Comment by jknz | Hacker News Reader

Comment by jknz | Hacker News Reader

Bitcoin seems quite straightforward and easy to understand, compared to our current banking system.

A lot of comments mention the difficulty of explaining what is bitcoin and how it works, and that mainstream people cannot get enough understanding to start using it.

What about the actual banking system? There are so much mainstream ignorance about our current banking system.

What does it even mean that I own $2000 at a bank? Ok I understand that I can withdraw this cash, but other than that it is a very abstract concept, built into the opaque IT system of my bank.

If I transfer money from bank A to bank B, what does that mean? Did the banks exchange an envelope of cash? Do mainstream users really understand the details of a bank transaction? I personal have no clue about the inner workings of this banking IT systems. Bitcoin seems very easy to grasp.

Understanding quantitative easing? In the bitcoin world this is transparent and easy to grasp. For my national currency I have no clue of how quantitative easing is done, by how much, etc.

The more I think of our national banking/currency systems, the more I believe bitcoin is way simpler to explain and understand.

That's ridiculous - you seriously think that how the blockchain works and concepts like cryptographic proof-of-work is easier for a layman to understand than interbank settlement and reserve accounts at a central bank?

It means exactly the same as bitcoins. You have an entry on some computers somewhere.

The difference is that the entry on a regulated bank's computer can be used to settle a tax bill, or a loan. The entry in a blockchain can do neither.

So at some point you have get the right sort of money to settle debts imposed on you by wider society.

Blockchain 'currencies' are just intangible bottles of wine, artworks, or tulip bulbs and will go through the same bubble and bust as all those things have previously.

You can't settle a tax bill with gold either.

It means they are holding $2000 of your money. And if you send it to another bank then it means they send it to them and now the other bank is holding your $2000. Nothing hard about that.

Bitcoin might be easy if you're a techie and interested in it. I am not interested in it and I barely even know where to start. What does it mean to mine stuff? Blockchain? What.. There is no way my parents would remotely get started with Bitcoins at this point. And I believe that once it becomes easy enough for mainstream, it will be as abstract as anything.

If everyone wants to take their $2000 out at once, can they?

In most countries that's highly unlikely, so is it really $2000? Or something entirely different?

I think it is common knowledge that banks use money to invest, lend to others for profit and so on. So no, not everyone could take it out at once as it would crash the bank.

I guess you could say that they hold your $2000 most times, but at times they use it for something else and are in debt to you.

I don't think on the user-level it is complicated at all. You can literally go to a bank, have them create your account and give them physical money. Then take it out.

It's common understanding. It's also completely wrong.

Banks are money factories, not warehouses. When you go for a loan the Bank creates the money for you on the spot. DR Loan Assets, CR Deposits.

We pay for things by swapping somebody else's liabilities with each other.

Which primarily shows that you don't understand the banking system?

Banks generally don't invest (with the exception of investment banks, but that does not have anything to do with the money in your account). They don't hold your money at all, rather they are in debt to you the moment you put money into your account. Also, there are way more functions and processes at a bank than "putting money into your account" and "withdrawing from your account".

So where do the $2000 go when I hand the bills over? Surely they keep it somewhere. And when I want to take it out, they give it back to me (obviously not the same bills).

But yeah, I don't really know how banks work and what they do. But for the average jo (me included) is is all extremely simple to use - which is my point, that Bitcoins are not.

Cash is an asset to the bank. If you give $2000 to the bank, they have an asset ($2000 cash) and a matching liability (they owe you $2000).

They either keep that cash to use for a withdraw or can swap it at the central bank (the Fed in the US) for central bank reserves.

Each bank has an account at the central bank, which they use for settling transfers. There are various ways for banks to send instructions to a clearing house (like ACH, Swift, etc.) but at the end of the day they settle the difference by transferring central bank reserves between their accounts at the central bank.

Here's the important part - since banks are transferring both ways between each-other, generally the amount of reserves transferred between them is some fraction of the total amount being credited to each account. For example, if bank A needs to give bank B $100 million, and bank B needs to give bank A $99 million, then only $1 million actually moves at the end of the day. So banks don't need to hold anywhere near the full amount of deposits in reserves. If they don't have enough to make good, they borrow if from another bank, or the lender of last resort (the central bank itself). For this, the CB charges them the official interest rate.

