re: Is Bitcoin vulnerable to a "bank run"? VIEW POST

FULL DISCUSSION
 

I see some issues in some of the comments, so hopefully I can make this clear:

  • A Bank Run happens when a bank becomes insolvent, e.g. it does not have physical assets to match the value it's customers have given it. Bitcoin however is a fixed, scarce, resource - and bitcoin itself cannot be "run" in the same way a bank can.

  • A more illustrative question might be "if everyone sells their bitcoin all at once, will I lose money if I also want to sell at that time" - which comes down to much more familiar financial dynamics - you can always sell for what the market is willing to pay. This value can drop as fast as it can rise, which we all know is very quickly. Can your bitcoin lose thousands of dollars of fiat value in a matter of minutes? Absolutely.

  • Another important thing to understand is that bitcoin is not itself currency - we primarily think of it in reference to fiat currencies, which have nothing to do with scarcity. Bitcoin is more comparable to gold when thinking about these types of scenarios. You cannot as of yet lend bitcoin, and exchanges receive and give no credit, nor is there a government willing to guarantee its value.

  • The last and likely most important thing to understand is that Exchanges do in fact re-introduce a bit of a bank-like paradigm to the market. If you bought through an exchange, you do not possess the assets, as they belong to private keys that you cannot directly access. Something that looks quite like a bank run is ABSOLUTELY POSSIBLE inside the conclave of an exchange. Gdax could crash, coinbase could become insolvent, the database could be hacked, and you will not be able to sell the assets you bought there. This is effectively the same as a bank run when it comes to fiat in your pocket.

There is a convenience and safety tradeoff when using an exchange - they are much less likely than you to lose your private key, they are much more safe/dependable than trading fiat assets for crypto assets in the traditional way (bringing a suitcase of money to a hotel), and they provide a sense of fairness when it comes to value, especially when it fluctuates so rapidly. But you should be aware that if a major exchange crashes, or if the value of BTC drops, large amounts of value stored in exchanges will be highly at risk.

On a personal note: please avoid thinking of BTC as an investment - it's relationship to fiat is incidental. If you want to gamble on high risk markets, the stock exchange is a wonderful place for that.

 

I think Jesse's comment is perfect. Allow me to elaborate further though:

A Bank Run happens when a bank becomes insolvent, e.g. it does not have physical assets to match the value it's customers have given it. Bitcoin however is a fixed, scarce, resource - and bitcoin itself cannot be "run" in the same way a bank can.

Most people think banks keep all your money somewhere to be readily available (ie in cash). It's simply not true. The bank can and will use your money to invest in enterprises. While invested that amount cannot be retrieved at will (it's called illiquid). Maybe the bank bought a warehouse. Or financed a startup. Whatever. But your money is no longer "cash".

Depending on regulations, banks are required to keep a minimum of liquid cash available (say, 10%), so as long as people do not withdraw cash over 10% of total assets everything is fine. But if people start withdrawing money massively (for example because of a crisis) the bank can simply run "out of cash".

With Bitcoin this cannot happen as the "currency" is always available in the ledger by definition.

 
 
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