Yes. It's called "fractional reserve banking". We did the same thing when the dollar was pegged to gold.

It works pretty well, as long as people trust the banking system. When people lose trust in the system, they all take their money out at once. So you get bank runs, and everybody gets screwed. It happened a lot in the 19th century -- they called them "panics".

With a fiat currency, the central bank can mitigate the disasters by printing more dollars and loaning them to the banks. Because of that, people don't worry as much about their bank, so the runs don't happen in the first place.

So if we waved a magic wand and replaced dollars with any fixed currency, you'd still get inflation. The money supply M0 would be fixed, but the M1, M2, etc. currencies would inflate exactly the way they always have. Only with greater opportunities for bank panics.

In the meantime, cryptocurrencies are very inflationary. Any one cryptocurrency is fixed, but cryptos as a whole are minted freely. So unless one used a fiat to ban all but a fixed number of cryptos, you get inflation anyway. The only thing preventing that from crashing was a continuous influx of new people trying to buy cryptos with dollars, often misled by fraudulent transactions making them seem viable. Once that crashed, you got a "bank run" on cryptos.

So we again watch as the crypto fans recreate 20th century economics on fast-forward.

There is a fair bit missing here. It might take too much time to detail out, so just a few thoughts that are easy to write and you could research.

First, what you are describing is closer to Ethereum, which is a payment vehicle that disperses ..not bitcoin. think bitcoin as closer to gold.

You can't "create it" out of thin air. That's what blockchain is all about. Think tiny little receipts that are shared instantly with a million computers. To "create it out of thin air' you would have to hack a million computers at one time and give them all the unique blockchain proof of mining...which is impossible right now.

simply = blockchain technology is what is keeping banks from creating it out of thin air.

Hope that helps

OP basically described how shady fractional reserve banking is. But I'd say that thinking in terms of masses of people storing Bitcoin in banks is probably a fundamental misunderstanding of how Bitcoin can and should be stored.

There's no genuine need to ever send Bitcoin to a bank for safekeeping. It safely exists in the blockchain so long as you have your keys. And unlike other types of assets, you don't need a bank to transact with Bitcoin.

You absolutely need some kind of secure vault to safely transact in large quantities of gold.

You absolutely need some kind of secure vault to safely transact in large quantities of physical cash.

You absolutely need some kind of processor to handle checks.

You absolutely need some kind of processor to handle credit cards and wiring money around.

But with Bitcoin, everything exists in a blockchain. You just need to hang onto your keys to perform the main function that a bank performs. (And with smart contracts and the like, you should be able to use assets like Bitcoin as collateral for many kinds of loans as well)

Banks are largely no longer needed in the future if crypto ever achieves real widespread usage and develops as it should. No wonder there's so much derision directed against it by authoritarians who crave control over others' lives.

Some financial services companies have tried this in the last few years, and it's worked out badly for them. The problem boils down to withdrawals - the "bank" can manipulate it's own internal accounts numbers all it wants, but it can't actually give out more bitcoin than it owns. Here are three failure modes:

1. People deposit bitcoin (10 million) and dollars into the "bank". Inside the bank, they trade the dollars for made up bitcoin. Now the bank books show 30 million bitcoin on people's accounts. People begin withdrawing the bitcoin. Because the bank controls 10 million of actual bitcoin, only the first 10 million can be withdrawn, everyone else is not going to be able to withdraw their bitcoin. This creates a run on the bank effect.

2. The bank has (10 million) bitcoin, and it wants to lend out lots of made up bitcoin. The first 10 million that it loans out can be sent using the bitcoin that it has. After that it has no more actual bitcoin. It can't send any more bitcoin out, so it can't lend out any more than that. You would be pretty mad if you had a loan that you were paying interest on that was stuck in your bank and you couldn't spend.

