Bitcoin Forum

..otherwise it will never achieve its true potential!

Bitcoin needs to have a mechanism that ensures price stability.

The current system has many excellent features, but it is broken in this critical area, and may never achieve widespread acceptance as a consequence.

The system has an inbuilt mechanism of currency destruction - as certain accounts are lost due to system failures, mistakes or death of their owners.
This in itself is not a bad thing, as long as it is balanced with an appropriate level of currency creation.

The ideal would be to manage the supply of currency such that it achieves approximate price stability relative to a broad range of goods and services.
This would increase the use and influence of the currency, and help its many advantages to be enjoyed to the fullest extent.

The current deflationary model is good for promoting adoption because early adopters have a financial incentive to adopt, helping the currency to gain a foothold.

Before very long though, I think the rules should be changed to address the price stability issue.
There ought to be an automated mechanism for doing this..

Anyone have any good ideas on this?

Note: It's not as simple as counting the number and value of transactions because many of those transactions may not be economically meaningful, merely a user shifting funds from one account to another.

Milton Friedman: "I've always been in favor of abolishing the Federal Reserve and substituting a machine program that would keep the quantity of money going up at a steady rate."

Stabilization is chaos! Attempting price stabilization would lead to a very quick end of BitCoin, because it will never work. The task is impossible, no one can no and foresee every BitCoin transaction that will happen. Instead the currency will just get less predictable, instead of a stable value increase there will be times when the demand for the currency is over estimated and the value plummets.

BitCoin is a commodity, an asset. Everyone have plenty of these and them fluctuating in value due to supply and demand issues is a problem every retailer overcomes every day.

How many sane people have thousands of dollars in there savings accounts? People generally want to get rid of any currency subject to price stabilization, they either consume them or invest them in assets as soon as possible. The only reason they can be used for this is that people are forced to accept them as legal tender. Since BitCoin is not legal tender price stabilization would just lead to no one accepting the currency as payment cause it would be constantly de-based and it's value very unpredictable.

If the Bitcoin community adds any form of currency creation beyond the initial decreasing reward for securing transactions, I will sell all my Bitcoins and move on.

Price stability is a pipe dream of central planners. The larger Bitcoin becomes, the more stable it will become. If you have a good way to force people to use Bitcoin without forcing people to use Bitcoin, please share.

Oh the graces of the daily newcomer pontificating upon the debilitating flaws of a project he recognizes to have "many excellent features". Frankly, how excellent do you regard those features if you think the system has such an ugly flaw it'll never go anywhere?

You are confusing different notions:

1) Are you saying Bitcoin needs to have a mechanism to stabilize its supply against eventual coin loss?
2) Or are you saying Bitcoin needs to have an elastic supply to accommodate for price stability?

In the first case, how is that a problem with an already deflationary, infinitely divisible currency? In the second case, you don't understand the benefits of deflation.


And why should it achieve that? As long as it satisfies its users, why should it cater to those who don't want any of it? If people are happy with inflationary, fiat currency, they can just start their own block chain with those rules. If people are happy with government controlled currencies, then there is nothing Bitcoin can offer them. The very premise that Bitcoin shall take over the world economy or fail to succeed is incompatible with the concept.

Likewise rezin777. However I would probably be willing to accept up to a 1% increase of the total supply (putting it on pair with the increase of the gold supply) if this is necessary to stimulate calculations needed to maintain the system.

I am an economist so I don't know that much about the technical specs but if I understood it right "mining" helps maintain the system and lower transaction times? In this case maybe a 1% increase per year could be justified but no more.

There's already a block chain modeled around gold going on somewhere. Dunno if it's still alive or not. The reward for mining will slowly shift from "coin minting" to transaction fees.

Well there is a reward built into the system to provide incentive for mining. It's currently 50 BTC per block. As half the coins are created, the reward halves. And again, and so on. The thing is, transaction fees are also included as a reward for mining. The miners receive the fees from the transactions included in the blocks they find. I suppose the idea is that as Bitcoin becomes more widely used, there will be more transactions and more fees that will slowly replace the block reward. Some do not think it will be enough, some do. Time will tell.

