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To be honest, when I read the original idea behind the bitcoin, I was thrilled. I thought This Is It (TM). The monetary system, as it exists today is based on debt as a lever for growth. Banks can get a deposit of 1$ and God/King/Char/President/Whatever gave them the right to lend 5$ with it, and hold the 5th person under obligation of debt, to pay back that one dollar which the bank that gave it to him DIDN'T HAVE in the first place. You have to give back that 1 dollar or you will lose what you bought with it.
Proponents of this practice call it "value" of potential, they argue that banks can do this because if they lend 5$ for every 1$ they have, people who borrow these 5$ will really work their asses off and pay 5$ back, which means that banks valuate the "potential" of the market to create 5$ out of 1$. Then come investors, speculating the value of this "potential", buying the debt and selling it again for 12$ this time etc. I thought that bitcoin was a chance to fight back the economy of debt. Every coin is 1BTC, no bank would be able to get it and magically transform it to 5BTCs any more. Potential would once again be expressed as ability to produce more or better of your products made for the same cost and EXCHANGE them for more or better products made by someone else, REAL things as assets against REAL things as liabilities exchanged through a non manipulatable medium. Then, I woke up :) Bitcoin adopters and proponents are so unbelievably vested in the current status quo that they managed to create a caricature of the same, old monetary system replicated in the bitcoin world: exchanges that don't exchange bitcoins but integers, speculators, market crashes... like Wall Street No.2... and naturally "It is not profitable any more, sell"... |
The fractional reserve requirement allows the banks to lend multiples of their incoming deposits no matter what the currency. BitCoin is just another currency, like the dollars. M1/M2 in circulation is much smaller than the actual money used in the economy. BitCoin will be the same way.
The banks can very well open BitCoin accounts, allowing people to deposit actual BTC. The bank then lends the BitCoin out in multiple of deposit, like 5BTC lent out for 1BTC deposited. The BitCoin lent out are not delivered in actual BTC, just some numbers in the borrowers' accounts. Only when the borrowers withdraw that they get back BTC. Like the dollar accounts, most people don't withdraw large amount of dollars; they just write checks or wire transfer them. Same way for the BitCoin accounts. Thus the debt-leverage economy with BitCoin will arrive.
If everyone withdraws from the BitCoin accounts, there would be a run on the bank and the bank won't have enough BTC reserve to meet the demand and collapses. Banks can put daily withdraw limit like ATM and tell people to write BTC check. It's just as good as BTC.
The digital nature of BitCoin will probably allow people to withdraw more easily and thus lower the possible leverage multiplier.