Bitcoin Forum

Hi, all.

     I just got an idea to stabilize the price of bitcoin by gold. I want to establish a company to backup bitcoin with gold. I will give the promise to exchange 3 bitcoin for 1 gram of gold. I will not call bitcoin a currency, instead I will call it a virtual commodity.

     I have done some homework, I think in order to keep the promise, I need to prepare 100 kilograms of gold, that is 4.8 million US dollar.   

     I believe that this will be benefical to the bitcoin economy. Also by doing so, I can make some profit by charging transfer fees like MtGox.

     So what you guys think? Any good suggestions?

       

I was going to argue with you, but this actually would work - BTC is so volatile at least partly right now because it is valued relative to currencies that are being constantly devalued, but if a private business or organization were to essentially place an open order for gold @ 3BTC/g that would quickly stabilize the price.

Pegs to gold don't work if you're expanding the currency (dollars) at a much faster rate than the supply of gold expands (2ish% a year I believe), but that's not a problem Bitcoin has given its transparency and distributed nature of generation....

Put together a business plan and we'll have you on BitTalk to do an interview segment about your idea

Not if I make a plan and act on this first, Atom. Hahaha. This is a very low-risk business. If all things go bust, at least you have a ton of gold as collateral.

However, essentially, you're just another Bullion dealer with tremendous stock.

and your going to keep this gold where.....please say your apartment

Even better: a decentralized gold storage network. Your gold to your home in 2-3 days or less.

One of the amusing things about when governments print money, is that the amount of money available for "speculation" surges incredibly, as we've seen.  It also dramatically expands the amount of Venture Capital available :)     

It may be amateur hour in the world of BTC for now, but if we don't get our acts together someone else is going to.

@ Atlas - You can't do everything my friend :) I think you have enough irons in the fire for several lifetimes now

Good luck trying to back bitcoin with gold.  It's a gamble, akin to a government fixing the price.  BTC and gold are independent markets and move for related, but different reasons.  Nothing stops BTC from dropping dramatically in dollars and everyone running to you for gold.

Bitcoin is not mature enough to stabilize, let it grow a bit more ;)

It could be done much more easily once the mining curve tapers off a little more -Then you just take however much gold the backing agency has, and you divide that by however many bitcoins there are in existence, and that's your exchange rate/backing.   Honestly at the stage that would happen you'll be able to use BTC to buy whatever you want, so it might just be a good way to monetize your gold lol.

I think you need more capital.  Eventually there will be 21,000,000 BTC, and so at 3 BTC / gram you will need 7,000 kg of gold (in case everyone decides to cash out).

Cool! Make the market! I'm a big advocate of pegged currencies.... but bitcoin doesn't necessarily need to be one, in my opinion. Eventually its value will reflect what you can buy in the Bitcoin economy, as if bitcoin were it's own city-state with its own economy and currency.

The networked world is the bitcoin economy, it just doesn't know it yet.

Quite a few banks in china offer the service to storage gold for you.

Thanks for supporting my idea.

I think what I'm planning to do will make it grow faster.

If there was any future prediction site where you could state your prediction in btc on where you expect the Gold price to go, or Agricultural produce (wheat, soybeans, porkbellies, etc) and get rewarded for correct predictions and punish wrong predictions - it would really assist all btc predictors and stabilise btc as well.

I'd love to see this tried out.

But... what will you do if the exchange rate for bitcoins falls to $10/coin and stays there for a few months?

No, I don't have to backup all the bitcoins, I need only to backup those who would like to trade bitcoin for gold. The number would be significantly smaller.

Here is my calculation. According to MtGox, the trade volume for USD is around 90k bitcoins everyday. Suppose that 1/10 of them would like to trade bitcoins with gold, that would be 9k bitcoins. So I need to prepare 3 kilograms gold. Therefore, minimum speaking, 3 kilograms is enough at this stage.

However, in order to stabilize the price, I need to prepare at least ten times of that amount. Therefore, 30 kilograms of gold would be a more reasonable number.

Considering the bitcoin economy is growing, 100 kilograms is the amount that I need to prepare.

Won't work.

