Bitcoin Forum

We have heard this argument before, but I had my first encounter with evidence (n=1, so far):


This was initially a transaction offered in these forums in BTC that fell apart for the reasons stated. If you didn't believe that volatility was an important factor, here's one example proving otherwise. Largest hurdle? Maybe. Hurdle nonetheless? Absolutely.

Bitcoin's strength is as a method of payment. For some transactions, it is superior to any other method of payment. If it becomes established as a popular method of payment, it may go on to become a defacto currency. It won't happen the other way round.

For now I'd recommend pricing in USD, and settling in BTC to help it first become established as a method of payment.

I guess I don't understand the distinction from your use of "method of payment" and any other commodity that can be traded. If I give you a sexy portrait of Mario Lopez for whatever it is I want from you (already a losing deal on my end), is that not "a method of payment?" Or are you referring to the transaction process (i.e. a physical handoff compared to an internet transfer)? If you're saying that Bitcoin has cornered the market on the latter, I would beg to differ. I manage to purchase things easier and faster with USD over the internet.

Basically, the one key element besides wide adoption that really solidifies currency is relatively stable value. My last attempt to purchase something with BTC was nullified because of it's volatility. I think that's a sign that BTC is nowhere near a "currency" at this point.

Thoughts?

On that basis, people shouldn't buy in USD because the value is dropping (or if you prefer, replace USD with some other currency)  Don't buy gold, the price of that is dropping too!?  sure?

So, buying cross border with exchange rates, someone might have bothered to notice there were 5% swings last week in major currencies, I don't think that stopped global commerce. 

Yes.


No. I'm not saying it has been widely adopted as a method of payment yet. I'm saying it is superior as a method of payment is some circumstances.

no its not

Here in Europe i need 3-4 Days to get RL Money into any Exchange because there is no Credit Card or Paypal pament method.

The world is bigger than the US

'method of payment' has nothing to do with your currency exchange issues.

once you have btc, using them as a method of payment is awesome.

Correct.

Also, I'm not in the US. Far from it. Indeed the further you are from the US, the more attractive Bitcoin is as a method of payment because the alternatives are fewer.

Well, the USD is decreasing (or increasing) with respect to other currencies a lot, but not in comparison to the local goods it can buy. As I have seen so far, BTC merchants moving serious volume will post exchange rates to USD because that's the measure of stability with respect to the goods they sell. Until that changes, BTC will always be second string (from a US perspective. The perspective that has the largest ramifications for transactions globally).


This is an interesting angle. But I expect that volatility still plays a major role, here. In places where bitcoin is actually less volatile with respect to the local goods it can buy, it's likely more useful as a currency than the native.

Note I'm using 'local' to mean 'accessible'; the medium of exchange for your daily needs like groceries, via grocer or Amazon Fresh, will reflect the most consistency in prices of those needs.

Yes, often where a currency becomes hyperinflationary or is not trusted, people start to use, and prefer, a second currency - usually USD.

Ok, local goods: When I go and buy petrol this morning, do I tell the gas station owner I won't pay his price because it might be cheaper tomorrow?  We have lots of local taxes, but a the underlying is still quite volatile - not necessarily on a day-to-day basis, but often week to week.  - Just providing it as an example.  Countries that import fruit often see similar moves affected by weather (supply/demand stuff).

BTC second string - I don't think anyone has argued it will take over the position of a major local currency.

What does it mean for a currency to be stable?  Stable against what?  It seems like every year the definition of the CPI is changing.  The value of real goods and services is always going to fluctuate relative to each other.  Has the dollar been stable against the Euro?  Has it been stable against gold?  Oil?  Corn?  Wheat?  I think the very notion of trying create a "stable currency" is flawed.  Instead why not price your goods and services relative to the things you covet the most in life?  And why not view the prices of others' goods and services as well as your own assets in those same terms?  We have the technology to this and I've just dismantled 50% of the justification for the FED's existence.

You're trying to change the subject by pulling an old elasticity switcheroo; regardless of the features of goods, all else being equal, if the price shifts significantly because the value of your currency shifts, you'll opt for a more stable currency where possible. I would also expect that consumer behavior would change as real prices change, whether that's due to goods shortages (your fruit example), or a change in the underlying value of the currency. Simple fact, people will buy less gasoline (or switch to stable currencies to pay for it) as its real cost increases. Point being: BTC will not be elevated to even a useful currency until price fluctuations tame down. This is really holding it back, and why I rarely see raw transactions in BTC (especially large ones) without some pegging to a USD/BTC ratio.

