whats the use case of bitcoins?

Before answering this question please go through this scenario

Lets assume we have now become a bitcoin only economy nearly all bitcoins have been mined, now someone wants to do business and he needs bitcoin loan, now lender will provide him loan at 10%. After one year borrower has to pay back bitcoins which now have a increased value plus the interest thereby he has two forces acting against his borrowing - the Interest and deflation.

In Fiat Interest and Inflation cancel each other and promote borrowing and thats a healthy thing, but bitcoin economy a borrower has to fight against deflation and interest, if interest rate gets lower to zero then lenders will have no incentive in lending

So this makes bitcoin as replacement to fiat useless as according to me lending doesn't works out in this economy

Further if somehow we make it work, where will the Interest amount come from ?There will be more btc to be repaid then actual btc we have have and this will lead to creation of IOUs and fractional reserve in essence we will be reinveting the wheel

KAKA BOOKIE

Posted 2018-06-03T18:57:08.307

Reputation: 1

Answers

In Fiat Interest and Inflation cancel each other and promote borrowing and thats a healthy thing, but bitcoin economy a borrower has to fight against deflation and interest, if interest rate gets lower to zero then lenders will have no incentive in lending

At a basic level, the person providing the loan hopes to receive a small return (interest) for providing the capital, and the person receiving the loan hopes to use that capital to make profits in the short term.

Removing inflation from the equation (eg by providing a BTC loan) does raise the bar for what could be considered a profitable venture for the loan taker, but that does not mean every loan will no longer be profitable. Rather, it just incentivizes individuals to seek out ventures which have a higher chance of turning more profit.

In my opinion, the argument of "nobody will spend a deflationary currency on anything!" is silly. Individuals will still have to spend, they may just have a higher threshold for the question of "what is worth buying? (or investing in?)". Even if your money is deflationary, you'll still have to pay rent, because its better to have a safe place to live than to have a little more money in the future, but nowhere to sleep.

Further if somehow we make it work, where will the Interest amount come from ?There will be more btc to be repaid then actual btc we have

Interest on a loan will come from profits made by utilizing the loan. This is no different than a loan denominated in dollars: when you pay the loan back, the interest you pay is not 'freshly minted money', it is just money that already existed in the system, but you are now the owner of.

In general: Use-cases for bitcoin are not dependant on how well the system mimics the lending properties of the traditional banking system, in fact bitcoin is likely useful because it has different properties than the traditional system. Bitcoin is a decentralized, permissionless, borderless, immutable and programmable system of value. What exactly the implications of this are is a story that is still unfolding, but it certainly does promise many exciting things. I think one of the most important is that it grants the user financial sovereignty, which is a rare and important thing in our increasingly Orwellian tech world.

chytrik

Posted 2018-06-03T18:57:08.307

Reputation: 10 276

i am asking on macro level, Say whole supply of 2.1 millions bitcoins are lent at 10%, from where does that 10% will come ? – KAKA BOOKIE – 2018-06-03T20:03:33.533

there will be increasing debt vs fixed supply – KAKA BOOKIE – 2018-06-03T20:11:10.563

In any system, not all loans will be (or perhaps can be) repaid. Indeed, in the legacy financial system, the derivatives and debt market is many, many times larger than the actual monetary supply. What you have described is a property of systems of debt, not an issue only inherent to bitcoin. In any case, if all of the system's liquidity is on loan, and then the loans are all called to be settled at the same time, then some loans will be unable to be repaid, and the debtor will lose out. Other loans will have made profit, and be able to settle fully. This is no different than the legacy system – chytrik – 2018-06-03T20:27:48.400

Put differently: A loan is always a risk, in that the loan maker may not be repaid later. A loan denominated in a deflationary aspect may present a larger risk, but it is the same type of risk, just amplified. This may change the willingness of someone to issue a loan, but it does not make the function of a loan obsolete. – chytrik – 2018-06-03T20:32:09.843

Do you agree to this : Due to Interest, bitcoins would be created out thin air by the banks/lenders, just like the current fait system which is said to be broken. And there will be defaults and market crashes etc..

So bitcoin is a good decentralised database, it has yet to find its usecase, in no way it can radically change the current system. – KAKA BOOKIE – 2018-06-03T20:47:24.203

Disagree: bitcoins cannot actually be created out of thin air: a bitcoin UTXO either exists, or not. A 'btc bank' may lend out more value than it actually holds (fractional reserve), but those loans would not be delivered in actual bitcoin (a valid UTXO). This is true even if the value of the loan is denominated in bitcoin, as it is impossible to lend the same bitcoin to more than one counterparty. – chytrik – 2018-06-03T22:03:20.430

If a btc bank made fractional reserve loans against it's btc holdings, then a default on loans would affect only that bank (and potentially it's customers). There is no option for a central authority to issue more btc in light of a crisis; that sort of existential systemic threat is not present in the bitcoin system. – chytrik – 2018-06-03T22:08:56.203

