The supply of bitcoins can be inflated in the same way that the supply of dollars is inflated, namely by fractional reserve banking. In fact the amount of dollars created by the federal reserve is a small proportion of the total dollars in circulation. The other thing is that the quantity of money, which is one of the key variables influencing the price level, does not remain constant even if the supply of money does, because of trade imbalances. For example, any trade deficit is necessarily offset by an outflow of money, thus reducing the quantity of money in the economy. Therefore if you think that the adoption of bitcoin as currency would prevent your cash balances from losing value in any way, shape or form you're completely wrong.
There is no such thing as fractional reserve banking in Bitcoin.
Say you have a wallet with a balance of 10 BTC and decide to act as if you're a bank. The first lender comes, requesting a loan of 30 BTC.
You don't have 30 BTC, and it basically already stops there. You can't transfer the 20 extra BTC to the lender, since that BTC does not exist. You can't make up your own BTC as it's all on-chain.
You can make up however much fiat money you want. You can own 10 BTC and loan out the USD equivalent of 30 BTC in USD, but that's traditional fractional reserve banking, which has nothing to do with Bitcoin.
If a significant amount of consumers would not hold their BTC on-chain but at some institution (which, if BTC would become very popular, would very likely be the case for most users - these mainstream users are very different from the groups which use BTC now) then they would effectively be holding IOUs-denominated-in-BTC issued by that institution, and the supply of those would be likely be much larger than real on-chain BTC, just as in the fractional reserve banking scenario.
I.e. I strongly believe that any widespread mass adoption of BTC would actually result in a mass adoption of BTC-flavored-fiat and a relatively smaller use of actual on-chain BTC; simply because of the preferences of the mass consumer market which aren't really aligned with the advantages of keeping stuff directly on-chain.
Right now, a lot of Bitcoin is held at exchanges, which you can consider an IOU. However, it's still real Bitcoin reflected on-chain. As a user, you basically bought your Bitcoin from the supply of real Bitcoin the exchange holds in aggregated wallets. Should the exchange run short in supply, they buy real Bitcoin from other parties. It's all on-chain. Exchange wallets are well known and actively tracked.
Theoretically, an institution could let you buy Bitcoin that doesn't exist or which they don't own. This strategy would fall apart in mere weeks.
Say there's a new bull run and people are mass buying Bitcoin, for about 50 billion USD per week. You, the exchange, don't actually have this Bitcoin, yet in your books you pretend that you do. The customer is none the wiser. Your revenue is 50 billion USD.
Bitcoin doubles in USD value and customers are now mass selling and/or withdrawing their Bitcoin (which you made up). So now you have to either payout 100 billion USD or actively buy real BTC at its high price, which just doubled. Unless you have an additional 50 billion USD at hand, your exchange collapses and goes bankrupt.
Can an exchange sell slightly more BTC than they own? Technically, yes. Can they do many multiples of actual supply? No.
What you describe is a currency exchange risk, which would be the same of a bank holding a position in (for example) Japanese Yen but not covering it and holding their assets in USD instead.
The fraction reserve banking is a bit different issue, it's mostly about working in a single type of currency but backing short-term liabilities (e.g. account balances) with long-term assets (e.g. mortgage loans). So a customer A deposits 1 BTC and on-chain it gets transfered to the institution. Then when a customer B gets a loan of 1 BTC there's still just 1 on-chain BTC but 2 BTC-denominated IOUs, so the effective supply has doubled. Obviously, both of them can't withdraw the same coin at once, but the institution is not bankrupt as it has enough assets to cover all their debts, it may be temporarily insolvent though if a bank run happens.
The key difference from ordinary banking, of course, is that noone really takes loans denominated in BTC, so right now there's not much that an institution could have on the asset side other than "real" BTC. However, in a hypothetical world where BTC becomes the "mass market money" in some countries, then there would be BTC-denominated loans which would (among many other interesting effects) drive the pressure towards an equivalent of fractional reserve banking.
A clarification: IOUs are not money, bank deposits are. The money supply is the money issued by the central bank (aka monetary base) plus bank deposits.
> There is no such thing as fractional reserve banking in Bitcoin.