3. Fine, the bank says. We'll have bitcoin that you can only spend inside our bank, can only trade to and from dollars inside our bank. Then we can do whatever we want! So the bank lets people buy bitcoin on their accounts inside their system for dollars. The bank doesn't even inflate the bitcoin holdings. Then the price of bitcoin goes from $20,000 to $60,000, and people start selling it back to the bank for dollars. Now the bank is loosing $40,000 for every bitcoin that it virtually held for users.

Doing the virtual bitcoin thing usually results in collapse of company doing it.

Bitcoins can't be printed out of thin air. People can't own billions of them. Yes, you're missing something.

New bitcoins are generated at a fixed, hardcoded rate. First off, the software can't be changed to emit Bitcoins at a different rate just because banks might want to.

And if the software is changed to emit Bitcoins at a different rate, Bitcoin owners will say "Hey, this changes the rules, it's not fair, I'm leaving." They'll sell their Bitcoins and buy some other cryptocurrency that didn't change the rules.

With banks you can't say "this isn't fair, I'm leaving." With cryptocurrency you can.

Yes, absolutely.

Tether is a stablecoin that was supposed to be 100% backed by USD, but there were a lot of doubts about this, lack of transparency on the backing and they did break the peg briefly. Now since tether can be used to buy Bitcoin, this indirectly inflated the price of Bitcoin as well. All of this and more already has happened in DeFi.

The problem is as long as you can use any currency X to buy Bitcoin, simply printing X and using it to buy Bitcoin will inflate the price of Bitcoin as well.

Even in a world of only cryptocurrency, lending money indiscriminately can inflate the amount of Bitcoin that is available to spend. Even if there are only 21M bitcoins but people collectively believe they have access to say 25M due to lending or investing, the same thing happens. What if the bitcoins are invested in a company whose market value crashes because of changing expectations? Just like today, people's net worth craters.

After a lot of reading and thinking I reached the same conclusion. Inflation, bad lending, leverage, bank runs, crashes etc. are all inherent risks of any financial system whatsoever because they reflect deeper truths about human nature. No currency can fix that.

> But what will prevent banks from creating it out of thin air, just like they create Dollars and Euros?

You seem to be missing some basic things about how Bitcoin works. It's a network, and a majority of the network has to agree on any changes. You can't change it unilaterally. There's no mechanism for banks to issue Bitcoin.

Of course banks could pretend you have BTC that they themselves don't own. All this does is create a naked short position in BTC for the bank. They're not creating or inflating BTC. This isn't even close to how your example of $'s being lent out works.

That's ignoring the fact that you couldn't use any of the "BTC" the bank gave you (outside of their own centralized network) if they don't own any of it in an actual wallet.

Your understanding of BTC and how a bank works is extremely weak.

i'm not sure that bitcoin is viable as fiat money, and it's failed as a store of value and inflation hedge. it behaves like any other bubble (risk on) asset.

regardless of what VC backed contrivances the future may bring, digital assets will NEVER have intrinsic value. that's the biggest scam ever invented, even more than the "cloud" and "saas".

but banks could just fork the chain, or copy-paste another chain, no shortage of options. that's what everyone else does.

Bitcoin are created and live on the blockchain.

If you invent Bitcoin out of thin air in your MySQL database, you can't transfer them to another Bitcoin address because they don't exist on the blockchain. How are people in these comments say "yes it's possible"?

It is not. That's the bloody point of Bitcoin that these kind of monetary games are impossible (meaning extremely hard and energy intensive to be considered impossible with current technology).

I wouldn't call what you're describing inflation but I can see why you would put it that way.

To answer your question, yes! People are doing that today, with Bitcoin and other coins. That is a large park of what was going on inside the defi ecosystem.

It gets fairly interesting because you see the exact same problems there you saw in the early days of banks.

Isn't this what off-chain exchanges like Coinbase are already doing?

Ask yourself why this hasn't happened to gold.

undefined

its not an inflation hedge. there is nothing stopping anyone from lending BTC but there are reasons it probably hasn't become a big thing

Every alt coin is crypto inflation.