If you want to stabilize the price of btc then we need speculators who actively trade in the markets. If btc drops below a certain price then they will buy and if it goes above a certain price then they will sell. Overall this will get rid of the volatility because speculators will buy up excess supply and move it to periods of high demand. The end effect is more stable prices. However, there could be negative effects especially if there are very few speculators and some of those speculators have lots of buying and selling power. In this case what happens is the speculator has the potential to corner the market.

http://en.wikipedia.org/wiki/Speculation#The_economic_benefits_of_speculation

http://en.wikipedia.org/wiki/Corner_the_market

That's why a company is needed to back bitcoin. If there was a company with enough gold that would like to back bitcoins, the price for BTC would not drop so much.

This forum, so many lulz/facepalms per minute.

I will still trade 3 bitcoins for 1 gram gold until my store of gold last.

Maybe what you say is correct, but not in this stage.

I think in this stage we need a more stable price for bitcoin economy to grow.

Gongcheng

Why would I want to trust you that I will really get my gold?

If bitcoin crashes, everyone will want his gold back and this will be hugely damaging for you. How do I know that you do not just pull a Maddoff? So it is not about trust in gold, but it is about trust in you.

Why on earth should I trust a single person with a shiny web site more than 10.000 people with their GPUs? Wasn't bitcoin made for exactly that reason - not having to trust in a single person or bank or institution?

Maybe I do not understand your concept, but I cannot see a single reason how this would help bitcoin. Economically, I rather see the contrary: IF such a business opens up then this opens up big possibilities for manipulating bitcoin. We already today see how the Mt Gox case with Mt Gox being one of the largest exchanges, is damaging the reputation and exchange rate of bitcoin. Why would I want additional dependency of a single entity? Assume, you have a car accident; assume, your wife files for a divorce. What securities do I have that your wife does not take the gold into her pension fund? What securities do I have that your employees know the proper passwords? Why would I want to concentrate risk on one person and his promises? I do not see a good reason.

You write. I will still trade 3 bitcoins for 1 gram gold until my store of gold last Thats fine. But what if your store of gold is not lasting any longer? What, if it is stolen? What, if it is confiscated by your ex-wife? How do I know that I can trust you more than these guys in my inbox who every other days want my support to recover the inheritance of that nigerian general?

Oh. I forgot. I do see a good reason.

If someone wants to damage bitcoin, the logical move would be to go for more concentration and for more centralized structures.

If I were Visa or Mastercard: I would use a small percentage of my wealth to do some rollercoaster gameing with bitcoin. Buying some, letting hackers steal some, writing about it, selling a lot to dump the course again. Destroying trust.

So let me see... Just assume you do this business... More and more people buy into that gold backing stuff. And then, one day there is an SQL injection at some Mt Gox 2.0 and the exchange rate drops down. Some people want their gold backing. And, for some very interesting reason you are, umm, just not able to fulfill their demand immediately. DDOS maybe or what have you. 48 hourse of negative reporting ... bitcoin crashes even more.

In the end, at the price of a few kilograms of gold, you have successfully destroyed bitcoin's reputation.

This certainly is better than the perspective of losing the credit card fee business model all together.

Yes. If I were Visa or Mastercard, I would do it.

Did you not read the wikipedia article or my post? If you want to stabilize the price of bitcoin then we need people to buy when the price is dropping and sell when the price is rising. Thats what stabilizes the price!!!!!!!!!!!

Also forp is right.

GongCheng, I appreciate your idea and effort but it won't work. You are better off gettting 4.8 million then buying when the price drops and selling when price rises. 4.8 million capital will definitely be able to stabilize btc price.

Glbse ( http://charts.glbse.com/markets/ ) allows for the creation of delivery contracts.  Delivery at expiration date can be in btc based on the day's market rate for btc/gold and need not be physical gold delivery.  Maybe you can create a contract like Gongcheng-Gold-Dec-2011 (symbol GONG-GCZ11)?  Based on your past reputation (based on successful contract delivery of GONG prefixed contracts) the market will find fair value for your contracts through active speculation.  Speculation is something that the bitcoin community is well versed, and comfortable with, it seems.

How much is needed to destabilize it?

