It's strange to think about, but realistically the exchange does not need 100% of the funds available, since they will never all be withdrawn at once, even in the event of a massive crash.

The actual proportion an exchange needs to keep to be able to pay everyone (who asks for it) at all times is about as predictable as the bitcoin market itself.

Would we trust "100% funds available" exchanges more? Possibly, but the "cost" would be very high so I would actually be a little wary of an exchange which does this, as to me it would be "trying too hard" to look nice (in reality there's always some trust involved, and so some risk that the owners run off with your coins/money).

> It's strange to think about, but realistically the exchange does not need 100% of the funds available, since they will never all be withdrawn at once.

This was never true, but in the aftermath of 2008, makes a really poor argument. Two points worth mentioning without going into details:

1. Bitcoin doesn't have a central bank to easy the bank-run.

2. When financial businesses go burst, it's extremely difficult to quantify the loss a priori for the accountants

Any sane financial business with half-brain at this time and age would keep at least some percentage of the funds intact.

> Possibly, but the "cost" would be very high so I would actually be a little wary of an exchange which does this

You lost me there. Why would that cost be high? All you need is a wallet (or two, hot/cold) which holds your customer deposits and which you are not allowed to spend from.

I meant the cost to the exchange. All that money they are not making by investing is a huge disadvantage relative to the exchanges that do invest.

This is not a comment on what should be done in an ideal and/or moral world but the bitcoin (and financial) world is neither.

Seriously, it is much more work to make additional transfers and accountings of where all the money is going.

Congratulations. You just invented fractional reserve banking.

No, he didn't. He invented insolvency.

With fractional reserve banking, the institution has assets greater than liabilities. With insolvency, the institution has a plan to someday have assets greater than liabilities.

Not sure I follow? This is standard in the banking world, yes, so why wouldn't it be standard in the much less regulated bitcoin world?

Because then you get all the "features" of the current banking system that bitcoin wanted to avoid.

Bitcoin is by design deflationary currency. Fractional reserve banking is by design inflationary. No matter where you sit on how much inflation and what monetary policy is best - it is obvious that it is against the intentions of the original adopters and creators of the BTC network.

Sounds like you're mixing ideology with technology.

Why should the be hold to a different standard than regular banks?