Do you use Bitcoin or Litecoin?

Linton

Can bitcoins be consolidated? Consider a trader selling lots of small objects who then wants to pay his supplier? Does he have to pass over thousands of little bitcoins? Is there an inherent tendency for the bitcoin lumps in circulation to get smaller and smaller? If not why not? If so, might this get a little inconvenient?

masonic

Linton wrote: »

Where does the money come from?

- Do bitcoin owners need bank accounts? Or do we just have software running on one's own raw bitcoins? If not who provides mortgages?
- If they do, do the banks hold real bitcoins or virtual bitcoins - ie entries in a database? If the latter then this removes one of the main advantages claimed by bitcoin fans - the currency cant be "printed". Virtual bitcoins can be created out of thin air. Does fractional reserve banking work with real bitcoins? If not is there the liquidity to provide mass lending?

All bitcoins are virtual. The whole system is a public ledger operating over an online network. The only place they 'exist' is within this distributed database. Bitcoin owners need to store their digital credentials that give them ownership of their bitcoin holdings - this is what allows them to perform transactions on the public ledger. There's plenty of information about bitcoin and how it works here.

I'm not sure how fractional reserve banking would work, though. There will be supply growth for quite some time to come, but eventually the money supply will be static. What effect that would have on the traditional banking model is a bit beyond me.

Can bitcoins be consolidated? Consider a trader selling lots of small objects who then wants to pay his supplier? Does he have to pass over thousands of little bitcoins? Is there an inherent tendency for the bitcoin lumps in circulation to get smaller and smaller? If not why not? If so, might this get a little inconvenient?

The transactions are just entries in a ledger. You could draw an analogy between bitcoin transfers and electronic bank transfers - if you received a lot of small value transactions, it wouldn't make any difference to the payments you made using the money you received.

TheTracker

Linton wrote: »

Where does the money come from

The bitcoin algorithm has a steady stream of bitcoins being "mined", in ever decreasing numbers. Think of it as a predictable QE. This is what ultimately inflicts deflation. There are particular issues with handling debt in a deflationary world but that is a function of deflation not bitcoin per se. Effectively CPI would be negative and the mortgage rate above that perhaps also negative. A common challenge is why would anyone lend rather than hold if interest rates are negative? That's because they'd be more negative if you didn't lend.

Deflation, and particularly a deflationary currency, may seem exotic. But we have it today in industries that are deflationary because they outpace inflation by its advancement such as consumer electronics. You can buy an 5k TV next year for £1000 next year but it doesn't stop people buying an HD or 4k TV this year for £1000.

Linton wrote: »

Do bitcoin owners need bank accounts?

Bitcoins need to be stored. The store is represented as a sequence of numbers. Those numbers can be stored in any way you might imagine. They are verified against a blockchain to ensure they are "real" when they need to be transferred or "spent". In a pure bitcoin world there would no doubt be services that would look after these stores (really, keys to the publicly held register or store) for you just as a bank does today. These "wallet" services exist today but have credibility/security risk.

Linton wrote: »

Or do we just have software running on one's own raw bitcoins?

You don't need software to store a bitcoin. You can use a pen and paper. Or a physical coin with the number embedded. Once again you aren't storing the actual bitcoin, but the key to it on the public register. The distinction between which may be overly meta.

Linton wrote: »

If not who provides mortgages?

Mortgages today are provided by those with value to lend. In a pure bitcoin world, holders of bitcoins would be able to lend bitcoins. There is no reason Barclays and Lloyds and so forth couldn't continue in a bitcoin world, though with less influence.

Linton wrote: »

If they do, do the banks hold real bitcoins or virtual bitcoins - ie entries in a database? If the latter then this removes one of the main advantages claimed by bitcoin fans - the currency cant be "printed". Virtual bitcoins can be created out of thin air.

Quite the reverse. It is pounds and dollars that can be created out of thin air at any time in any amount. That is QE. Bitcoins can only be mined once and there are limited amounts to mine and the production is algorithmically controlled against time. Also, they can in fact be printed in just the same way a pound coin may be.

Linton wrote: »

Does fractional reserve banking work with real bitcoins? If not is there the liquidity to provide mass lending?

Yes as long as there is an agreed exchange rate between the parties at point of exchange. They are not destroyed, they are transferred. Importantly Bitcoins are also fungible, and infinitely divisible.

