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Comment by yunesj | Hacker News Reader

Bitcoin's value prop isn't in its anonymity.

Early adopters weren't enthusiastic about bitcoin because they hoped it would end fractional reserve banking or any other financial product. Rather, it was incredible to see the entire financial industry quickly rebuilt on top of sound money.

I agree that small transactions and mining can be (and are being) improved, but not for the same reasons. It's silly to blame bitcoin for government corruption and people taking advantage of government subsidies. Bitcoin is simply doing what was always done more efficiently.

I would expect that an individual like Bear would be more in tune with what bitcoin was trying to accomplish.

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> Early adopters weren't enthusiastic about bitcoin because they hoped it would end fractional reserve banking

Just to amplify your point: There is a weird idea that that monetary multiplication (like fractional-reserve banking) is not possible with bitcoin. However, anytime someone lends bitcoin or shorts it on an exchange, they increase the bitcoin in circulation past the base count of 21 million btc (or however many have been minted at the time).

The idea that bitcoin would somehow escape fractional-reserve banking was only held by people who do not understand the difference between M0 and M1/M2 in elementary macroeconomics.

There is a subtle distinction though. When a bank lends out US dollars, they are effectively creating new money that is treated as “real” money. They don’t technically lend out the deposits. In contrast, crypto lenders can’t create new bitcoin. They need deposits to lend out. The depositer in turn is aware they don’t hold real bitcoin, just a deposit credit at the lender. This is the origin of the crypto mantra “Not your keys, not your crypto.”

It’s true that the “M1” value can increase, but unlike fiat money the distinction is (for now) visible to the user.

> When a bank lends out US dollars, they are effectively creating new money that is treated as “real” money. They don’t technically lend out the deposits.

This is exactly wrong. In fact, it is the origin of the term "fractional reserve": They are reserving a fraction of the deposits and lending out the rest.

Right, but in crypto world most people regard coins held in custody as different from coins held in a private wallet. The Mt Gox experience was a good lesson on this topic, if it’s not your keys, it’s not your bitcoin.

In comparison, very few people distinguish paper cash money from a bank credit backed by a fractional reserve.

> In comparison, very few people distinguish paper cash money from a bank credit backed by a fractional reserve.

I would add the words "in the modern era". My grandparents generation regarded those two as very different, having lived through the bank runs of the depression.

The difference between their gen and mine is due to the advent of the FDIC. This would also address your point about Mt Gox: Had there been insurance, Mt Gox would not have been such a clusterfk.

So no surprise: Coinbase and Bakkt both tout the insurance of their holdings. It's not quite FDIC levels (ie, a defacto government backing) but it's getting closer. As a consequence, it is not too hard for me to imagine a time that custodial accounts will have nearly the same confidence as a private wallet, because the equivalent of FDIC will likely be created by bitcoin-based institutions.

>The idea that bitcoin would somehow escape fractional-reserve banking

You are correct, but unlike with banks, at least there is an escape hatch: "not your keys, not your coins", which is a lot simpler to implement than walking to your bank and withdrawing all your savings in cash.

Sadly, the vast majority of Bicoin buyers just leave their coin on the exchange (or worse: in the case of Paypal, they can't do anything else), thereby opening the door to all kind of shady practices, including FRB.

> You are correct, but unlike with banks, at least there is an escape hatch: "not your keys, not your coins", which is a lot simpler to implement than walking to your bank and withdrawing all your savings in cash.

To be clear: "Not your keys, not your coin" equivalent in the fiat world is not putting your money in the bank, but holding on to it instead. So you put all your fiat in a safe eg.

> Sadly, the vast majority of Bicoin buyers just leave their coin on the exchange (or worse: in the case of Paypal, they can't do anything else), thereby opening the door to all kind of shady practices, including FRB.

In order to short bitcoin on the exchanges, the exchanges need to have bitcoin to lend out. Naturally these lent bitcoin come from deposits. Exchanges are already practicing FRB on a large scale, but somehow nobody is calling it that (mostly because FRB is not well-understood by the bitcoin community.)

Isn't the fundamental difference here that we can't print more bitcoin to bail out bad investments?

Yeah, you can lend out bitcoin and even do fractional reserves, but ultimately, the bill must come due and over leveraged bad bets will get wiped out and good bets get rewarded.

Contrast this to the current environment where we are constantly bailing out and even financially rewarding business and investment failures, which comes at the expense of the working class who both foot the tax bill and aren't well insulated from the ensuing inflation.

> Isn't the fundamental difference here that we can't print more bitcoin to bail out bad investments?

Absolutely. (Although it's "a" difference, not "the" difference.)

> you can lend out bitcoin and even do fractional reserves, but ultimately, the bill must come due and over leveraged bad bets will get wiped out and good bets get rewarded.

Yes, and the subeconomy of bitcoin investing has a very different risk profile. As an example: I mentioned in another comment, the exchanges are already doing fractional reserves in spades. Bitmex has an insurance fund, and there has been at least one occasion where liquidation could not be covered by the traders and then exhausted the insurance fund. What happened then? The insurance fund paid out pro-rata on the successful bets (the successful traders made less than they should have") and much grousing ensued.

So it's the rough equivalent of an old-fashioned bank run, but tempers lessened because some money was made and nobody was zeroed out (other than the losing bets who should have gone negative but were only zeroed out).

I'm not sure the occasional bank run by people who get over zealous with their greed and desire for MORE is necessarily a bad thing.