And how big a share of a major financial institution's yearly earnings is this?

And, given the potential of bitcoin to change the financial world in the internet, would that be a good investment, if you want to keep the fees for traditional institutions flowing?

I am not suggesting to do it. For me, trust just means to think about possible threats. Trust, in the sense of open eyes. So we should know the answers!

This is like trying to back silver with gold. It makes no sence, and furthermore, you will only create an arbitrage opportunity for savvy investors that will profit from you.

Honestly it makes no sense.
(1) It goes against the descentralized quality of bitcoin.
(2) How can you choose an appopiate market cap? This market should keep growing dramatically. Why 4.8 million. You cant pick an arbitrary number.

Then only sure way to stabilization of price, is when bitcoin reaches the stage where you can buy most things directly with it. Then the value of bitcoin will not be compared to other fiat currencies, but to the purchasing power of bitcoin itself. It will end being a speculative comodity, and  really become a wide accepted currency.

Those who believe in gold will speculate for gold, those believing in silver will speculate for silver, those believing in btc will speculate in btc and those who believe in fiat will be in fiat.  Creating a trading opportunity for all these parties to counter trade with btc will be priceless and stabilising for btc and will also add even more liquidity as forex markets do for fiat.  Arbitrage opportunities exists in all marketable goods as a price finding mechanism.  It is a win-win opportunity when one who needs potatoes can exchange to obtain it from someone at the other side of the world by giving that person btc.  Both might have had a vested interest in btc or potatoes before the trade.

Depending on your need at that stage and the relevant commodity/good fulfilling that need:

Potatoes - Making potatoe chips / feeding your cattle / use as a food additive, etc.
Gold - Use as an age old store of value / electronics / decorative use

or

Bitcoin - Use as a safe, secure, frictionless globalised accounting digital good system for the private key holder, paired with a publicly accessible key

I had a slightly different idea for a way to help stabilise the market. My idea is that cooperative of Bitcoin merchants, who would be eager to see a more stable BTC price to encourage its use in commerce, would act as market makers by selling BTC when the price rose too quickly and buying when it drops too quickly. It would need to be well backed financially and would need to be well managed to predict a realistic long term BTC price based on market uptake and usage statistics. If run well, it should make a handy profit by buying low and selling high. Better than just one such "central bank" would be a number of competing cartels that could each base their actions on their own predictions for BTC.

These corporations could contract with mining pools to ensure a steady flow of bitcoins and could also write put options to merchants worried about a falling exchange rate. There are a number of different income sources for it. The major risk to such a market stabiliser would be a continued fall in value such that it eventually ran out fiat with which to buy BTC, but the presence of a well enough capitalised cooperative should inject confidence in bitcoin and help guard against this.

Thoughts or criticisms?

Andes,

Can't you just register Andes-Gold-Dec-2011 (symbol ANDS-GCZ11) at Glbse.com and Gongcheng register Gongcheng-Gold-Dec-2011 (symbol GONG-GCZ11) contracts?  Based on both of your (and other users) reputation for contract delivery will the decentralized market not decide whose contract to counter trade on?

Is it a contradiction in terms - but the more upside and downside opportunity there are for speculation - the more stable the value of a speculated good / commodity would be in a decentralized free market?  Given all players having different views?

I think the issue is liquidity. Bitcoin prices swing wildly when there is low liquidity and so relatively large orders have the ability to move the market significantly.

Will you only offer to *buy* bitcoins for 1gg/3 BTC or also to sell bitcoins?

If you just offer to buy it will only place a price floor, providing you are trusted. The value of a bitcoin would not be stabilized at any level above you buy price.

Glad to hear it. ;D

Be sure to let us know when you have it up and running....

I guess these "backings" make no much sense.
It's like backing silver with gold. What for? They're both bullion, can't back each other...

I think your plan would be good for bitcoins, but I don't see how you could profit from your idea. If 3 bitcoins are more valuable than one gram of gold then nobody is going to exchange their bitcoins for your gold. If 3 bitcoins are less valuable than one gram of gold then your promise would cause you to exchange your gold for bitcoins at a loss compared to what you could get by selling your gold at market price and buying bitcoins at market price. It seems there is no way for you to win, but there is a way for you to lose.