Having said all that I hold no bitcoins or any other crypto currency/asset.

masonic

TheTracker wrote: »

They are not destroyed

One could argue that if the owner loses their private key, the bitcoins that user owns are unrecoverable and effectively no longer part of the money supply.

Linton

TheTracker wrote: »

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Bitcoins need to be stored. The store is represented as a sequence of numbers. Those numbers can be stored in any way you might imagine. They are verified against a blockchain to ensure they are "real" when they need to be transferred or "spent". In a pure bitcoin world there would no doubt be services that would look after these stores (really, keys to the publicly held register or store) for you just as a bank does today. These "wallet" services exist today but have credibility/security risk.

....

At present banks dont hold your money safe in a vault, they use it to lend out for mortgages or whatever. Can they in bitcoin world?

If they cant, how do mortgage suppliers get the money to lend out?

If they can, then your wealth ceases to held in the bitcoin ledger as what were your bitcoins get transferred elsewhere, but rather it becomes just an entry in the banks internal ledger. All you have is a promise, which is of course exactly how modern currency came into being - "I promise to pay the bearer the sum of £1" being handed over in exchange for gold. The documented promises were tradable for goods and are now our real currency. The underlying gold which was promised is now irrelevant. One can see the same thing happening with bitcoins.

TheTracker

masonic wrote: »

One could argue that if the owner loses their private key, the bitcoins that user owns are unrecoverable and effectively no longer part of the money supply.

Yes definitely. I reckon that will happen, and the difficulty is in knowing the value that have been lost forever! I was was pointing out they are not destroyed in an exchange with a fiat currency.

TheTracker

Linton wrote: »

At present banks dont hold your money safe in a vault, they use it to lend out for mortgages or whatever. Can they in bitcoin world?

If they cant, how do mortgage suppliers get the money to lend out?

If they can, then your wealth ceases to held in the bitcoin ledger as what were your bitcoins get transferred elsewhere, but rather it becomes just an entry in the banks internal ledger. All you have is a promise, which is of course exactly how modern currency came into being - "I promise to pay the bearer the sum of £1" being handed over in exchange for gold. The documented promises were tradable for goods and are now our real currency. The underlying gold which was promised is now irrelevant. One can see the same thing happening with bitcoins.

A bitcoin is closer to gold than a promise to pay.

A mortgage supplier gets its bitcoins from borrowing them from others. I will lend Lloyds 100 BTC if they give me back 101BTC, in the meantime they lend it to you for 102BTC, and they come out 1BTC ahead.

brendon

masonic wrote: »

One could argue that if the owner loses their private key, the bitcoins that user owns are unrecoverable and effectively no longer part of the money supply.

You can say the same about that £20 note you can't remember what you did with.

Linton

TheTracker wrote: »

....


It is pounds and dollars that can be created out of thin air at any time in any amount. That is QE. Bitcoins can only be mined once and there are limited amounts to mine and the production is algorithmically controlled against time. Also, they can in fact be printed in just the same way a pound coin may be.
...

Pounds and dollars are created every day by bank lending. You put your money in a bank. The bank keeps some for reserves but uses the rest to lend out to someone who at least initially puts it back into the bank. The bank can then lend it out again, keeping a bit back for reserves etc etc. Fractional reserve banking. If it all stays in the bank then money is removed from the economy, however if it is spent the government may have to print cash to meet the demand. So contrary to what the bitcoin fans say, money isnt printed by corrupt governments. It is created by the underlying operation of the economy. Governments role is to roughly balance the creation and removal of the money by changing interest rates to encourage or discourage lending and spending and by changing the % reserve requirements.

If fractional reserve banking exists you will get ongoing creation and removal of the currency, if it doesnt ISTM you wont have sufficient cash available for investing.

Linton

TheTracker wrote: »

A bitcoin is closer to gold than a promise to pay.

A mortgage supplier gets its bitcoins from borrowing them from others. I will lend Lloyds 100 BTC if they give me back 101BTC, in the meantime they lend it to you for 102BTC, and they come out 1BTC ahead.

The fact that you have the right to 100BTC is only known to the bank and whilst no cash was withdrawn all the borrower would have is also the right to the same 100BTC. These rights could be traded or used to pay debts just as if they were BTCs. The actual BTCs need never exist.