...

It's obviously not some key target, it's relative (to, again, the goods it can buy), which is how Gresham's Law works. More stability is a better feature for a reliable store of value, a major component of having a useful currency.

Remember what we're talking about here: USD prices increase 3% per year. We've seen 600% swings in BTC value over 3 months. Tell me which one you'd want to use to buy your food: The one that gets you a loaf of bread yesterday, today, and next year for somewhere around $5-$5.15, or one that gets you a loaf of bread yesterday, today, and next year for anywhere from $.16-$30?

It's a fair point and I do agree that the volatility of bitcoin at this point in time impairs its usability.  However, I wouldn't advise using dollars as a store of value.  I'd rather have a diversified mix of assets that preserve their wealth better than dollars.  Bitcoin won't become as stable as dollars relative to the price of a loaf of bread until people start using bitcoin for pricing loaves of bread.  Another possibility is that we experience high inflation with the dollar and people switch to setting prices based on indexes to real goods.  With the technology we have today, it's conceivable that this could be made so easy for merchants that we see a permanent switch from setting prices in dollars to setting them based on such indexes.  If a shift like that were to occur, the FED will have a much more difficult time maintaining the stability of the dollar...prices will be much more sensitive to fluctuations in the money supply.  Then bitcoin might start to look a little more favorable when compared against the dollar in terms of volatility.  But, the most likely scenario is that bitcoin simply keeps rising in value over time and people want to hold some of it for its ability to retain value...and the more people that have a few bitcoins, the more likely we are to see commerce in bitcoin.  And the more commerce we see in bitcoin, the more people start to perceive value in relation to bitcoin, and that will lead to greater stability.

In the mean time, you can deal with the volatility of bitcoin through dollar cost averaging into and out of it as needed (tools on the exchanges that make that easier and more automatic would be nice).  It's a hassle, but it works.

I did a post including the example of Stockton CA property noting the price fall in the GFC.  People make commercial decisions based on needs and wants, but even in property transactions some buyers would want to pull out if they suddenly thought the price was suddenly higher than their perceived value.

Even at a small scale, I had some computer components I was buying via auction and the seller had a fit because the winning bid was less than he thought it should be.  They failed to complete the sale, but they were 15 years old and an $80 loss was way to big for him to suffer (I just had to find a different set of SCSI discs elsewhere).  Nothing to do with value of coin, but just arsehole traders.

So, if we can fix the problem with people doing the buying and selling backing out of commitments, then we could look at volatility of the payment method.

I am not following the volatility argument: if my transaction is settled (confirmed) after one hour, as a buyer, I can buy back the same amount of coins I just sent for payment for the same amount in dollars.
The seller also can sell the coins to get the same amount of dollars, presumably on the same forex.
So we traded in bitcoins instead of using a bank card scheme.
How much volatility is there over one hour ?

you must be new here.

A: with bitcoin, the price could easily swing 50% or more either way in just an hour.

What would the unit of exchange be for these "Index Prices"? Interesting idea, trying to imagine the logistics.



Reasons for transaction failure matter. I was quoting a transaction that was cancelled in part because of a fear that the unit of exchange for the transaction, one that he would be holding at the end, would be worth less than it was at moment of sale.

I'm not pointing to all failed transactions in general as a failure of bitcoin; only that this particular transaction (and many others, from anecdotes and the existence of web software to instantly update BTC prices to USD), bitcoin's volatility is an extremely important barrier to move it into the world of "currency". Now, it's a fancy commodity easily moved about the net semi-anonymously. Not much more.


If volatility is extreme enough that it requires transfer into, a goods/service exchange, and then transfer out of BTC for every transaction ASAP, doesn't that speak volumes about how useless (and costly, remember fees) it is as a "currency"? How could this be less complicated and less expensive than using paypal, not to mention faster?

One of the hallmarks of the adoption of a useful currency is that people don't worry about its value at $5, $10, $100 investments (USD used for comparison). You ever left $100 in an interest-free bank account, and worried terribly about inflation/deflation? No, because it's immediate use as exchange isn't particularly vulnerable to crazy, nation-wide price changes across the board (i.e. serious currency value changes). Not true with BTC so far.

