Talk:Myths

Terrorism

From the linked Wikipedia page:

The USA PATRIOT Act defines terrorism activities as "activities that (A) involve acts dangerous to human life that are a violation of the criminal laws of the U.S. or of any state, that (B) appear to be intended (i) to intimidate or coerce a civilian population, (ii) to influence the policy of a government by intimidation or coercion, or (iii) to affect the conduct of a government by mass destruction, assassination, or kidnapping, and (C) occur primarily within the territorial jurisdiction of the U.S."

This definition is broad enough that it could probably be applied to the Bitcoin system. IANAL but I imagine lawyers could pretty easily demonstrate that Bitcoin is 'dangerous to human life' because the Four Horsemen can use it for evil [drug-dealers, money-launderers, terrorists, and pedophiles.] It can 'influence the policy of a government by coercion' by removing options such as Federal Reserve dollars. (C) might be tricky to prove. PLATO 22:34, 23 March 2011 (GMT)

besides the one attorney general that made a snide remark about terrorism in the LibertyDollar case, i don't think that this is in any way a 'common misconception', so i'd question whether we need to have the 'terrorism' section at all.--Nanotube 04:02, 24 March 2011 (GMT)

I agree. All yes for removing terrorist stuff? EvanR 00:10, 30 March 2011 (GMT)

Fractional Reserve Banking

I'd like to suggest a change here (translation: I fundamentally disagree with the tenor of the article). Credit Unions/Building Societies could quite easily be created, and this would increase the apparent amount of BTCs in existance, but it probably wouldn't exceed twice the original number.

However, a bank functions differently: it creates a distinction between "hard money" (bank notes+coins) and "credit money" (money in bank accounts). So, in a bank I may deposit some real money (notes) but the bank effectively may lend some of that money to others AND I may also spend that money "in" my account by transferring it via a cheque or e-transfer to another person's account. (Building socities don't allow you to do that.)

Now if I were to make a _BTC_ deposit into a "bank", then I wouldn't be able to spend the money in my "account" using conventional BTC trading (confirmations etc). No, what the bank would have to do is to set up a "virtual BTC" (vBTC) trading system, whereby they would manage accounts and transactions, and banks would owe each other v-BTCs depending on how their clients were deciding to spend/borrow their money. Banks could issue huge (virtually infinitie) amounts of v-BTCs depending on how risky they felt that morning.

But then we'd be back to the present situation with fiat currencies, banks, treasury bills, etc etc. I guess it could be a new kind of "gold standard" - a "BTC standard". But the banks would still rule the world, and I thought we sought a way out of that....

...maybe the ability of the user to transact BTC independently of any "fractional reserve banks" would keep a check on their potentially enormous power. But then if the number of v-BTCs was much more than real BTCs (as seems very likely if FRB took off - currently then ratio of v-GBPs to real GBPs is 20:1) then BTCs might end up so scarce in comparison that user trading in BTCs would no longer take place: it would all be in v-BTCs. All this make me think actually v-BTCs wouldn't work in the conventional way, and therefore that fraction reserve banking might not generate any more than 21m v-BTCs. I'd welcome help here.

So my simple answer to the "Myth" question would be "FRB is possible, but "virtual BTCs" would be created, not real BTCs. Lawrence18uk 19:47, 8 September 2011 (GMT)

No no.. No v-BTCs are necessary for Fractional Reserve Banking at all. You can read how Fractional Reserve Banking works on Wikipedia. Pay special attention to the "Example of deposit multiplication" section.

--Atheros 03:02, 11 November 2011 (GMT)

Fractional reserve banking with Bitcoin is fundamentally different

My edit was removed only because someone disagrees with it, although they did not provide counterarguments. I did not claim that FRB is impossible, I claimed it is unlikely, due to lack of demand for Bitcoin substitutes. Without substitutes, FRB is impossible. Supply of Bitcoins cannot be increased beyond 21 million. The only thing that can be increased is the amount of Bitcoin substitutes, which are incompatible with Bitcoins. Demand for lending does not increase demand for Bitcoin substitutes. The argument presented by the author of the current text on the wiki is erroneous. It is impossible for a bank to accept a Bitcoin demand deposit and lend it simultaneously. It requires a creation of a Bitcoin-subsitute, for which there is no demand, because Bitcoins can exist in forms that other money, such as gold or fiat, require substitutes. PeterSurda 09:28, 7 November 2011 (GMT)

I rewrote FRB, hopefully it is more understandable now. I found the explanation of Atheros in my talk page so I was able to address it. PeterSurda 23:44, 7 November 2011 (GMT)

I (Atheros) have responded on your talk page and I will respond here as well.

You are confused because you are confusing money supply with currency supply. Indeed, you are only using the word "supply". The currency supply is limited to 21 million bitcoins. The money supply is not. MtGox could tomorrow start lending out the hundreds of thousands of bitcoins they have in cold storage without adjusting the amount of bitcoins presented to users as available for withdrawal. They would maintain a reserve for the people who do withdraw bitcoins. We would then instantly have Fractional Reserve Banking. You need to give up this idea of substitutes that you keep using. Substitutes which are fundamentally different from Bitcoins are not necessary for fractional reserve banking. You've said several times on several talk pages that "Without substitutes, FRB is impossible" but need to explain what you mean by substitutes in the first place. The Wikipedia article on FRB, despite being very detailed, does not talk about substitutes.

