So what you're saying is that banks are more stable because only a small portion of their assets are kept as reserve? In that case, what's stopping bitcoin "depositories" such as this converting the bulk of their assets to something else as well?
They can't do that because there is nowhere really safe to put the BTC. They cannot loan it out because nobody needs that much BTC, and it's unwise to invest it in USD or anything else because the currency's fickleness compared to USD(you could lose a lot of money, or possibly make some).
The problem is that the current Bitcoin "banks" aren't really banks. They're more akin to socks under a mattress than a bank.
At a very basic macro economist level, banks have two functions:
1. They are a place for clients to place their money. To incentiveize this behavior, they pay those clients interest on the money in their accounts to keep it there.
2. They take that money and give out loans to people, and charge interest over the time it takes to repay the loan.
In a healthy economy, the two feed each other. Broadly speaking, the circulation of currency works like this: People/businesses take out loans. That money is used to buy things (houses, cars, short term equipment expenses, etc.). The businesses that are paid for the goods/services pay their employees, who put the money into the bank. Note that even in this situation, banks aren't entirely necessary, because people could just buy stuff, which goes to employers, who pay employees, who buy stuff...
Bitcoin does not have either economy yet. Right now, it's used just to buy things, with BTC being converted to a "real" currency(USD, Euro, etc.) on both ends. So it's really just a single directional currency. So, right now, if I wanted to operate a Bitcoin bank, I'd have to convert it to USD or some other currency, and keep it totally separate from my liquid BTC wallets to mitigate the risk of getting hacked and the wallets getting stolen. Unfortunately, that's incredibly risky, because I would then have to deal with the exchange rate between BTC and USD.
This is not exactly true. I believe MTGox uses offline wallets for the storage of the funds, and I'd expect any other sane bank use it as well.
If someone breaks into the MTGox, they'll be only able to steal the "reserve". To get to the real money, the MTGox admin has to physically go into a vault (safe), and retreive its contents.
That isn't necessarily the fault of BTC banks though. Let us be honest here - if we (the viewing public of HN) collectively wanted to put in every effort to supplant flat currencies for BTC so nobody can print it anymore, all of us combined would not have the financial assets required to sway the supermassive giants of the world like Walmart, Amazon, Google, Apple, the big 3 car manufacturers, realtors, and more importantly than anything else, the stock markets to start trading in BTC would take the financial efforts of pretty much the entirety of the top 400 wealthiest Americans.
The markets are more resistant to currency shift than enterprises are to getting off XP and IE6. BTC will always fail because everyone is to lazy to get rid of the dollar as the reserve currency.
Well, it doesn't make them more stable, but it makes them more resilient to criminal theft.
Bitcoin "depositories" open up a pretty big can of worms if they convert their assets. Part of the point of using bitcoin is not to have to use other assets.
They could start lending bitcoins, but that's going to invite a lot of scrutiny, particularly from the regulators.