Yep, and those who disagree with the way the it works are welcome to modify the code and start their own block chain.

See thread: http://forum.bitcoin.org/index.php?topic=9923.0

It's about creating a currency backed by bitcoins. The bitcoins then become similar to gold in currencies backed by gold. The new currency will have great price stability in the sense of being resilient against deflation and inflation.

Because there are a fixed supply of Bitcoins - Bitcoin value is directly related to the demand side.  It means that the value of Bitcoin adjusts automatically to the value of goods/services traded in the Bitcoin economy - the balanced price is achieved automatically.  Most central banks will adjust interest rates up and down to keep up with inflation/deflation in order to have a money supply of value equal to GDP.

In addition to the adjusted Bitcoin value, Bitcoin miners adjust the Bitcoin difficulty when it becomes more profitable to increase mining capacity, when the Bitcoin price goes up in relation to mining costs.

Price stability is not dezirable per se.   The idea of controlling prices defeats the very purpose of prices as economic signals.

Many people would like to have stable prices just as many people would like to have nice weather every day.  But it is just a silly wish.

Prices have to vary in order to reflect economic reality.   Trying to interfere to this only sends false signals in the economy.

There is no "built in" price deflation in Bitcoin.  Anyone who is sure BTC will be worth more will buy it now, capitalizing that into the current price.  Anyone who is sure it will be worth less will sell it now, again capitalizing that into the current price.

The current price is ~$8 because that is the consensus expectation of future price, factoring in the structural inflationary and deflationary factors.  If the price goes up, it's because Bitcoin becomes seen as more useful or desirable, not the "built in" deflation.

 :D

Well, it would be nice if there were a way to price things in bitcoins that would not be affected by bitcoin's change in value. I shouldn't have to keep lowering my price quote somewhere as bitcoin's value increases.  Why would somebody loan out bitcoin to someone else to buy capital, when there's little certainty about its value when the loan is repaid?

I think the best way to do this would be to establish a basket of commodities that everyone can agree on, and have this be automatically computed and posted in multiple locations.

Right now the price of one bitcoin is not stable because it's such a new currency and very little people know it even exists.   Give it time.   Eventually it will stabilize once everyone in the world will know about this currency.   And then it will stabilize because the overall quantity of bitcoins will stabilize.


I barely understand what this would mean exactly.  Feel free to elaborate.

Sounds like dollars to me.

It sounds like he is pushing IMF agenda of replacing about to implode fiat pyramids by a new bigger one... what is the name SM* something...

Special drawing rights?

Sounds like IMF'd!

I concur. Price stability is only approximated, and then only by (and some people think this is ironic) speculators.  If bitcoin moves up too much, speculators sell, lowering the price. If it goes down, they scoop up bargains, raising the price.

No need to bother with liquidating bitocoins in "community adds any form of currency creation beyond the initial decreasing reward for securing transactions" scenario. We will just split the blockchain and continue biz as usual using old rules.

Adjusting your prices is part of retailing, in electronics in particular many stores still need to adjust there prices daily because the development is so fast...

Any import/export business also need to adjust to exchange rates all the time. This is a very normal part of doing business for everyone that deal in multiple currencies or volatile products. If BitCoin becomes more dominant this problem will also decrease as more of the cashflow will be in BitCoin only and rather then being compared with the value of fiat currency all the time it will be the amount of BitCoin demanding your goods that is the only factor you need to worry about in pricing.

I wasn't aware of anything the IMF had that was like my suggestion, and so I was not trying to "push their agenda." What are the similarities here? Do you have a link to this?

I am an INTP (http://en.wikipedia.org/wiki/INTP) I do not have links, I have Intuition (which is nearly always right, BTW). If you need links try to google "IMF special drawing rights".

