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What happens when bitcoins loans start to appear?

Loans have interest rates that "create additional value". Given the limited amount of bitcoins, couldn't we realistically run out of them?

BitBanker loans 1000BTC to the user with a 5% interest. The loan could be backed up with, say, a house.

The user then has to pay back 1050BTC, somehow acquiring the 50BTC deficit.

Given how quickly interest on top of interest grows, won't the bankers get to 21 million BTC quite quickly?

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    Loans are unlikely to ever be offered on any significant scale in Bitcoin, because of its deflationary nature. – eMansipater Apr 17 '13 at 8:09
  • @eMansipater this line of reasoning is wrong: they would simply require higher interests. – o0'. Apr 17 '13 at 9:00
  • there's a thing called real interest rate: en.wikipedia.org/wiki/Real_interest_rate – fiatjaf Apr 17 '13 at 12:46
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    @Lohoris from the lender's perspective, sure. But that's a brutal deal for the borrower who must now pay back increasing amounts of a more and more expensive unit. I'm sure you can find edge cases where someone would want a loan denominated in BTC, but I disagree entirely that the typical borrower would do anything other than take out a fiat loan and buy bitcoins with it. Hence my claim that it's unlikely they'll be offered "on any significant scale." There's simply no market for it. – eMansipater Apr 17 '13 at 19:50
  • @eMansipater yeah good points – o0'. Apr 18 '13 at 9:29
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Given how quickly intrest on top of intrest grows, won't the bankers get to 21 million BTC quite quickly?

Sure, but is that really meaningful? Let's say that I loan you 1 BTC, with the terms that I get 10% interest per day. Before the year is out, you owe me more bitcoins that actually exist. The face value is the amount that the loan is supposed to be worth, if everybody keeps their word.

However, the real value is much lower - you're a random stranger on the internet, and you're unlikely to come up with quadrillions of dollars.

Bitcoin can't save you from untrustworthy borrowers.

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If bankers would, by giving out loans and the interests on them, transcend the actual number of bitcoins existing, what is the difference with the current banking system?

In most countries, there is also more money in circulation through banks and loans than there actually exists. And it was just so when the gold standard still existed.

That's just how these economic systems work. The only difference is that when bitcoin banks would fail, they cannot, or hardly, be saved by governments.

Besides, wouldn't such a situation contradict the spirit that makes bitcoin so popular? Bitcoin is about doing away with bankers and the corruption they are associated with. Bitcoin is about not having to trust someone else that gives you some money and tells you that it has value.

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  • "there is also more money in circulation through banks and loans than there actually exists" but compared to bitcoins, they can just print more money to cover the deficit, right? – user4432 Apr 18 '13 at 7:33
  • @user4432 Banks cannot, but the government can, that's true. But still there will always be more money than they will print. Only when too many people together want to move their money to somewhere else, banks collapse. – Steven Roose Apr 18 '13 at 9:10
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Loans have intrest rates that "create additional value". Given the limited amount of bitcoins, couldn't we realistically run out of them?

No, you wouldn't run out of Bitcoins for the simple fact that they will always be traded. Your interest payments on your loan would come out of Bitcoin trading that you did to increase your Bitcoins, even if you only did Bitcoin trading to repay your loan.

If ALL Bitcoin holders became hoarders, the price of Bitcoins would increase as more and more people wanted some. Bitcoin, if as rare as gold and jewels, becomes more valuable. Finally, when the "price" of Bitcoins was high enough, some hoarders would trade theirs off for fiat currencies, just like gold and silver.

People or companies who loan Bitcoin need to be as careful as those who borrow them. If a lender lends when the Bitcoin price is high, and then the Bitcoin price drops, it will be much more easier for the borrower to "purchase" more bitcoins to pay off the loan. This may be adverse to the lender's financial plan.

On the other hand, if the borrower borrows when the price is low, and then the price goes way up, the borrower might be scrambling just to make payments so that he doesn't lose the house, and his proverbial shirt.

As Bitcoin becomes more commonplace, there might come into being "holding houses" that hold the paper on property that secures the loans that lenders make.

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None of the above really answers your question. To understand the answer, we have to first understand the main difference between a fiat currency like USD and Bitcoin which is fixed in amount, just like gold.

In fiat currencies like USD, the amount/quantity of money is unlimited, i.e. banks can create new money out of thin air. So when banks give loans, they create new money out of thin air and charge a positive interest rate on it. Remember that this interest amount does not exist in the economy when the loan is taken/given and the interest amounts' worth of money/notes/coins are also created by banks from thin air. So in fiat currencies, the value of each unit of money goes down as time passes because the amount of money/notes/coins is being increased every day and so everybody has more amount of money/notes/coins with each passing day. A dollar tomorrow will buy less goods/services than it can today and so on.