You said on my talk page that "With fiat dollars, the base money are the reserves the commercial banks have with the central bank"

Why must the reserves be held at a central bank? I see no reason that this is necessary.

You said: "Only the central bank can create the reserves. "

What does this mean? If a commercial bank holds money in an account from which they do not lend out any money, then that money is held in reserve. No central bank is needed.

You said: "With gold, banks take in gold bullion or coins, and provide either bank notes, account balances or cheques as substitutes. The banks in case of gold money cannot create more gold any more than in case of fiat money commercial banks cannot create more reserves."

Ok, suppose they did not provide cheques or bank notes. Suppose that they only provided an account balance. I suppose you could call this account balance a substitute, but I've never heard it called such a thing. No one calls their bank account balance their "substitute dollars". For all intents and purposes, they consider their balance to be as good as dollars- indeed they can demand dollars at any time which is why the deposits made with the bank are called demand deposits.

In response to the rest of your post on my talk page, you seem to be saying that because Bitcoin has no substitutes, then there cannot be FRB. My response is to say, first of all, that I'm just barely going along with your idea of a substitute anyway. I still don't see why having or not having substitutes has anything to do with FRB. But I will respond to your paragraph anyway because it contains a contradiction which makes winning this argument easy. You have previously defined that account balances (along with things like cheques) are substitutes, correct? And Bitcoins can be put in accounts, right? So then the user would be presented with an account balance, for example their MtGox balance, right? So there is your substitute! You have said that "The only way to do FRB is to present an alternative, a substitute, which of course is incompatible with Bitcoin". Thus we have a clear contradiction in your logic.

I will now respond to your sentence: "Bitcoin Substitutes are required. Please explain how otherwise you can expand the supply without using magic."

It is important to recognize the difference between Currency Supply and Money Supply. The currency supply of bitcoins is limited to 21 million. Money supply is higher because it includes demand deposits. Let us take an example: Suppose that there are only 100 Bitcoins on Earth all owned by Satoshi. He puts all 100 in Bank Alpha. Bank Alpha puts 20 of the bitcoins (20%) in a special account and leaves them there. They then lend out 80 bitcoins to Gavin. Bank Alpha tells Satoshi on his account page that his account has 100 bitcoins in it. The total money supply of Bitcoins at this point is 180. You can see that there is no magic required. Now, Gavin buys some LolCat comics from Cameron for 80 bitcoins. Cameron puts his 80 bitcoins in his bank, Bank Beta. Bank Beta puts 20% in reserve (16 bitcoins) and has 64 to lend out. They lend those 64 bitcoins to someone else. Cameron's account page on Bank Beta's website says he has 80 bitcoins in his account. The money supply of bitcoin is now 100+80+64 = 244 bitcoins. Supposing all banks put 20% in reserves for safe keeping, and suppose everyone uses banks (as opposed to keeping them in a wallet on their computer) then the money supply of bitcoin will max out at 500 bitcoins. Obviously because some people will hold their own bitcoins and because they will be used out in the world for transactions, the money supply wouldn't reach 500 bitcoins, but it can easily exceed 100.

An obvious response is 'Well what happens when Gavin takes his bitcoins out of the bank!?' The answer is that that is what the reserves are for. Although not reflected in this example, the actual reserves held by a bank would be vastly greater than the amount held in any individual customer's account.

And that is how Fractional Reserve Banking works.

To avoid an edit war on the wiki page, I have put in a temporary message which I believe is neutral.

--Atheros 02:55, 11 November 2011 (GMT)

You are confused because you are confusing money supply with currency supply.

Your alleged distinction between "money supply" and "currency supply" is bogus. Please look at the wikipedia page about Money supply: http://en.wikipedia.org/wiki/Money_supply

MtGox could tomorrow start lending out the hundreds of thousands of bitcoins they have in cold storage without adjusting the amount of bitcoins presented to users as available for withdrawal.

You fail to address my point that this requires that these balances need to be accepted as if they were real bitcoin. That's not the case. It is explained in the wikipedia page: http://en.wikipedia.org/wiki/Metal_as_money :

Money must be a tangible asset while a money substitute may be only a claim on a tangible asset. Either money or a money substitute may circulate as currency.

This matches exactly your descriptions of fictional FRB-Mt. Gox activies: they provide to borrowers claims on bitcoin: Mt.Gox account balances. Only if someone else accepts these balances instead of Bitcoin, would the FRB have an effect on the money supply.

Why must the reserves be held at a central bank? I see no reason that this is necessary.