Wrong. There's such a thing as fractional reserve banking in bitcoin. Any entity that takes bitcoin deposits from customers can engage in fractional reserve banking and create new bitcoins out of thin air. Fractional reserve banking works perfectly well with bitcoin just like it works perfectly well with gold or with any commodity. It doesn't rely on fiat money at all, in fact fractional reserve banking was invented long before fiat money was a thing.
You don't know how fractional reserve banking works? It's quite simple. An exchange, or any institution that takes bitcoin deposits, can take a fraction of the deposited bitcoins and lend them out, so far as the depositors don't withdraw all the bitcoin deposits at the same time. As soon as this happens, the amount of bitcoins in circulation goes up by the loaned amount.
Nope. The only amount of Bitcoin in circulation is in actual wallets. Including deposits at exchanges, which are just aggregated wallets.
There's no such thing as loaning out a Bitcoin. You can loan out the fiat equivalent of it or a synthetic token (wrapped Bitcoin), but these are swaps, which is not the same thing as a supply increase. Truly loaning out BTC means moving the actual coin to the customer's wallet.
Say I run a bank that has 10 depositors that deposited 1 BTC each. My balance is 10K. Next, I assume they won't claim this BTC anytime soon so I "loan" out this 10K 10 times, for a total loan value of 100K BTC. Hence, I created 90K out of thin air.
This doesn't work. You didn't give the loaners BTC, you gave them something else. No new BTC was created. With fiat, actual new money would be created this way, not with BTC.
Wrong on all counts. Bitcoins can be lent out, just like anything else can be lent out. All you need to make a loan is a loan agreement, and any asset can be lent out with a loan agreement, including bitcoins. There's nothing magical about bitcoins that prevents them from being lent out.
You're stilling missing a very basic concept. You cannot loan out BTC that you do not have. If you have 50 BTC, you cannot loan out more than 50 BTC in actual BTC as loaning out BTC involves MOVING the BTC to me, which means you no longer own it.
Yes, you can loan out BTC. The point is that you can't loan out BTC that you do not have.
An exchange has 1000 BTC in deposits and holds 100% of the deposits as reserves. The exchange makes a loan for 500 BTC. The 500 BTC come from the reserves. Now somebody has 500 BTC. The depositors still have 1000 BTC, except that the deposits are now backed by 500 BTC, instead of 1000 BTC (hence the name "fractional reserve"). The supply of bitcoins has gone up by 500 BTC.
The supply DID NOT go up. You can do as much shadow book keeping as you like, but you didn't create a single new BTC. Nobody but miners can increase the BTC supply.
Just count how many coins everybody has before and after the loan and the only possible conclusion is that the supply has gone up. If you still maintain that that the supply has not gone up, you have a lot of explaining to do. This can't just be dismissed with a handwave.
The explanation is pretty simple actually: you created unbacked paper Bitcoin. Not a single new real Bitcoin was produced. The initial depositors no longer have the BTC they deposited, you loaned it out to somebody else. Yet you count their deposits as if they still own it, which they don't. It's a paper lie that does nothing to BTC supply.
You can write anything on a piece of paper, it doesn't affect Bitcoin supply. Miners mint new coins, nobody else.
Bank deposits are legally enforceable claims on money, which means they're... money, regardless of whether they are fully backed or partially backed by reserves. It doesn't make any difference. And the same applies to bitcoin deposits on exchanges, which are nothing more than legally enforceable claims on bitcoins. In other words bitcoins. Why are you struggling so much with this? I mean... it's pretty basic stuff.
You're the one struggling. You just agreed with what I said earlier: you did a swap from real Bitcoin (actual BTC that was mined and sits in a wallet) into a "promise" of said Bitcoin.
That doesn't increase the BTC supply. It's just shadow book keeping outside the blockchain. You made new "money", not new BTC.
Replacing an asset (reserves) with another asset (a loan) is not "shadow book keeping". But anyway... there is no such thing as actual bitcoins sitting in wallets. A bitcoin "wallet" is not a wallet but an ID. And there are no bitcoins either. There is only a transaction record of fictional tokens. These tokens (aka bitcoins) are created by appending an unbalanced transaction into the transaction record. This is shadow book keeping. But conceptually it shows that bitcoins are created with a simple bookkeeping entry. And more bitcoins can be created with the process that I described earlier known as fractional reserve banking. Again, this is all simple stuff that can be corroborated easily with minimal effort. This conversation is over as far as I'm concerned.