The point has already been made that BitCoin is in fact a commodity, there's no need to make it a commodity. And probably one of its most valuable intrinsic qualities is decentralization, so in a sense Forp does a have point in being all suspicious: But he's not considering that single guy doing something for the first time is not forcing centralization. Even if MtGox was the most centralized part of the BitCoin economy for a while, recent events are making the community go to new exchanges, making BitCoin more and more resilient.

So basically what I'm saying is that I hope competition will eventually come up guaranteeing 1gg for 2.99 BTC, and that BTC for Gold exchanges become decentralized. In the meantime, Gongcheng, I wish you luck and hope you make a good profit for being the first one to take the risk.

usd is backed by bullets

Well what do you expect insolvent governments to do, ask nicely for all the hold'em players to stay seated while they quickly dash off to manufacture some new poker chips to pay their debts with?   What, you don't think that's right?   Would you rather the game end????  Because that's what's going to happen if I can't manufacture more poker chips!

For what it's worth, the USD is also backed by oil - Until recent currency swaps between a few countries you could only buy oil for the dollar, which meant there would always be demand for the dollar as long as there was demand for oil.  That's the system we moved to after the gold window closed in '71

This is true and this is why speculation stabilizes the markets. If there is ever a large sell/buy order then the speculators will have the necessary btc or usd to supply that order without drastically moving the market. Speculators provide additional liquidity to the market by buying and selling often.

Even betterest:

Mt. Cox

Yes. "backing" is a over-hyped word. It plays with the fear of uncertainty within human minds.

This will not work, because:

1. You cannot back a currency (or something) unless you have a dominant control over the currency, e.g. creating or destroying it on a whim

2. You are essentially trying to fight the market force. If btc is valued $1000/btc and you still peg it to 3btc/ggram, a lot of people will buy gold from other markets, exchange for btc from you and make handsome arbitrage money, you'll run out btc in no time. The other direction is also true.

3. Even you successfully manage to back BTC with gold, for many it's still not good enough. "Gold is too volatile" is a common argument being used against gold investment.

I think once bitcoin passes this equilibrium-seeking phase, more and more merchants will have more faith, they will voluntarily back btc with their goods: socks, coffee, beef jerky... ignoring most of the day-to-day exchange rate fluctuation. Who knows, ultimately US dollar may need to be backed by bitcoin :)  

Bitcoins are better than gold.

The only way bitcoins gonna stabilize is with high day volume trading and high $/btc ratios all linked to e-commerce.

I'd say RMB (yuan) is purely backed by bullets, the communist party doesn't even try to hide it. Chairman Mao: Government is made of barrels of guns

The backing of USD at least contains some element of (false) promise of America dreams, Hollywood style deception,  and the illusion of democracy, besides missiles and aircraft carriers.

I think you misunderstood my idea. I will not keep your btcs or gold. I just trade gold with btc and trade btc with gold to stabilize the price of btcs. I will buy 100 kilograms btcs and promise to trade gold with btcs at 3btcs per 1 gram gold.

I believe that 100 kilograms of gold is enough to stablilize the btcs so that all the dealers would like to trade with btcs. At nowadays, no much dealers would like to trade with btcs because the price of btcs changes too volately.

You don't need to trust me. Even I broke my promise, no damage to your btcs or gold. Because it is in your control.

Did you not read the wikipedia article or my post? If you want to stabilize the price of bitcoin then we need people to buy when the price is dropping and sell when the price is rising. Thats what stabilizes the price!!!!!!!!!!!

Also forp is right.

GongCheng, I appreciate your idea and effort but it won't work. You are better off gettting 4.8 million then buying when the price drops and selling when price rises. 4.8 million capital will definitely be able to stabilize btc price.
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I don't agree with you. How can you judge "the price drops" and "the price rises"?

Put 4.8 million capital into the market now could manipulate the price more volately nowadays. For example, I buy btcs with all the 4.8 million, the price would rise to 50USD or 100USD/Btc, and then I sell gradually, the price will drop back to 15USD/Btc. I may make some profit. However, this would be bad for BTCs, because nobady would like to do real business with a currency the price of which changes so dramatically.
 