The unit of exchange could be anything you want, paypal dollars, physical dollars, gold, or bitcoins...that's the point.  The price in any one of these units of exchange would be determined based on market exchange rates.  The index itself would be set based of the price of goods in one of these units of exchange.

The important point I was making is that the very notion of a stable currency is flawed.  And, central bank market actions to keep a currency stable are exactly the activies that enable the banking industry to extract wealth without providing anything of any real use to the market (ie front-running the FED based on insider information).

Wait, so what you're talking about is exactly what I'm seeing on sites like the Silk Road, with one more hurdle: summarize prices as an "index", with exchange rates into each currency posted instead of just USD. So basically, a price in each currency based on current exchange rates between them...how is that any different than what we have now? I mean, it still requires you to pay with the currency you hold. If you hold one that fluctuates wildly with respect to others, you'd dump it in exchange for something less volatile.

I'm not sure what you think is in the realm of reality about the existence of volatility; What, exactly is flawed about the fact that relative to what you can get, goods-wise, BTC is more volatile than USD?

I'm talking about the natural tendency for mediums of exchange to disappear as such because they are more volatile, relatively, to others. It doesn't matter a whit whether it's backed by Mariah Carey's ruined tits, my pubes, or artificial diamonds. The more volatile "currency" dies in favor of the less.

It just so happens that Fed-backed USD has a centralized control on it's volatility, whereas gold does not. This has potential problems, but is far beyond the scope of this discussion. Fact is, BTC sucks because of it's volatility relative to USD, whatever the reasnos, and people are choosing not to transact with it for this reason, among others.

Do you disagree with this?

It's not that different except for the fact that you establish prices relative to other real goods (the index) instead of relative to any currency.  By doing so, your real prices aren't affect by the mismanagement of a currency or swings in the market.
I never said btc wasn't more volatile than usd.  Most currencies are naturally going to be more volatile than the currency that is predominantly used for pricing purposes.
Are you sure about that?  Gold is certainly more volatile than dollars relative to real goods.  Gold has not disappeared.
I do.  I have transacted nearly as much in btc the last few months as I have in usd.  I'm finding many people that appreciate the convenience of bitcoin and like using it.  If people find it useful and use it, while it might be volatile, the long term trend will be up and people will tolerate the volatility.

Steve, I have thought a lot about a bitcoin-like currency with stable prices and I think that's impossible.
Here I have a proposal for an index reference currency similar to the one you talk about:

https://bitcointalk.org/index.php?topic=11614

We can price in RFC (referenceCoins) and pay in bitcoins. Prices would be volatile in dollars too.
What we're talking about here is separating the "measure of value" function of money.
Loans and other contracts can be signed in RFC too.

I don't get this whole "price fixing" and "pinning" bitcoin to anything. It seems to me this means someone must back bitcoin with something like the dollar used to be with gold and silver. Who would do that?

No, bitcoin will fluctuate freely and the reference currency is not backed because it doesn't exists, it is not issued.
For example, you sell a beer for

1 reference currency  1 usd, 0.20 btc

with time you sell the same beer for say

1 rfc, 1.05 usd, 0.17 btc

No one can pay you with rfc because it is not an actual currency, you're just pricing in it.
If you define it, for example,
like 1000 rfc = {
1 barrel of oil +
100 gr of silver +
0.5 ton of wheat +
100 kgs of rice +
...
}
you don't have to store all those commodities, it's just a definition and you don't need to back it.
What I propose is voting inside a chain for the prices in btc of 1 barrel of oil, 100 gr of silver, etc so you can have the price in bitcoins of a rfc (or the price of a btc in rfc). Miners won't have any special incentive to lie in those price reports because it won't affect the issuance of btc, they will get the same lying or not and lying they take the risk of their block not being accepted.
You can also implement the reference currency just with a web following the definition, that last proposal was to decentralize the reference currency.

So if BTC is pinned to an index, then your wallet would fluctuate with the market. Who would you trust to report the index?

Would fluctuate only in rfc terms, not in btc terms. You can have a client denominated in btc, rfc or both.
Like I said, I'd like to trust a chain for that, but I could just trust various private rfc reporters and compare them.
The definition would be an open standard.