Anyway, that's how banks are able to create money to lend. Since money lent becomes a deposit, lending from existing deposits doesn't work if you want to follow the laws of double entry accounting. Instead, the bank creates an asset (the signed loan contract with you) and then deposits your account (creating the matching liability), creating new bank credit (which is considered money by people and the Government, even if taxes can only be settled in cash or reserves) as well as debt.

What happens to Bitcoin if everyone decides to cash in?

Same as what would happen in case of USD - price would drop to zero.

Well, someone has to be buying all those btc at the other end. It might drop a lot but I find zero unlikely.

"Price drop to 0" literally means nobody's buying it, of course. If everybody (in the absolute) suddenly decided they didn't want to hold bitcoins, the price would indeed be 0, since there wouldn't be any buyers. (It might even be negative in some cases - you'd have to pay someone to take it from you.)

Price tanks. But your bitcoin remains.

It's debt, they're not storing money for you unless you get a safe deposit box and leave it in that.

Deposits are loans you make to the bank. The interest rate is crap because you want the ability to call in that debt whenever you feel like. But like loaning anyone else money, they might not have it on them when you come to collect.

Deposits are de facto loans, but not given the same rights as the actual loans the banks are creating.

A long, long, long time from now they'll call that exploitation in the name of convenience and the status quo.

> If everyone wants to take their $2000 out at once, can they?

They'd stand a better chance than everyone trying to withdraw their bitcoins from the various ~bucket shops~ er, bitcoin exchanges.

Are you suggesting that bitcoin exchanges keep a fractional reserve? Nonsense.

Also, there's no requirement that you keep your coins in an exchange unless you're, well, exchanging them. That's kinda the point.

> Are you suggesting that bitcoin exchanges keep a fractional reserve?

No, fractional reserve would imply transparency. I'm pointing out that historically, several large bitcoin exchanges have lost or stolen their customers' coins, and lied or tried to hide that fact.

And now we have large bitcoin exchanges which undergo regular, verifiable audits as a result.

Last week: https://www.cryptocoinsnews.com/btc-e-domain-seized-by-autho...

BTC-e has never been a reputable exchange. Nobody has recommended its use ever since there's been reasonable alternatives, such as Coinbase and Kraken.

Also, the fact that it was used for money laundering does not in any way show that the exchange system provided to customers was anything other than totally above-board. That the police are able to steal people's money when the issue at hand has nothing to do with those people's money is the problem here. HSBC isn't stealing its customers' money because it turned a blind eye to money laundering either.

> "It means they are holding $2000 of your money. And if you send it to another bank then it means they send it to them and now the other bank is holding your $2000. Nothing hard about that."

This isn't even close to how modern fractional reserve banking systems or payment settlement processes work. The average user has no need to understand these systems, just as they will have no need to understand how the blockchain works in order to benefit from it.

I don't mean they hold the cash, I mean they "write a note" that you have deposited $2000. So they know they can give it back to you at some point. If that makes it better I don't know. It was supposed to be a simplification anyway.

The issue with Bitcoin is that you current kind of need to know about how it all works don't you?

You don't need to know how it works, you just need to download some software on your phone, or buy a hardware wallet, and then buy some Crypto from some place like Coinbase. Sending/receiving crypto (specifically Bitcoin or Ethereum) is actually very easy.

The real issues right now are:

1. Buying crypto in the US requires giving private info to 3rd party companies you may not trust (I wish my bank sold Bitcoin) or using a Bitcoin ATM, which most people would be hesitant to use.

2. Storing coins on your phone wallet has more risk than using Apple Pay or a credit card.

3. If you use a phone or hardware wallet, you have to maintain your mnemonic phrase, or if you lose your wallet, you lose all of your money.

4. Prices aren't stable, and people generally want their currency to be stable. In some countries, crypto is more stable than the local currency, but in the US, that isn't the case.

These things can be made easier, and hopefully financial institutions get on board and start providing crypto access with means of securely storing your mnemonic phrase in a way that they can't access without you.

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