This is one of the casualities of the Bitcoin monetary policy.
(Obviously I'm simplifying, your money gets pooled with others and deposits and withdrawls happen from a pool of money, you don't get your own money back when you withdraw, but lets compare two hypothetical banks with only 1 customer each)
A dollar denominated bank takes your money and invests it. They use it for mortgages, or they put it in bond markets or equity markets. They make a profit. Some of that profit gets returned to you as interest. They also provide for safe keeping of the money. With interest rates near zero, we forget this, but thats the real reason for a bank. If it was just a safe place to keep money, we'd be paying them.
A Bitcoin bank couldn't work. You give them some Bitcoins. They transfer them to dollars, make some investments. Now you go to withdraw some money and they have to sell the investments. Since Bitcoins are deflationary, they can not make you whole without incurring a loss. There is no money to be made in operating a Bitcoin bank and giving interest so long as the exchange rate of Bitcoins to the real world keeps going the way its going. Everyone should just sit on their bitcoins and hold them.
Now if you just want to make a safe deposit box for Bitcoins, that's would work. And you would have to pay a fee. But there is a difference between a bank account and a safe deposit box, and I don't see bank accounts working with bitcoin any more so than they would have worked based on tulip bulbs in the 80s.
What you described is not how banks or money work.
Below is an entertaining, albeit slightly alarmist, educational video on how the money system works today. This should be required viewing for anyone considering using money:
I don't want to risk wasting 45 minutes listening to a crackpot, and honestly, there are quite a few indicators for lunacy in the first few minutes. Can you give a few bullet points to help me decide if it's worth to watch?
I haven't checked the video (can't watch it here), but there are indeed many misconceptions about how the banking system operates.
In particular, banks do not lend out deposits, at least not in any meaningful way, and the so-called money multiplier is non-existent.
To get up to speed on such things, I would recommend the blogs of economics professor Bill Mitchell. His style is a bit rambling without much polish, since he writes one entry every day, but I found it very worthwhile for getting a deeper understanding. Consider looking for entries with "money multiplier" in the title in the index here: http://bilbo.economicoutlook.net/blog/?page_id=1667
It talks about the history of banking and the fractional reserve system, the difference between commercial and central bank money.
What most people don't realize is that banks don't have to actually have the money they lend out. That's the basis for our monetary system and while it has nice qualities, like spurring innovation, there are some undeniable drawbacks.
The point is that is a little bit harder and more traceable than having to manage files(all your money) yourself. There is at least a semblance of security and the bank/govt will make good if someone breaks into the bank and steals all the cash there.
Banks are regulated by law and have the funds insured by FDIC. i.e even if the bank goes belly up, the FDIC will make sure the depositors get the money. With BitCoin, how do you trust a bank? Even if it's just by word-of-mouth trust, eventually the bank will be taken over or run by non-trustworthy people. The threat of federal prison keeps most real banks honest. Nothing like that exists in the BTC world.
Well, ultimately what you're saying is that you trust the FDIC more than you trust any given bank. That's nice, but it begs the question:
- Will the FDIC fulfill its obligations at all times?
- How does the FDIC have the resources to do so?
- Does the presence of the FDIC lead to better or worse behavior among banks?
It's especially interesting to look at the issue of non-trustworthy people. When S&Ls were semi-deregulated in the early 80's, they got extra FDIC protection and were allowed to lend to a wider variety of projects. Suddenly, the credit decisions of the bank didn't matter, because the FDIC backstopped their deposits. And that attracted some really non-trustworthy people.
Wikipedia says the total cleanup cost was $87.9 billion, which discounts the opportunity cost from building pointless malls and empty offices. Can you imagine a BitCoin-based system ever hitting that level of losses?
I agree that circulation of currency/commodities is necessary for a healthy economy. I don't agree that we're better off having value stolen from our currency by inflating it for the sake of "incentive".
How many joe sixpacks actually spend their money as quickly as possible because they're afraid of inflation? Hopefully it never comes to that.
> Deflationary spirals are no fun.
$5/gallon of gas and $7/gallon of orange juice are no fun either.
>If you think that is honest behavior, then bury all your money for 10 years and then try to spend it. Suprise! You've been robbed.
That does induce people to spend,invest or save(savings in banks are loaned out to others by the banks) which drives the economy.
The problem with bitcoin right now is that it's being thought of an investment to hold on to, instead of a currency that must be exchanged for goods.
Imagine if the dollar was appreciating in value big time every week and month. People would stop spending and just hog them. The economy as we know if might collapse and lead to a full blown depression.
> instead of a currency that must be exchanged for goods.
My prediction is the bitcoin market will correct itself, as markets without interference do. Bitcoins are intrinsically worthless, like the USD, unless it can be exchange for goods/services.
> Imagine if the dollar was appreciating in value big time every week and month.
As long as a central banking authority (Federal Reserve) can legally make dollars from thin air, this will never happen.
The problem is that people are using BitCoin as a 'Get Rich Quick' scheme instead of a currency. While this does drive adoption, some lives may be destroyed on the way because of market manipulation by malicious parties. How many legitimate transactions are happening compared to transactions with an intent to hoard BitCoins for future gains?
> Banks are regulated by law and have the funds insured by FDIC. i.e even if the bank goes belly up, the FDIC will make sure the depositors get the money. With BitCoin, how do you trust a bank?
There were banks before the FDIC and people trusted them. The threat of insolvency can (but doesn't always) keep them honest.
True, but atleast the banks were real physical places with real people at the helm. It is really hard to trust anything over the internet these days,except if one of the big financial players like Citibank or someone like Amazon starts a bitcoin bank.
AFAIK any of the online banks could be running out of a hole in the wall in Ukraine or Nigeria. Even paying online sites with credit cards is risky these days with the rampant fraud etc, I wouldn't trust anything online only enough to entrust my money unless backed by a big player.
> except if one of the big financial players like Citibank or someone like Amazon starts a bitcoin bank.
That's part of how the market solves this sort of problem, traditionally. When trustworthiness is especially valuable, brands develop that have it. One way to bootstrap the process is to start with an existing brand that has it, like American Express. Companies that want to be seen as trustworthy can also do things like offering money-back guarantees and putting money aside in an escrow account held by a third party.
More interestingly: are the features that let you set up a dollar-denominated bank features or bugs?