I don't know why nobody against speculation.

I think Bitcoins is still in the early stage, speculation will definitely hinder the growth of bitcoins. The volatile price will stop dealer doing real business with BTCs.

Propaganda plays a big part in both countries. A lot of chinese think that the dictartorship is great. Even during medieval times, intelectuals and peasants said that the monarchy was great. Propaganda USA style is not the only type of propaganada.

And while propaganda plays a role in keeping the people using fiat currencies, the final argument is always the bullet that is backing fiat currencies. Without them, a lot of people would stop using them and there would be a cascade effect.

My autotrader bot which will be offered on GLBSE in the next 2-3 days after the Gox re-opening will be doing precisely this.  However, unless interest is really huge, of course, it will not have that great a stabilizing effect.

I'd rather have the BTC.

Ok. So essentially you are telling me you trade a fixed amount of gold against a fixed amount of btc. There are two possible cases:

Case 1: Your gold is too cheap. Everyone will buy your gold and that's it.

Case 2: You gold is too expensive. Everyone will sell gold to you and that's it.

So, this is of a great service and, in fact, yes, it will stabilize the course of the btc. I agree.

In the end there is no economic benefit for you. There is only economic benefit for me, and I just have to make my choices, depending on which case is true.

But: Why should I do it? Every day my spam filter filters out some 5 or 6 emails where people want to share millions from a dead nigerian general with me. There is only economic benefit in this concept for me. I still do not do it.

The issue here is: I do not see the economic rational reason for you to damage yourself. And since I do not see it, I am not ready to make the deal, because I assume that there a strings attached to it.

I think I have a better idea along these lines: Offer a service to convert back an forth BTC to/from gold or silver using a Goldmoney account.

For the users of this service, the advantage is that they would not need to open a Goldmoney account themselves (which require sending to Goldmoney your personal documents and bank account data), so they could convert instantaneously their BTC to gold or silver and viceversa maintaining their privacy and anonymity, so avoiding that the evil Gov't know anything about their trades, and without converting previously their BTC to USD (as operating directly with Goldmoney would require).

You could charge a small fee (let's say around 0.5-1% per trade, plus something else to pay for the montly storage fee on Goldmoney), and everyone would be happy.

The drawback is that you would need a very good reputation so that someone will trust to keep their ASSets in your hands not fearing to be Goxed. Not to speak of all the technicalities of the programming and securing the website about which I know nuthin.

Feel free to use my Goldmoney referral code if you like the idea:
http://goldmoney.com?gmrefcode=goldsilverage (http://goldmoney.com?gmrefcode=goldsilverage)

I would personally invest in a project like this.

Bingo. 

- get more traders buying and selling bigger volumes of BTC
- get more real businesses accepting and using btc around the world

Right.  Other arbitrage opportunities arise even if OP has lots of bitcoins, b/c if they go up and gold goes down, people will take his BTC off his hands for cheap gold.  Essentially he is offering a fixed price for the foreseeable future against an ever-changing marketplace.  Arbitrage will kill him.

I would use this service.  Essentially, just another market for BTC.

Exactly, this except make it www.pecunix.com instead of GoldMoney.

GoldMoney demands all users mail them certified ID documents and utility bills as address proof to them, whereas Pecunix does not and it's more secure in my opinion.

Buy 4.8 million USD worth of Pecunix or whatever amount, and then set up a website offering instant exchange between BTC and pecunix at whatever rate you like. Now you've "backed" 4.8M USD worth of BTC with gold.

I see I have to be more clear:
1. Only the business owner should open an account on Goldmoney, Pecunix, or whatever (I like Bullionvault too. Has lower fees than Goldmoney). He will then use that single account to execute all the trades requested by his clients. Of course, maintaining securely the accounts would be exclusive responsibility of the business owner.   

2. Since such trades are almost instantaneous, there is no need at all to have a stash of gold or dollars in advance. Once the business owner/manager receive let's say BTCs from a client to buy gold, he will convert them to dollars and execute the order on Goldmoney, that's all.