[MereInterest]

Unless people decide that bitcoins are not fungible, then fractional reserve banking is absolutely possible with them. You give me Bitcoin, and I will lend them out at interest, keeping some on hand to give back to you as you need them. The process is identical to banking with a fiat currency, and results in the same money multiplier.

Where there is confusion is because economists accept that money is an abstract thing, backed by people's willingness to accept it, whereas Bitcoin enthusiasts see money as a tangible thing that must be backed by a concrete thing. Thus, when economists say that the supply of money changes with fractional reserve banking, they are referring to dollars in the abstract, not physical dollar bills. When Bitcoin enthusiasts say that the supply is limited, they are referring to the bitcoins themselves, not the abstract availability of bitcoins.