Import/export businesses generally don't adjust their prices due to exchange rates (at least not on a short term basis): they just trade currency futures to lock in an exchange rate (and build the cost of such trading into the prices).

At the moment there's no easy way to trade BTC futures, though.  Once there is, then you'll see a lot more price stability.

PaulDonnelly, please read this http://forum.bitcoin.org/index.php?topic=10552.0 .

"PaulDonelly" is probably yet another troll. Posts one post about bitcoins "price stability issues" and disappears.

We are averaging these at about 2-3 times per week or more.

Yes, depending on the size of said import/export business they could use currency insurance instead...

Anyone could issue a BitCoin future ... someone just need to code a market. Though designing a anonymous futures market might be a bit of challenge without having to lock down all the promised funds for the durations of the futures.

Also BitCoin futures would probably only be issued in one direction. Futures that give you a lower BitCoin price in the future in fiat currency then today would probably not exist. But people might still want to pay for a contract that gives then a specified increase to the BC value a few months into the future. So I guess we just have to start coding that maketplace...

That is exactly what my gut feeling tells me about Bitcoin. It will be adopted by governments worldwide to back their currencies—and actually, I even go further speculating that the first government who decide to do that, will be the one in the command of the world.

PaulDonnelly, if you are staying in the Bitcoin forum you need to spend some time studying these:

No.

I think the US$ should be stabilised. It keeps dropping in value. Last time I checked it was only worth around 0.016 BTC. This will deter USD investors.

exactly the same gimmick or another gimmick:
Dollar pegged currency like CNY.

The first government that does this will go bankrupt shortly afterwards, as soon as BTC price rises and said government's debt increases disproportionately compared to its tax revenue. There's a reason why the gold standard was abandoned. The same reason that makes every single monetary sovereign nation want to devalue their currencies (so called currency war). The same reason that most Eurozone nations suffer. And you are suggesting that a government that decides to issue debt backed by an asset in fixed supply will somehow end up benefiting from it?

Exactly right. Governments always spend more than they receive through taxes because politicians are incapable of avoiding the temptation to buy votes ahead of the next election. They always want to spend money giving freebies and entitlements to the public because they think it keeps them on their side. Having spent too much money with no intention of paying it back by letting the government run a profit, then inflation is fostered to reduce the government debt in real terms. The downside is that prudent savers are robbed, imprudent borrowers are rewarded, capitalism is crippled by mal-investments.

That is why all of us have lived our whole lives burdened by ever increasing monetary bases, resulting in price inflation, until most of us have accepted it as the normal way an economy should work.

The new era of deflation will make governments go cold-turkey as severely as any heroin addict has done.

Govt.s will no longer be in control of the money supply in the foreseeable future. This is the best possible outcome, so it will happen.

Why change the rules when the possibility already exists? (But apparently very few people seem to understand it...)

Basically:

There should be a functioning market between buyers and sellers of block space.
Anyone wanting to move bitcoins between wallets obviously needs to buy block space by bidding for it.
Any miner who discovers a block obviously needs to sell that block space in order to earn more bitcoins.

However, unlike ordinary markets which have price discovery, I strongly suspect that some interesting things will happen when it finally begins to resemble a functioning auction:

• Miners will notice that if they increase the cut-off price and reject more transactions, there will be DOWNWARDS pressure on the exchange rate.
• Whereas if miners decrease the cut-off price and accept more transactions into each block, there will be UPWARDS pressure on the exchange rate.

I'll let you guys try to figure the relation between transaction fees and exchange rates. A key concept here is "monetary velocity". :)

However, let me just say that I'm really annoyed with the "core developers" right now for sitting on this functionality the entire time and doing SFA to enable it! Even worse, they've sabotaged it for the sake of merchants who want that "zero-confirmation" bullshit to be resistant to double-spends. I guess that that's what happens when one gets stuck straight into coding without figuring out the design first! >:(

that will be the real independence day