I haven't read your proposal in full, but yes, that's basically the idea.  Such a reference coin (and there could be many different ones indexed to different things that people derive real value from) could be used generally as a unit of account and for pricing.  When you think about it, it makes sense to think of the value of things relative to other things we desire since the whole reason we work is to afford those very things (either now or in the future).  The most basic such reference index could be: 1 = the price needed to provide 1 day of basic sustenance for the average person in some region

Also, I believe that over time the market will start to develop derivative instruments that either help to stabilize the value of a bitcoin, or that create derivative, privately issued coins, that use derivatives and hedging techniques to create stability.  Bitcoin itself might remain fairly volatile even once it has achieve broad use, but you might have an alternative to purchase company X's coins that provide more stability (and those coins could be made compatible with bitcoin based payment systems).  We're a long way from this of course, but I do see it as the likely shape of things to come.

I do agree completely that the volatility of bitcoin is an impediment to its use, however I also believe there are ways of dealing with it (today, and even more in the future).  Consider that you can buy bitcoins on an exchange today in cash...you can withdraw cash, make the deposit and you'll have the money in an exchange all within ~1 hour.  You can make the bitcoin purchase on the exchange and then buy something with it.  The merchant can then transfer those bitcoins to an exchange and sell them within ~1 hour (or use a service like bit-pay that can convert to dollars for a flat rate).  Total exposure to the bitcoin volatility is on the order of a few hours in that case.  Now, you might say why go through all that hassle, but you have to remember that bitcoin does have advantages in that it's an irreversible, 2 party transaction that is relatively private.  There are transactions for which those are important properties and which would warrant the effort.  The other possibility is that you accept the volatility but believe in the long term value proposition of bitcoin and hence you don't have an issue holding and transacting with some bitcoin.  Again, I agree with the OP that volatility is an impediment, one that can (and very likely will) be overcome in time.

Ah, as a medium of exchange, it has certainly disappeared almost entirely, unless someone wants to bargain with it. As a commodity, it still exists. I was referring to volatility's role in currency, not commodity.

I need to read up on this price indexing system, to really understand what's happening here. I am having trouble imagining exactly how these would work, even with the explanations above. I'll be right back.

Edit: So let me get this straight. Reference currency is defined by a set basket of goods, and an index shows currency exchange rates against this reference currency. So in this case:

If I had 1.05 dollars or .17 btc, I could purchase a 1 RFC priced item, correct?

Question:
What determines these USD/RFC, BTC/RFC rates?

a) If rates are determined by sellers: then you have nothing new. Pricing responds to demand and increase/decrease of currency quantity just as before, and that volatility associated with this helps you decide which currency (in relation to RFC) is the most stable for what you can get with those goods. I'll leave out the simple example unless it becomes clear you don't know what I mean.

b) If rates are determined by central authority: ex: 1RFC = 1USD = 1BTC = 1JPY, you now have a complete Soviet-esque command economy. You are not actually suggesting this...?

This reminds me to sacarlson's beertokens, a privately issued block chain.
https://bitcointalk.org/index.php?topic=9493

He's developing multicoin to implement beertokens:
https://bitcointalk.org/index.php?topic=24209.0

I don't think there's too many, but there's people trading with precious metals:
http://www.youtube.com/watch?v=nNtIsSWVJBI

Look who wanted to use it too:
http://www.youtube.com/watch?v=PLJu0X14vmg

Even if it weren't used as money, gold has most of its value from the fact of being money for thousands of years and that it has the qualities to become the medium of exchange again if people want it to.

Exactly!  I hadn't seen that before.  So beertokens is both an index (to Leo Beer in Thailand) and a currency.  Unlike bitcoin, you have to trust a central issuer of the currency...holding a beertoken is basically a contract with this central issuer.  Beer would be fairly easy to hold as backing for this currency.  This is rather like any commodity backed ETF that holds the actual commodity, but with the key difference that the shares are issued as crypto coins and would be readily compatible with existing bitcoin payment infrastructure.  A Multicoin wallet capable of holding both beercoins and bitcoins would let you easily diversify your holdings without compromising privacy.  A beercoin would have absolute stability relative to the price of a can of Leo Beer in Thailand (as long as you trust the issuer).  You could decide what percentage of beercoin and bitcoin you prefer to hold and when making purchases, the system could automatically spend a percentage of each so as to maintain that balance.  Likewise, merchant that accepts both bitcoin and beercoin could decide what allocation of each they prefer to hold and have the system automatically maintain that percentage as they received payments for goods.

Yes, but that's primarily due to convenience issues...if it were as easy to use as checks, credit cards, or cash, and if the US gov't had not confiscated it in 1933, I'm quite sure people would still be using it regularly for exchange...once it became fully decoupled from the dollar (such that Gresham's Law would cease to apply), it might have even become the dominant form of money (which is probably why it was banned in 1933 in the first place).