The problem in my mind is when banks are doing fractional reserve without the explicit understanding and consent of their depositors. This might mean we'll have to get used a world where we pay banks a tiny fee to secure our money, rather than the risk free interest we expect now.

> I'm not sure the occasional bank run by people who get over zealous with their greed and desire for MORE is necessarily a bad thing.

I mostly agree. I think one of the biggest problems with the bank meltdown of 2008 is that no heads rolled, so it's no surprise that there has ultimately been very little behavioral change.

> The problem in my mind is when banks are doing fractional reserve without the explicit understanding and consent of their depositors.

All of them are consenting (FRB is what banks do, they don't make money by simply holding a deposit) but boy is there a lack of understanding on how the modern bank works as a business and it's effect on the money supply.

> Rather, it was incredible to see the entire financial industry quickly rebuilt on top of sound money.

What is your definition of sound money?

It has been said many times but it bears repeating that a money supply that grows more slowly than the economy it is traded in will be deflationary. Deflation inhibits economic activity because money saved is worth more tomorrow than today even when not invested in productive enterprise. Deflation enriches existing asset holders at the expense of new entrants, even if those asset holders are just stuffing their money in the proverbial mattress. Economists consider deflation a terrible outcome for an economy; Japan has experienced it for thirty years now.

> deflation

You are making a lot of assumptions. But yes, a productive enterprise has to outperform doing nothing to be successful. And no, it is not possible to generate unlimited wealth simply by investing in a deflationary currency.

> Deflation inhibits economic activity because money saved is worth more tomorrow than today even when not invested in productive enterprise.

What is the rationale for this? Because by that token, nobody would ever buy computers, because the money saved by not buying a computer today can go into buying a better computer tomorrow.

if anything, deflation is fantastic because it makes you think twice before rampantly consuming shit, which is going to be much better for the environment than the misaligned incentives of demand-side economics. (not that supply-side is any better).

Finally, inflation redirects real returns from the poor to the rich and deflation does the reverse. Japan (which has had net ~0% official inflation over the last 30 years) has had a stable GINI coefficient; the US has gotten worse and worse.

> > Deflation inhibits economic activity because money saved is worth more tomorrow than today even when not invested in productive enterprise.

> What is the rationale for this?

The rationale is explicitly stated.

> Because by that token, nobody would ever buy computers, because the money saved by not buying a computer today can go into buying a better computer tomorrow.

No, because then you lose out on the utility of the computer today.

The argument was about financial investments; that it discourages investments in productive enterprise since holding cash produces a real gain at low risk. Putting off buying future potential money via investment in productive enterprises because holding money gives you more value of money in the future with less risk than investment in productive enterprise and the liquidity of money now is not parallel to deferring buying a computer to buy a better one later.

> if anything, deflation is fantastic because it makes you think twice before rampantly consuming shit,

While you call it “fantastic”, that's just another way deflation depresses economic activity, discouraging consumption as well as productive investment. (Of course, discouraging consumption also further discourages investment itself.)

Your assertions are simply not borne out by historical truth, there have been periods of history where there was no inflation or deflation, where there was plenty of investment and growth. For example, post-civil war US. Similarly the 1850-1900 sweden free banking era. Oh. And Japan. Do you seriously think there is NO productive investment in Japan currently, simply because there is no inflation?

People grow and invest in things with only minor regard to whether or not there is inflation, just when there is inflation they invest more in dumber shit like juicero and theranos, because if you are on a moving compounding treadmill you have no choice but to participate in the casino.

> Your assertions are simply not borne out by historical truth

What assertions?

> there have been periods of history where there was no inflation or deflation, where there was plenty of investment and growth.

That...doesn't contradict anything I've said. I have not stated or implied that, in the absence of inflation or deflation, one would not expect productive investment and growth. I have agreed with upthread claims that deflation discourages economic activity, and also pointed out that the effect you praise of deflation discouraging consumption is an example of discouraging economic activity.

> For example, post-civil war US.

You mean the 1865-1867 recession (which also featured significant deflation, not “no inflation or deflation”) or the 1869-1870 recession (ditto), or the Long Depression starting in 1873 (ditto, again.) The post Civil War 19thC USA is actually a pretty good example of the association between deflation and poor economic performance, and definitely not an example (for good or ill) of a period with “no inflation or deflation”.

How can you claim the us had poor economic performance in that era? The country went from "having torn itself in two" to "becoming a international superpower" in 50 or so years. The rejection of reality implied by your selective analysis of economic history is truly astounding.

> Bitcoin is simply doing what was always done more efficiently.

Where by "more efficiently" you mean "vastly less efficiently", right?

I'm not anti-crypto, but I honestly don't know what you mean by "sound money". Could you elaborate?

Many, or even most people, believe that money must be controlled by the government for the economy to function. "Sound money" is money whose supply cannot be controlled by the government. Some further reading:

* https://fee.org/articles/what-do-we-mean-by-sound-money/

* https://mises.org/library/principle-sound-money

* https://www.aier.org/pertinent_category/sound-money-project/

Thanks, a good explanation. And I don't think money has an inherent need to be government controlled in order to be stable either. (Though I do see some benefits)

But I think it's relevant to split hairs a bit and say that "sound" often has the sense of "firm" or "solid/reliable", but that is not an inherent property of non-governmental currencies that can be controlled by groups that are no more beholden to users of the currency than governments. (Consider Facebook's attempt at creating a currency as an example)

Yes, you're right! That was my mistake.

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