The reason why commercial banks cannot create fiat reserves is that it's illegal: only central banks are permitted to do that. They allow commercial banks to use these reserves and issue substitutes (e.g. bank account balances) upon that. The physical currency (notes and coins) is, in case of fiat, merely a distraction. Typically, the bank notes and coins are also issued only by the central bank, but in small exceptions, private banks are allowed to do that too (e.g. Scotland, Northern Ireland, Hong Kong). In the latter case, these are however also only substitutes: the issuing bank must redeem them to legal tender upon request. Please read the wikipedia page on Reserve requirements: http://en.wikipedia.org/wiki/Reserve_requirement . Of course, a commercial bank can create their own fiat currency, let's call them Rothbards. But that's not the case we are discussing.

No one calls their bank account balance their "substitute dollars"

Economists do.

For all intents and purposes, they consider their balance to be as good as dollars- indeed they can demand dollars at any time which is why the deposits made with the bank are called demand deposits.

However, they only do this because they know that if they use EFT or cheque, the recipient will accept it as if it was money proper. There is no way of creating cheques or bank account balances with fiat money or gold that does not involve substitutes, and because these have sometimes lower transaction costs, this creates demand for these substitutes. With Bitcoin, the requirement for such substitutes is absent (or, better said, limited).

you seem to be saying that because Bitcoin has no substitutes, then there cannot be FRB.

I did not say FRB or substitutes with Bitcoin are impossible, on the contrary, I provided examples of both FRB and substitutes as such. I just explained why it is difficult to conduct in in a profitable manner, unlike with fiat and gold.

My response is to say, first of all, that I'm just barely going along with your idea of a substitute anyway.

Money substitutes are not "my idea", these are terms by many economic schools and even the legal system. I merely merged various facts into a unique arrangement.

I still don't see why having or not having substitutes has anything to do with FRB.

Let's say I have 100 BTC. How can I increase the money supply to 200? Only by promising to my customers "I will redeem up to 200 BTC". This is a claim they have on me, i.e. a money substitute I issued. If these claims are accepted as if they were money proper, they can circulate, and increase the money supply. If they do not circulate, they cannot increase money supply, they can only make me bankrupt (or a rich scammer).

You have previously defined that account balances (along with things like cheques) are substitutes, correct? And Bitcoins can be put in accounts, right?

Poor choice of words on my part I am afraid. I said that "Bitcoin is the equivalent of a bank deposit". I should have written rather something like "Bitcoin is functionally similar to a bank account".

So then the user would be presented with an account balance, for example their MtGox balance, right?

Bitcoin Mt.Gox balance is a substitute: it is an entry in their database that represents a claim on their reserves, an actual Bitcoin wallet. You cannot transfer this substitute outside of Mt.Gox' systems, i.e. they do not circulate. Even withdraw methods like green addresses and redeemable codes are Bitcoin rather than substitutes.

They then lend out 80 bitcoins to Gavin. Bank Alpha tells Satoshi on his account page that his account has 100 bitcoins in it. The total money supply of Bitcoins at this point is 180.

The total account balances indeed list 180. However, this only increases money supply if someone is willing to accept these fractional balances as if they were real Bitcoin. But you can't do anything with them. In order to use them, you need an account in Bank Alpha. For people that do not have an account with Bank Alpha, these balances are not only worth less, they are unusable (incompatible with Bitcoin network). And even if there was Bank Beta that accepted it, these two banks would need to agree upon a way of settling these balances, and promise not to redeem other banks' deposits against real Bitcoin. This works with fiat and gold because there is no alternative to these settlements, and it can increase banks profits. With Bitcoin, it would just increase the costs so banks cannot gain anything in participating in something like this.

And that is how Fractional Reserve Banking works.

You omit the point where the substitutes need to be accepted as if they were money proper, which is the basis of argument.

To avoid an edit war on the wiki page, I have put in a temporary message which I believe is neutral.

Thank you, I prefer to have it clarified instead of an edit war too.

Let's say I store Bitcoins and instead provide you "Surdas", which will be denominated in BTC. You can only use Surdas in my "bank". Bitcoin users cannot send or receive Surdas because they are incompatible with their systems. Let's say I collect 100BTC from you, and issue you a trillion Surdas. Will that increase the money supply of the Bitcoin economy?

--PeterSurda 10:15, 11 November 2011 (GMT)

Bitcoin mining is a waste of energy and harmful for ecology

IMHO this chapter is superficial. Compare Bitcoin to electronic fiat currencies. --Shrewdwatson 17:57, 23 April 2011 (GMT)

How about this:

The electricity spent in hashing is not wasted. It creates a product of value to the Bitcoin economy. The product is a supersignature on the complete list of transactions to date (the Block chain). This supersignature attesting to the chain's completeness is Bitcoin's defense against double spending.

Many sources of energy vary in their availability in ways that do not match the variations in demand. The law of supply and demand will require Bitcoin to soak up a lot of energy that is currently "wasted" without making a big dent in the otherwise usable energy supply. [Perhaps cite estimates of the break-even point for mining profitability that imply near zero-cost electricity.]

More --JohnTobey253 04:49, 29 April 2011 (GMT)

Categories and subcategories

Now we have everything in one place, but it should be divided into smaller subcategories to make it easier to find interesting topic

--Zwierzak 22:03, 13 August 2011 (GMT)

That's an excellent idea.

--Atheros 03:46, 11 November 2011 (GMT)