Have I correctly understood the logic of lending money to a bank? [closed]

Question

Let's say that I am able to convince my local bank to borrow 1 Bitcoin from me today, with them allowed to hold it for at least a year before I am able to ask them to give it back. After a year, if I choose, I can allow them to keep it indefinitely (or for another year, etc.).

The point of this would be for me to receive a monthly interest on the Bitcoin, in fiat, put into my personal bank account which I already have with them.

In other words, I "loan" them my 1 Bitcoin, and they give me interest... indefinitely. This is where my question comes in:

Will they own my 1 Bitcoin at some point, after "paying it off"? I don't want that. I want my 1 BTC, which I have given up control over with the assumption that they aren't going to run away with it or fold as a bank, to earn me a perpetual income (however small it may be) simply for them "having" it.

In this kind of situation, is it implied that the bank at some point will own it and not have to give it back to me? Or is the interest forever?

If they are simply "paying it off" based on the initial value when I originally sent it, this is useless to me. If they have to pay forever (unless they send me back the Bitcoin, terminating our agreement), then that's at least interesting (no pun intended) to me.

If the Bitcoin price skyrockets, I expect that my monthly sum will go up proportionally.

If the Bitcoin price remains exactly the same forever, I expect to perpetually get the same amount of fiat monthly.

If the Bitcoin price plummets, I expect that my monthly sum will go down to near-zero or even full-zero, but never "negative".

As in, I never have to pay them any money, and I never lose my 1 Bitcoin. The only risk for me is that they will steal my coin (unlikely) or that the price goes to such a low level that it's "pointless" and I'm temporarily locked out of using the Bitcoin, yet not getting any money.

I make the assumption that our agreement/contract says that they pay me the monthly fiat amount based on the current Bitcoin price -- not the price when we originally entered into the agreement and I sent them the Bitcoin.

Have I correctly understood this? Or am I fundamentally confused about something? I have a nagging feeling that they may be "paying off" my loan to them and that it will stop at some point, with them keeping the Bitcoin and me receiving no more money.

Answer 1

It depends on your contract with the bank. But note that a bank isn’t going to pay you interest just to hold your Bitcoin — they will need to lend it out themselves, on a longer-term contract than their contract with you, and charge more interest than they pay you — that’s how banks work.

Answer 2

Imagine you have a very rare gold coin, and today it is worth $100,000, based on a solid appraisal that everybody trusts.

You have several choices if you want to give control of the coin to the bank:

• They take the coin, give you $100,000 and they use it to purchase a CD that will mature in a year. You can also roll over the CD at the end of a year. Based on the rules of the CD they could deposit your interest into the CD, or into your regular bank account. When you no longer want to roll it over they cash out the CD and give you the proceeds. The CD could even have features such as a adjustable interest rate. During each period they will lend the money and charge a higher rate so they make a profit.

• You can put the coin into a safety deposit box that both of you have to cooperate to open. They will not pay you any interest, they might charge you a fee for the having the box. They won't be able to lend anything based on the contents of the box. They could also put the coin in the window, and then pay you a fee for doing so. Though this would involve risk that they don't want to take, and there will probably be insurance costs beyond that involved in a typical safety deposit box.

• You could find a bank that was willing to take the risk as you propose. They would have to turn the coin into cash at a coin dealer, lend the cash for profit, pay you some interest during the year, and then a year later buy back the coin. The risk for the bank is that the coin could have gone up in value, or it could have plummeted in price.

In the first case you might be able to buy the coin back for the amount of cash you now have, you are taking that risk. In the second case you still have the coin and the value has gone up and down with the market. In the third case you have the coin.

The third case will be very hard to find a bank to do this. They will have to understand that market. They will have to be able to evaluate the risk. They will also have to be able to be able to do this under the bank regulations of the country. The regulations may limit their ability to accept the coin as you propose.

You might have better luck with a company that is willing to take bets, and has insurance policies in place if they guess the market wrong.