-reserve system. Bank deposited 100$ into reserves and give 900$ in a loan to Peter. He bought TV set and transfer 900$ to AGD shop bank account. Bank accepted 900$ deposit and again store 90$ and AGAIN give 810$ in a loan to John. John bought new phone and transfer 810 $ to store bank account. Bank accepted 810$ deposit and again store 81$ and give 729$ to Mike in a loan. And again and again untill there is nothing to borrow. At the and, out of 1000$ banks created 9 000$. Its in 10% fractional-reserve system. In most countries mandatory reserves are around 3-5% (do your own math here
) ... and its legal !Can bitcoin be affected by that?
Big part of all bitcoins are stored in crypto exchanges wallets. Daytraders are buying and selling coins every day but storing them on exchanges (amount of founds stored in exchanges are not changing, only records are being changed - whose coins are whose). Part of hodlers are storing coins on exchanges (not knowing how to store them safely). Crypto exchanges knows exactly how many coins they have and how many of them are needed for everyday withdrawals and which are never being used. That's why they are transferring part of founds into cold wallet and never withdraw. That's similar to banks situation and that's makes me think that exchanges may apply fractional-reserve system too.
Good example is better than the best explanation... imagine this situation:
Crypto exchange knowing a fact that (f.e.) 80% of their users founds are never being withdrawed they can create sell orders on market equal to 300% of their users founds. Where the hell 300% came from? lets put that into numbers.
Crypto exchange store 100 000 users bitcoins. Knowing a fact that 20% of users founds is enough to cover everyday withdrawals they know that they can create in their books 300 000 btc and sell to their users who came with fiat to buy btc (all users together has 400 000 btc now - in exchange books, 20% - 100 000 is needed to cover every day withdrawals). That way crypto exchange created extra 300 000 btc. Don't get me wrong. They are not true bitcoins which can be stored on blockchain and transferred to wallet. Those are bitcoins created in exchanges books into investors, storing founds on crypto exchanges, hands that thinks that they have real bitcoin. What if they know that only 5% is needed for everyday withdrawals? Do your own math
. In worst case if they will sell too much they can dump altcoins to cover lack of liquidity on their on any other exchange. Why Mt-gox even said that it was hacked. Why didnt it start to work in fractial-reserve system covering loss from profit from fees? Maybe it wasn't hacked. Maybe mt gox set minimal reseves too low and it has to lie that it was hacked (https://en.wikipedia.org/wiki/Mt._Gox). That applies also to every crypto not only bitcoin and not only exchanges can do that. Every company that stores your coin on their wallet can do that.
How to fight against bitcoin creation?
After I realized this I've started to search for a way to fight against coins creation. I found "proof of keys" initiative that encourage crypto society to withdraw all coins from exchanges in 3 of January every year to make crypto exchanges show us that they actually have our coins - they were not hacked and they are not working in fractional-reserve system. I think that it's the most important initiative in all crypto word. It's the only way for us to know that there is no 200 mil bitcoin in system (20 mil real and 180 mil fake bitcoins in exchanges books) and bitcoin is not similar to fiat (can be printed). The second way for that is to force on exchanges creating huge exel file in which every users founds will be written so everyone could check if his record is not faked and if sum of users founds is similar to hot and cold wallets exchange founds. But its more like a dream that will never happend. We need to know that storing coins on exchanges is not only risky (they can be hacked) but doing that we are allowing exchanges to dump them decrissing prices. Storing bitcoin on exchanges or any other third part company wallet dumps and destroys bitcoin.