Well, what will happen is that there's now going to be great pressure for all exchanges to prove they are not in a fractional reserve state (one of the advantages of bitcoin is that it makes such a proof possible.)
It'll be interesting to see how many of them can provide such a proof... I'm guessing most of them can (but only time will tell)
If they successfully provide this proof, there's no reason to expect a bank run.
My suspicion (I am not an expert on finance) is that (if it remains successful long enough) Bitcoin is going to end up being fractionally reserved by the exchanges—I mean openly so, with the consent of the depositors. That should generate a large increase in the apparent supply of Bitcoins. I mean, gold is already heavily fractionally reserved...
This is interesting because bitcoin is presented as a reliable store of value, but I bet a lot of people who trade on exchanges leave their coins with the exchange for convenience.
So - what if some operators hold less coins than they claim to have, and are shuffling around from a fractional reserve, as you describe?
There would be more coins in the system than actually exist. I get lost in the M1/M3 representation of volumes of money, but that starts to reintroduce some of the confidence problems with paper money.
But - if this problem exists - it will be temporary, and is not inherent to bitcoins. Either the ecosystem will evolve so people stop holding coins at the exchange, or there'll be a couple of run events causing a loss of confidence in exchanges for storage.
Bitcoin is fractional reserve. There isn't $982B in currency backing it. If everyone tries to sell at the same time it'll collapse after $10B or so leaves. Prior collapses have been from small enough heights that individual Billionnaires like Jack Ma have been able to rescue it. At some point its going to hit a crash where a billion here or there won't be enough to bail it out when it goes down.
I have a small amount of Bitcoin so this scenario would be good for me, but the looming crisis is that transaction fees will go really high (or the chain will become insecure) once Bitcoin’s inflation runs out.
The magical 21 number will come into question, which will really dent confidence in the entire premise.
Sooner or later bitcoin must stabilize. Either because it goes to zero or because it starts tracking inflation with volatility way down. That's when we will know.
The part you should have highlighted at the end is where I predict collapse, not where I predict it'll have a confidence issue at some point. There's no way BitCoin will avoid some sort of issue at some point and just monotonically increase in value forever and ever, amen. If nothing else, after its inevitable and mathematical wild success (cough) BitCoin will one day attract the attention of the IRS who will decide they need to tax it. If you manage to get that far without a confidence crisis, that's an automatic one. You'll lose a chunk of people for whom the primary draw was that the IRS didn't care about it. Confidence crisis isn't the question, collapse is.
(And that's the gentle one. There's also "The US government has decided that BitCoins are primarily a money laundering operation" and it starts throwing people in jail for using them. I consider this a less likely outcome by far, but still on the table.)
When I say confidence crisis, I do mean that as a distinct thing from a collapse; as I said, all currencies face confidence crises.
I think Bitcoin has huge potential right now, even after its recent run up. It could easily 4x to 6x from here, before the next halving. It could also drop by half, but at least the rewards are asymmetric with the risks.
But even though I'm optimistic about Bitcoin, I don't see it as crash-proof except in one crash scenario. It's mostly a speculative risk-on asset that loses value in crisis scenarios. We saw that in the covid crash in March last year as Bitcoin prices tumbled along with other markets.
The one crash scenario where Bitcoin doesn't crash is if Bitcoin is the thing that triggers a crisis of confidence in fiat assets. That's the hyperbitcoinization scenario that still looks improbable, but easier to imagine now than it was a couple years ago.
A bank run would be as devastating on any other currency as it would be to Bitcoin of course. Loss of confidence in a currency destroys it. The same is true for the Yen or the Euro or USD too.
It's reasonably likely that there will be a run on dollars at some point.
If/when it happens, the bitcoin network collapsing is a pretty likely outcome.
(what I mean by a run on dollars is that lots of people may decide they want dollars instead of bitcoin, so the people with dollars won't have to pay as much for bitcoin, and then the people who want dollars will have to accept less for their bitcoin, and then…)
It'll be interesting to see how many of them can provide such a proof... I'm guessing most of them can (but only time will tell)
If they successfully provide this proof, there's no reason to expect a bank run.
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