In a fixed amount currency like bitcoins, as people borrow bitcoins from others, the value of each unit of bitcoin goes up as time passes. This is because there is a fixed number of bitcoins available and more people demanding more bitcoins through loans will mean every unit of bitcoin is valued more. So in bitcoin loans, the interest rates will be negative. That is, if I give you a loan of 1 BTC and charge -10% interest rate on it, I will actually pay YOU 0.1 BTC every year! It's the exact reverse of the fiat currency system. Now in a fiat currency economy, if the inflation rate is say 5%, and banks charge 12% interest on loans, they beat inflation by approximately 7% every year which is their profit. In the Bitcoin system, if the "deflation" rate is -15% and banks loan at an interest rate of -10%, they make a profit of -10% - (-15%) = 5%. In simple terms, while the rest of the bitcoin holders have to give away 15% of their bitcoins every year due to deflation, the bank have to give only 10% of their bitcoins, thus saving 5% every year.

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From a purely monetary perspective the difference between a fiat currency and Bitcoin is that Bitcoin does not have a central bank (this was a main goal of Satoshi Nakamoto as we can read here). A central bank can create new money just by printing it, which causes inflation.

If you think of a fiat currency where the central bank decides not to increase the money supply (didn't happen often historically), it would resemble Bitcion (note: only from a monetary perspective, not technologically). But when there are banks or other ways to grant loans two things happen. First, there is an increased demand for money for the interest payment. Second, the money that has been borrowed is either directly deposited at a bank or taken to purchase something and then deposited at a bank by the buyer. The bank can (and most likely will) take this money to grant a new loan which in turn increases the money supply.

When the money supply is increased through loans, it will cover for the increased money demand from interest payments. My co-founder and I run the Bitcoin peer to peer lending platform Bitbond.net where loans are granted, but without a bank. Some other sites essentially also grant loans. Such services won't be hurt by the finite number of Bitcoins because the loans increase the money supply sufficiently.

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a few facts and ideas on the topic :

  • bitcoin is not an inflation/debt based economic system, its based on https://en.bitcoin.it/wiki/Deflationary_spiral and encourages savings, not borrowing.

  • bitcoin debt ( and even more shorting bitcoin ) is really dangerous, many btc loans have already been given on #bitcoin-otc, but everyone knows its real dangerous ( and possibly even more for the borrower than for the lender ).

  • if what you say happens, the value of bitcoin will grow even more, and people will borrow smaller amounts ( valued more ) with time.

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The short answer is no. You can't run out of Bitcoins.

How many people make their mortgage payments using dollar bills? Almost nobody. So you don't have to worry about running out of dollar bills preventing people from paying their mortgage.

If I owe a bank 100 Bitcoins, all they care is that they get something they value at 100 Bitcoins. It doesn't have to be "real" Bitcoins on the block chain. It can just as well be a "check" for 100 Bitcoins from some organization they trust, and then they only have to settle the difference with that organization. They can even settle the difference in dollars or gold. It doesn't matter.

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All you have to do is convince an existing holder of Bitcoin to accept a payment in another form such as goods or services. This will mean you will need to produce goods or services that people want, otherwise they will not be willing to give up their coins, and you must be willing to produce more of them than the original value of whatever you've borrowed.

Since Bitcoin is deflationary in nature, credit will be tighter than in other systems, but that is neither good nor bad, it simply is what it is.

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Bitcoin lending would be done as in any bank lending - the bank opens a bit coin checking account for you in the amount of the loan. You pay back the loan and interest by using the funds other people have borroed from other bitcoin banks. As long as more & more banks make more & more loans its ok. As in any banking the banks only need a fraction of the bitcoins on hand to cover the loans made. This also gets rid of the bit coin deflation problem because the banks are inflating the bitcoihns by making all these bitcoin checking accounts. The big wall street bank could jump in by seting up bitcoin debet cards and bitcoin credits cards. Paypal could setup a system to support bitcoins. Once bitcoins get going you could have specilized version of bit coins. For example you could have a type of bitcoins the mostly are used for pork bellies. Or say a type of bitcoins that tend to only be used for realestate. That way the exchange between these types of bitcoins would soffen any bubbles that may appear. There may be 100s of different types of bitcoins. To make a transaction the user would use plastic that would altomaticly use the correct bitcoin type for the transaction and adjust the verious accounts of the user. The user would be protected from bubbles by the fact that only a few of the accounts would be effected by bubbles at any one time. So it a housing bubble broke you might find it hard to get a housingbitcoin loan but you still could get a transportationbitcoin loan to build a plane. We will therefore never have a problem like we had in 2008 again.

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