As it is now, a bank operating on fractional reserve orders in someone else's money to loan more than they hold. This aspect would not need to be any different for a Bitcoin bank. Ultimately, however, it is the government's that mint more money to increase supply but, in the case of Bitcoin, the BTC must actually exist and banks will not be able to offer more BTC than they can source. This is a good property of Bitcoin where it cannot be deflated by simply printing more. – Willtech – 2018-06-04T03:28:22.623

Okay we agree bitcoin banks will have fractional reserve and fractional reserve is equivalent to creating money out of thin air. They could give some bank credits as loans denominated and redeemable in bitcoins. As Govt will have no role this would make banks absolute powerfull. Who will maintain the repo rates? Further those bank credits wont be like reinventing fiat? bitcoin loans seems costly to me and if bitcoin has no capacity of lending then it cant replace fiat, if it cant replace fiat what its use ? – KAKA BOOKIE – 2018-06-04T13:18:39.063

You are approaching the question too narrowly, bitcoin's use case is not "it must replace lending or it is useless", I'm not sure why you see it that way. Is gold useless because fiat still exists? What about stocks or bonds? Or Paypal? Or the currency of a small country? Different financial instruments have different uses and purposes, some overlap in function yet peacefully coexist. Re: Lending: You've outlined a way that btc could be lent, now understand that regulation around how much a bank is allowed to lend could still be easily imposed, just as it is in the fiat system. – chytrik – 2018-06-04T18:59:07.933

First of all I don't think it needs to be so binary (bitcoin or nothing). Fiat and lending will likely co-exist along with bitcoin.

Additionally, what if instead of creating a business based on debt, the business owner saved his money for a few years in the deflationary currency and thereby gains the needed funds and discipline to start a business? Debt can be used responsibly and irresponsibly. What we have seen over the last half a century is more and more debt instruments, and less true savings instruments via sound investments. As we saw in the 2008 crisis, banks and retirement money managers were investing/saving in mortgage debt, these bonds were given a value based on non-guaranteed future receivables. Then when the debtor (who has no idea that his mortgage payment is one of many pillars holding up a derivative people are using as a investment instrument) fails to make his mortgage payment, is now breaking the derivative's promise to investors.

Debt can help fuel short term growth, but when everything is based on debt, even the world reserve currency, then eventually it can have devastating consequences later down the road when too many promises are left unfulfilled. Unfunded domestic liabilities such as social security, and pensions are only promises based on debt. If those promises are broken, you can be sure there will be riots in the streets the next morning. A little deflationary currency, isn't a bad thing ;)

m1xolyd1an

Posted 2018-06-03T18:57:08.307

Reputation: 3 356

but in the end we cant imagine a economic system without a debt, Imagine a 24 yr old wanted to start a small scale business of his own, from where he can get the funds ? – KAKA BOOKIE – 2018-06-03T19:58:36.053

Again, I don't think it needs to be so binary (bitcoin or nothing). Fiat and lending will likely co-exist along with bitcoin. – m1xolyd1an – 2018-06-04T01:32:09.280

So bitcoin will be a parallel currency to fiat mainly used for ..... ? – KAKA BOOKIE – 2018-06-04T15:58:43.403

in the end we cant imagine a economic system without a debt

I can. Perhaps your mind is limited by assumptions about the status quo

Imagine a 24 yr old wanted to start a small scale business of his own, from where he can get the funds ?

I know a 30-year-old who started a business when he was 24. He earned money from customers, reinvested the profits into the business. He never needed to borrow a cent

Owen Currie

Posted 2018-06-03T18:57:08.307

Reputation: 11

So that 30 year old started a business by getting money from daddy or he amassed money by selling burgers ? – KAKA BOOKIE – 2019-06-11T09:03:56.907

You're still stuck with prejudicial assumptions. The business had low overheads - because it is a small-scale business - so it only needed about $1000 to start. The business had customers. They paid for services. The business's income was re-invested in the business to fund the salary of the first employee. His work was productive, allowed more sales. Fairly soon, the business had 10 employees, and after a few years it had 30 employees. All the growth was funded from the profit from sales – Owen Currie – 2019-06-30T19:35:47.600

You can’t say this for all business, not all business has low overheads. – KAKA BOOKIE – 2019-07-01T07:41:20.000

The amount of overheads is not relevant to the discussion of borrowing versus funding growth from profits. The point is that borrowing is not necessary, but it can be a way to make growth come earlier, at the expense of diverting some profits to interest costs. If credit is not available, grow more slowly. Note that interest payments are overheads too – Owen Currie – 2019-07-21T16:43:44.737

if you have done some business or experience in that, You would agree that profit is not always linear to amount of money you have. There is certain threshold of money that is required to generate profit or to start some business. – KAKA BOOKIE – 2019-10-11T11:32:45.193

Any business can be initially funded with equity instead of debt, whether it needs $1000 or millions. If the business is properly managed, growth can be funded from profits – Owen Currie – 2019-10-24T01:18:06.997

Not all business attract equity, not every one want to sell equity at initial stages this would make rich richer poor and the poor wont be able to rise above the riches – KAKA BOOKIE – 2019-11-02T17:49:51.217

The poor can rise to riches through their skills. If you have $50k and your business plan says you need $100k, sell $50k equity to a partner or make a new business plan – Owen Currie – 2019-11-28T07:39:03.707