TIL: Fractional reserve banking is possible with cryptos

[Tibster]

Very different.
It would be sound banking, if the Bank just used your paycheck and nothing more to lend it out for a fee. But they don't!
It's Fractional reserve banking, if they multiply your paycheck amount 10 times (out of thin air), and lend that out for 10 times a fee. That's the very difference!

That's not how it works. You deposit 100$. They lend 90% of it, it gets deposited. They lend 90% of that and so on. It ends up at 10 times the original amount after many loans.

It's not you deposit 100$ and they lend 1000$ right away.

 

[Hoi]

That's not how it works. You deposit 100$. They lend 90% of it, it gets deposited. They lend 90% of that and so on. It ends up at 10 times the original amount after many loans.

It's not you deposit 100$ and they lend 1000$ right away.

OK, but the end result is still the same: only a Fraction is sound.

Anyway: this should not be possible with Bitcoins. The amount is fixed. The only party which generates additional Bitcoins are the Miners.

But as central Exchanges work off-blockchain they can in theory game/fraud the system until they are exposed and a bank-run will follow (as no one in Bitcoin's world will accept that).
I really hope we will have decentralized exchanges soon (then no more MtGox).

 

[JackRab]

If it is theoretically possible (it is*), you bet your ass someone is practically doing it. Mt Gox cames to my mind... Apparently coinlenders.com also did it while it existed.

*It is even in the Bitcoin Wiki:

https://en.bitcoin.it/wiki/Fractional_Reserve_Banking_and_Bitcoin

"Fractional Reserve Banking with Bitcoin is possible and practical. It is already implemented with CoinLenders. There is no fundamental difference between classical currencies and Bitcoin as it applies to banking. "

Today You Learnt...

How does the MtGox saga come into play in this? Probably missed that...

I would think it's not that easy with bitcoin. Since the whole idea is avoiding double spending. So... all transactions on the ledge/chain are true bitcoin transaction.

What you're saying is increasing of the supply by the exchanges... it's not the same. I'm sure if lending and massive short selling on margin would be happening that would create issues when you want to pull the bitcoins out of the exchange.. which would be a virtual bankrun. The exchange doesn't have enough coins to give out...

Is that what happened with MtGox? Did they increase supply by massive lending on margin?

 

[JackRab]

It's not Bitfinex itself, but the users who lend Bitcoin for a fee in USD (and take the risk). Just like how Brokers work if you want to Short a stock (Netflix). Some other client who has Netflix stocks can give them to the shortable-pool, and get a special interest for it (in USD, not in extra Netflix shares).
That has nothing to do with Fractional Reserve banking.

Actually in a way its' very much the same.

With fractional reserve banking the banks lend out more than they have. When depositors want their money in their hands, and the bank doesn't have enough since it's lend out... it creates a bankrun. A bankrun in this sense is basically a liquidity issue, creating a short squeeze on whoever is short, which is the bank. So in a bankrun the bank gets squeezed in cash.

With stocks lending, if done large enough... you can also create a short squeeze when all actual holders want their stocks.. which happens quite often, especially when there is a large shareholders vote coming up on for instance a takeover. You can't have more than 100% votes. But there are more than 100% holders... if there's a 50% short interest, there are 150% longs.. but only 100% can vote.
This will create short squeeze, since all shorts are required to deliver the shares/votes asap. That's technically a bankrun on the shorts.

Banks are short cash on long IOU's ... Same same...

In bitfinex, it will work the same again. If I hold bitcoin on their exchange. And they lend out 100% of all bitcoins held. There are 200% longs and 100% shorts of bitcoins held at their exchange. If all 200% longs now want to 'withdraw' their bitcoins on the wallet... bitfinex is fucked since their short clients will get fucked because they will be squeezed. Someone needs to purchase real virtual bitcoins to deliver them to the 200% longs....

In any system where you can short through lending, a squeeze can happen... and this system inflates the amount of assets...

 

[DeltaRisk]

So much about the claim of cryptos being limited supply...

https://seekingalpha.com/article/4082979-many-bitcoins-lost-forever

" while the number of bitcoins in existence will never exceed 21 million, the money supply of bitcoins can exceed 21 million due to fractional-reserve banking."

"Martin YK Li, Contributor explains:

"Fractional reserve banking is when banks loan out or invest with money that customers have deposited, while keeping just a fraction of that money in reserve (actually sitting in the bank vaults) in case of a bank run. This form of banking increases the money supply by a factor of x, where x is the money multiplier (http://bit.ly/2tPc0Ys).


Let's look at a small microcosm of the economy, for example, a society that consists only of you, me, and the bank. For the sake of example, let's say there are only $100 that exist in our small little society, and you own all $100. You decide to give the money to the bank for safekeeping, which doesn't change the amount of money in the system; There's still only $100. However, the bank decides to let me borrow $50 of that $100. Now I have $50 to spend, and you still have $100 sitting in the bank, so there is now effectively $150 in the money supply.


The actual number of Bitcoins in existence is capped at 21 million, but with fractional reserve banking, banks or exchanges can loan out Bitcoins the same way they would loan out money. It's as simple as a large bitcoin exchange lending out 10,000 bitcoins to an individual to start a business. The money supply would thus increase by 10,000 and we would instantly have fractional reserve banking. Fractional reserve banking was actually already implemented by CoinLenders.com, which is unfortunately now defunct. Seeing that the government does not regulate Bitcoin fractional reserve banking however, most consumers are wary of banking with exchanges that utilize fractional reserve banking, and most exchanges are aware of this sentiment as well. Poloniex for example makes it clear on its front page that it doesn't operate under fractional reserve banking."

Credit creation. Credit creation. Credit creation. When will you guys ever understand?

 

[Algo_Design_Kid]

Pekelo, you continue to amaze with your ridiculous comments. You should just avoid posting about BTC altogether.

 

[maler]

Optimists would ask, why would you want to poison a "supposedly" clean water well in the middle of a poisonous swamp? Cynics would ask, is a ponzi on top of a ponzi a better ponzi?

 

[Pekelo]

Cynics would ask, is a ponzi on top of a ponzi a better ponzi?

Charles Ponzi actually had competitors later on. His fame and success gave birth to copycat companies (just like alt-coins) and they opened up business in the same building where Charles operated. Imitation is the sincerest form of flattery...

Still, the best modern day crypto based ponzi was the Chinese one using Litecoins. My hat is off to them. They only accepted Litecoins, so anybody who wanted to give them investment money, first they had to buy Litecoins artificially increasing the price.