Bank Run

A bank run occurs when a large number of depositors try to withdraw their money at once, fearing the bank will fail. Because banks operate on fractional reserves, lending out most deposits and keeping only a small share liquid, no bank can survive a sufficiently determined run without outside support.

Why it matters

Runs are self-fulfilling: the rational response to fearing one is to join it. Deposit insurance was invented to break the spiral, with the FDIC covering 250,000 dollars per depositor per US bank. The digital age made runs faster, not obsolete. Silicon Valley Bank lost 42 billion dollars in withdrawal requests in a single day in March 2023, driven by smartphones and social media rather than queues on the sidewalk.

Crypto has its own version: custodial platforms including Celsius and FTX froze withdrawals in 2022 when customers rushed for the exits, revealing that deposited coins had been lent or lost. A custodian is a bank in everything but name.

In the gold vs bitcoin debate

Gold and bitcoin held directly are immune to bank runs for the same reason: possession is complete, with no fractional claim standing between the owner and the asset. Historically, runs on gold-backed banks and the 1971 run on America's gold window itself pushed the world off metallic money. Bitcoin adds a twist gold cannot match, the proof-of-reserves audit, since anyone can verify on-chain that coins exist, though not the custodian's hidden liabilities against them.