Once something becomes widely used as a pricing mechanism, then it follows that its value will become much more stable...with one important assumption: that people don't change prices too often.  With point of sale software and highly liquid and easily integrated exchange markets, I'm not sure you can make that assumption any more.  Irrespective of bitcoin, more and more merchants might start setting prices based on real, continually updated indexes to real goods instead of indirectly via the dollar.  That's bound to increase the volatility of the dollar.

So, where does that leave bitcoin then?  Well, I think we can say that ignoring some near term usability and security shortcoming, if everyone used bitcoin as money, then it would be far more convenient, cost effective and private than using the traditional banking system.  By design, bitcoin would also hold its value over the long term better than a currency that uses debt for issuance and backing (pretty much all national currencies today).  Out of necessity, you have to expand the money supply of debt backed currencies, otherwise there wouldn't be enough money in circulation to repay old debts (the deflationary spiral problem that debt backed currencies have)...that makes it inevitable that the value of such a currency must fall over time.  So, given a choice of holding a currency that is going to decline in the long run and one that will appreciate, you'll want to hold at least some of the one that will appreciate (even if you're not entirely certain that something might cause that currency to completely fail).  You may even want a portion of your pay to be automatically converted into that currency.  And, once you have that currency, you'll want to use it to buy things (otherwise, there would be no point in holding it or any other currency at all).  And since there are some people that want to direct a portion of their income to bitcoin, there will be people willing to sell you things in exchange for bitcoin.

Using the beertoken software, you could also issue a full backed USD chain currency. With that and contracts we could have decentralized exchanges. Instead of trusting mtgox for holding your bitcoins and dollars, you just trust them for issuing chain currencies.
Even with merged mining, you need a way to reward USDcoin miners, transaction fees I guess.
The issuers can live on redemption and/or issuance fees.
We could have EUR, JPY and other currencies and trade between them in a decentralized fashion too.

If you have to trust the issuer to provide the backing (exchange for beer or usd at a certain rate), then you may as well also trust them with maintaining the transaction history (block chain)...hence, no need for proof of work based block chain creation.  But yes, this would enable decentralized bitcoin exchange, especially if combined with a ripple style routing of privately issued coins (maybe you trust mtg usd coins but I trust tradehill's. ...as long as mtg and tradehill trust each other, a trade can still happen).

Great idea!
The ripple concept is so useful...

One option is to create a new, stable currency using Open Transactions--let's call it StableCoin.  StableCoin can be guaranteed by the issuer to be equivalent to some basket of commodities or other suitable target.  For example, I decide that I'm going to issue 1000 StableCoins which might have a starting value of 1 USD each.  To back these StableCoins, I need to purchase 1000/5=200 BTC at today's exchange rate.  I send these Bitcoins to a special address and publish the address.  I could even place the wallet under the control of an escrow agent.  Anyone who wishes to exchange USD or BTC or whatever else I accept for StableCoin can look at how many StableCoins have been issued and how many BTC are backing them.  The combination of Open Transactions and the Bitcoin blockchain allows a zero-knowledge proof of the issuer's solvency.  As the StableCoin/BTC exchange rate fluctuates, I (the issuer) need to maintain a sufficient BTC balance to cover the outstanding StableCoins.  The nice thing about using Open Transactions to do this is you can add another layer of anonymity on top of Bitcoin's pseudonymity.  

The problem with your proposal is how to back a basket currency without actually backing the commodities. I guess they could use the right option contracts to do that, but then maybe the issuer needs part of the bitcoin funds to do that.
You can fully back a bitcoin or usd OT currency though.
For the btc/usd OT market, it would be useful to have a special type of trade that executes a set of trades atomically.
This way, I could trade bBTC for aUSD only if I can also trade those aUSD for bUSD atomically.
By implementing that, you effectively have ripple inside OT. I've been discussing this with fellowTraveler, but he insists that a new "ripple credit connection" instrument would be needed.
I don't think so. You just can implement this thing and people will issue "unbacked" OT currencies instead of Ripple IOUs.
You can think of ripple as a means for everybody to issue their own currency. The backing of each currency is the goods and services each person provides. The only thing OT needs to have ripple are these atomic multi-trades.

When did that happen last ?

i don't recall it ever happening.