Banking with Bitcoin

Banking with Bitcoin

“Btcpop needed to re-invent banking for Bitcoin. The modern banking system we are familiar with isn’t compatible with Bitcoin primarily because Bitcoin cannot be created out of thin air”

The blockchain  is an outstanding innovation for many reasons, and it will undoubtedly benefit mankind greatly and change the world for the better. The 1st and most important way it will do that is by allowing us to digitalize value, and store and use that value all over the world using the internet. Bitcoin, the first manifestation of digital value is known to many as a currency and form of money. Bitcoin is indeed a form of money, and because of its attributes it is the best money mankind has ever known. But, the same attributes that make Bitcoin the best currency in the world, also make it incompatible with one of the largest and most powerful institutions in the world, modern banking.

What Banks Do: At the most basic level, what banks do is fairly simple. Banks accept deposits from customers, raise capital from investors or lenders, and then use that money to make loans, buy securities and provide other financial services to customers.

So you may be asking yourself: “Why Bitcoin would be incompatible with something as simple as taking deposits and issuing loans”? The answer is a bit complicated and must first be broken down into 2 parts.

  1. Bitcoin is in fact compatible with the above definition of banking. and Btcpop.co  is a thriving example of a Bitcoin bank doing just that.
  2. Bitcoin is incompatible with the “Modern Banking” model we are used to. Put simply, modern banks operate in a completely centralized environment, and Bitcoin being decentralized cannot work the same way. It is like trying to stick a square peg in a round hole, it just doesn’t work.

To better understand this incompatibility we have to look at Bitcoin and modern banking a bit closer. Lets start with the more complicated of the two, modern banking.

Modern banking

The fundamental difference I want to emphasize between modern banking and Bitcoin is that modern banks create money.

 

“Banks create money in the economy by making loans. The amount of money that banks can lend is directly affected by the reserve requirement set by the Federal Reserve. The reserve requirement is currently 3 percent to 10 percent of a bank’s total deposits. This amount can be held either in cash on hand or in the bank’s reserve account with the Fed. To see how this affects the economy, think about it like this. When a bank gets a deposit of $100, assuming a reserve requirement of 10 percent, the bank can then lend out $90. That $90 goes back into the economy, purchasing goods or services, and usually ends up deposited in another bank. That bank can then lend out $81 of that $90 deposit, and that $81 goes into the economy to purchase goods or services and ultimately is deposited into another bank that proceeds to lend out a percentage of it.”- Investopedia.com

It seems like a ponzi scheme right? Why on earth would people work their lives away and sacrifice so much for this money, when this money can be created out of thin air by banks?! I cannot really answer that question because I actually do believe it is a ponzi scheme of sorts, but that is for another post.

Authority
The real reason this model works is because they operate using  fiat currency.

“Fiat money is currency that a government has declared to be legal tender, but it is not backed by a physical commodity. The value of fiat money is derived from the relationship between supply and demand rather than the value of the material that the money is made of. Historically, most currencies were based on physical commodities such as gold or silver, but fiat money is based solely on the faith and credit of the economy.” – Investopedia.com

So fiat currency is basically a promise from your central authority or government written on a piece of paper. Because enough people believe in their governments the system, it  miraculously works. And even more miraculously, the government can create as much money as it deems fit out of thin air, so it lets banks create money out of thin air as well!

money out of thin air

On a side note here is a great book on why not only the belief in government’s ability to handle money is crazy, but how belief in authority itself is irrational.

Why Bitcoin is Different
Bitcoin is different than the centralized banking ponzi scheme different in many ways. But, the for the purposes of this article on banking, the only difference you need to know is that Bitcoin is mathematically finite. It is programmed into Bitcoins code that there will only ever be 21,000,000 Bitcoins.  So needless to say, Bitcoin cannot be created out of thin air.

How Btcpop Does Banking
Besides “creating” money out of thin air, banks do provide some useful functions for their customers. Btcpop is able to perform these functions as well. But at Btcpop, the lender takes the place of the banker. All transactions are transparent and P2P. Btcpop simply acts as a platform for these transactions to happen between users.

Bank

  1. Accept Deposits / Make Loans
  2. Provide Safety
  3. Act as Payment Agents
  4. Provide Lines of Credit
  5. Interest Bearing Savings Accounts

Other Financial Services “Banks” Perform

  1. Credit rating
  2. Currency Exchange
  3. Share issuance and exchange
  4. Bond issuance and exchange

Through innovative thinking, trial and error, and plain hard work Btcpop has innovated and created functioning systems to perform these services in a P2P model.

