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Will Bitcoin [BTC]’s legacy be the destruction of the 21 million coin supply cap?

Anirudh VK

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Will Bitcoin [BTC]'s legacy be the destruction of the 21 million coin supply cap?
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Opinion: Bitcoin [BTC]’s first block remains, until this day, with a message indelibly etched into it. A headline from the newspapers on that day: January 3, 2009. “Chancellor on brink of second bailout for banks” was the headline, depicting the reason Bitcoin was created, to take the power of value away from banks and corporations, decentralize it and give it back to the people.

Now, 10 years down the line, one of banking’s biggest “problems” is coming to the blockchain, courtesy of none other than Mastercard. A patent was filed late last month, called the “Method and system for linkage of blockchain-based assets to fiat currency accounts”. This aims to introduce fractional reserve [FR] banking to the blockchain, effectively “solving the problem” of Bitcoin’s scarcity and dilute the supply.

Fractional Reserve is a banking system which effectively allows banks to only hold a fraction of the assets that they manage. This effectively means that more capital is freed up for loaning out to various parties, effectively introducing a large amount of debt into the picture. Moreover, banks are required to only hold 10% of their deposits as reserves.

FR is one of the many methods to increase the “paper supply” of an asset, in the same way that Wall Street has been doing to silver and gold for the past eight years. This can also be done through offering derivative products, which are being carried out by Goldman Sachs with their derivative products offered to a “small number of clients”.

If the principle is applied to Bitcoin, one of its biggest value propositions, the fact that there will only be 21 million coins in circulation, will effectively be rendered moot. As financial institutions are effectively required to hold 1 Bitcoin for every 10 Bitcoin they “lend”, the supply of Bitcoin can be inflated to levels that would compromise its scarcity.



This can be added to the list of complaints that the Bitcoin and cryptocurrency community has towards the increasing institutionalization of the cryptocurrency. Its acceptance as an asset class will lead to the dilution of its supply by paper-Bitcoin, which is usually a cash-settled product which does not trade on exchange platforms. This effectively means that while underlying spot markets might decide the price of the asset, derivative products can effectively be traded without the need for markets to decide the price.

This marks the beginning of a dangerous path for Bitcoin, and one that might see it move away from its fundamental philosophies. However, even if Bitcoin turns into being the direct successor to banking, that message will always remain in the first block, deciding the values of the coin in an absolutely immutable fashion.





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Anirudh VK is a full-time journalist at AMBCrypto. He has a passion for writing and interest towards the future of blockchain technology and cryptocurrencies. He does not own any cryptocurrencies currently.

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2 Comments

2 Comments

  1. Avatar

    Derick

    November 4, 2018 at 10:01 PM

    If bitcoin becomes the no 1 currency, then borrowers will ask their money in bitcoin, MaSterCard or banks can’t print their own bitcoin because the system will reject it. So fractional reserve will only work if banks have their own crypto currency that is pegged to bitcoin let’s say, 1bitcoin:10mastercard coin. But still the borrower will have problems In buying goods in that MaSterCard currency. So again th

  2. Avatar

    sfiii

    November 5, 2018 at 6:49 AM

    Not seeing how a ‘patent’ could give Mastercard permission to alter the collective blockchain. After all, they don’t own Bitcoin.

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HitBTC responds to allegations of insolvency, refutes claims made by Redditors

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HitBTC responds to allegations of insolvency
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HitBTC, a Hong Kong-based exchange has been the center of accusations among users on Reddit, Twitter, and other forums. HitBTC users started complaining about issues regarding withdrawal and extensive procedures after one particular user @ProofofReserach put out a thread alleging insolvency of HitBTC.

To put an end to all the accusations, HitBTC has broken its silence with a blog post explaining their side of the story. According to HitBTC, their systems performed well during the winter of 2017-18, however, HitBTC mentioned that due to overwhelming demand for the services, they experienced bottlenecks at an operational level.

Referring to the BitcoinExchangeGuide article, HitBTC responded:



“A widely quoted article, in its entirety, is based on only 2 AML cases. One of them was initiated as part of the investigation into the December, 2018 BTCP security breach, at the request of the coin’s core team. Unfortunately, there is no clear indication of the nature of the second case that can be discerned from the article. The author of the article failed to track the deposit/withdrawal dynamics that did not uncover any irregularities. A simple block explorer or our public System Monitor would suffice for these purposes”

Additionally, referring to the altcoins being added and removed from the platform, the exchange said that they were honored to work with a diverse range of projects, however, since the crypto sphere was still nascent, there were lapses in their judgment in assessing the integration partners. With the above-mentioned prominent cases, HitBTC also addressed other topics.

@ProofofResearch replied to HitBTC’s blog:

“Is there a reason why you’re unable to tell people us where your Bitcoin storage is at? If what I published is as untrue as you claim it is, then providing a wallet address where your Bitcoin funds are stored will go a long way in *proving that*.”





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