  1. Accepts Deposits/Makes Loans:

This is arguable the most important, profitable, and difficult things banks do. Making the decision on how much credit should be granted to someone and at what interest rate is no easy task. In normal banks, professional bankers take on this tasks and usually have some general guidelines and market rates to follow. At Btcpop this profitable, yet difficult task is done directly by the depositors themselves with Btcpop just providing the platform. Borrowers ask for a loan with a specified terms. They then post their loan request on Btcpop’s loan marketplace where individual investors at Btcpop can choose to invest any amount  to fund the loan. If the market accepts the loan and investors raise enough bitcoin, the transaction is completed, funds are dispersed, and the payment timer started.

  • Provide Security:
    Many depositors in traditional banks only deposit their funds for the security and actually receive little to no interest on their holdings. This is a viable service with fiat money, but it doesn’t exist with Bitcoin. Bitcoin funds are cryptographically secured on the blockchain using public/private key technology. So simply put if you have the private key, you have the Bitcoin. This 100% pure form of ownership  provides individual wallet holders almost limitless security of their funds, but they have to protect their private keys. The cryptocurrency market has made it easy for users to obtain a very high level of wallet security and there are many good solutions for securely storing your private key. Btcpop is no slouch though when it comes to providing security. Btcpop maintains the highest level of private key security and holds all coins offline in secure vaults. Btcpop’s owner is a very successful and competent computer scientist who has created secure multi-level procedures for keeping all private keys at an extremely high level of security. This includes the 100+ Altcoins private keys for the platform. The company has successfully fended off multiple hack attempts and users have never lost any Bitcoin at a fault other than their own. Bitcoin withdrawals are even reviewed and  done manually by the owner of Btcpop just to add a final level of security.
    Btcpop is also very transparent about the whole platform and how it works. Here is a link to one of Btcpop’s transparent wallets
  • Act as Payment Agents
    Traditional banks digitize your money and make it easier to use. This isn’t needed with digital currency such as Bitcoin because it is already digital and highly usable. Btcpop does offer some unique bitcoin payment services though. Such as dividend disbursement for shareholders in the share market.
  • Provide Lines of Credit

Btcpop offers instant loans to verified borrowers. Btcpop extends a line of credit out to borrowers in the form of an instant loan. The loan has set terms, and the line of credit starts out quite small and at high interest. However, as your reputation and payment history increases so does your line of credit.While instant loans are a good form of quick credit, the loans themselves are relatively small and can be expensive. If you have some holdings in Btcpop you are willing to use as collateral, you can take out an instants collateral loan and receive a much larger line of credit that increases with more collateral at only 15%APR.

Today at most banks you are encouraged to open a savings account to earn interest on your funds. But this risk free interest rate is far lower than inflation and last time I checked it was .1%. While nothing is ever completely risk-free due to platform risk. Btcpop also offers customers risk free interest bearing wallets. These accounts can be withdrawn from anytime, and they receive interest on profits from btcpop’s instant loans (or lines of credit above). The Instants Pool return rate varies depending on deposits and loans, but it has historically returned anywhere from 4%-15% risk free returns on deposits. Anybody can technically create theses features and say they work, but Btcpop’s features actually do work and I’ve used them all successfully myself. And I can further confirm they work, because I know what it’s like when they don’t work as there were some bugs in the features at early implementation.

So Btcpop has successfully created a banking solution for Bitcoin. But they didn’t stop there. Btcpop also offers Investment banking solutions

  1. Credit rating
    Btcpop provides users with a credit rating derived from their payment history on the platform. This is still a work in progress and primarily used as a tool for investors. But in the future your credit rating at Btcpop could be transferable to many other applications like your credit score is today at traditional banks
  2. Currency exchange
    Btcpop offers an in house cryptocurrency exchange. Here you can buy and sell 100+ types of altcoin with bitcoin.
  3. Share issuance and exchange
    Btcpop allows users to create a global initial public offering (IPO) of their business idea or existing business. Once the shares are issued, they can be freely traded by shareholders worldwide on btcpop’s exchange.
  4. Bond issuance and exchange
    Btcpop offers users/companies the option to take out loans and issue debt using the bond model.

What the future holds for banking
Needless to say its an exciting time to be in the cryptocurrency space. Entrepreneurs will continue to innovate and move our standard fiat services into decentralized models using decentralized money. Finance is a necessary tool for these entrepreneurs, and Btcpop has created an excellent platform to facilitate that transaction.

 

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