Bitcoin Forum

So, I've been thinking about this a lot.  It seems like if bitcoins were a more widely utilized medium, the price would stabilize because people would be interested in exchanging from within the currency rather than just using it as a transactional medium.

Just as a thought... if the bitcoin community at large spent a great amount of time on PR and either started offering valuable services at a discounted rate if BTC is used or convinced businesses to offer certain services for BTC, you might see prices regulate and become more stable.

I honestly expect to see BTC price reflect a combination of mining cost and economy size.  IE, if the average person began to transact 1% of their total expenditures in BTC and BTC held a fixed value more widely (as opposed to currently being only as valuable as it's equivalent trade value in USD), you would see the trade value stabilize because price wouldn't strictly be the result of speculation.

Basically if their were a demand for the currency because it had implicit trade value, the value and liquidity would improve.

What this would take:

Many service providers to begin to offer services at a slight discount in BTC OR offer services or web products for a fixed BTC price regardless of trading value.

For so long as the currency serves little purpose besides speculative and transactional ease, it will lack the necessary market depth to regulate price.

Any thoughts? 

Is there a list anywhere of service providers that will trade in BTC?  Something we as a community can help to promote in order to increase the adoption of the currency?

I agree that increasing services used in BTC is the only real way to stabilize the currency.  I rant (https://bitcointalk.org/index.php?topic=42514.msg579016#msg579016) about this occasionally, and we're trying to quantify (https://bitcointalk.org/index.php?topic=49396) where the real floor (and thus stability) is.

The list you want is over here. (https://bitcoin.it/wiki/Trade)

I don't think it can be stabilized.

If markets would have been remained open the whole time this would be a different story, but it did happen (closed markets) the consequences are here.
So actually there is a way to stabilize prices: A fully decentralized exchange method which can never be shutdown or hacked.

Assuming you have to exchange Bitcoin with some external thing (by definition), what can be better than #bitcoin-otc? An easy to use client software and a distributed storage for the WoT database? Or do you have something else in mind?

That could be a nice start.

Things are complicated, I've been dreaming about this a long time, even before bitcoin came along but I never got around to write something down.
Has to do with some rewrite of some archaic data entry software, a decentralized physical network layer and "tiers" of collaborative growth according to the number of people working most successfully in a group.

Some of it could be substituted by existing things like tor, community networks and the now BTC WoT but stitching those together would result in a different concept. But something to enable a working exchange method for bitcoin could be a good start.

I am not yet convinced though that bitcoin would be the ideal candidate to finance the project since the goal would require a substantial part of the economic power behind it and I am doubtful people are willing to give that.

@chodpaba
Don't you think that holds true on the other hand of the spectrum? As soon as the prices are resembling anything long term investors are hoping for some early adopters could see the window of opportunity and do whatever they want with the economy. There are individuals with five to six figures in BTC holdings and if they decide to want to buy up an industry they'd do it.

This is completely correct. With a million dollars, even a fool will be able to manipulate the price up 5000%. No person would argue this is stable.

That's correct - a low market cap can be cheaply manipulated.  However, the high market cap simply means that we have a very large hoarde of speculative investors who're pushing the price around without regard to fundamentals.  A low market cap means that the hoarde has left, and the price is beginning to be controlled by commerce again.  Pushing the price around by large percentages against a heavier fundamental anchor just increases your losses in doing so - I'll remind you that cornering a market is a fool's errand.  That's where the stability comes from.

Real stability will come from increased commerce which will result in a high enough market cap to make the price harder to push - stability from both sides.

With a million dollars I can manipulate the price up 5000% today.  I wouldn't be able to hold it there very long since I'd be bleeding money fast, but I'd probably get a couple hours before someone with a large enough wallet came along to sell through me.

Price manipulation potential is not a simple ratio of your cash on hand to the market cap.

Why would one be interested in that if one could own, for example the whole market for supplying 3D-Printing raw materials, or Massive Parallel Processing Arrays, or any of the hypothetical emerging Industries.
I suspect that we have at least a dozen individuals who are planning to do exactly that, because we would have seen a much, much further drop after 30 otherwise, but we haven't. (In that scenario the price right now would be stabler and a little higher)

They won't sell out at 100, 200, 300, 500, or 1000. They want a monopoly, god help us if it ever comes to that...

Let me qualify my argument a bit:

A low price doesn't provide stability, and indeed reduces it - I agree with you there.  However, a low price indicates that the destabilizing jackoffs have left the market.  For that, I believe we will therefore see stability correlated with a lower price.

Of course, even greater stability results from a high price driven by commerce.



Absolutely.  This is preventing me from doing my business in BTC today.  I'll try to switch to BTC as soon as the market depth supports it, but we're a long way from there.



Artificially inflating the price to $30 makes it a joke.  I don't want to stay at $2 forever.  I just want it to grow with real commerce instead of crazy speculation.

You are both implying that a) a situation where a monopoly in an industry acquired by one individual with over 0.5% of all currency hoarded is not possible and b) someone with such a motive must be someone who bought them originally at an exchange or is planning to.

I've read somewhere that 97% of all bitcoins were never sold and that the richest hoarders are in fact early miners. (According to Blockchain statistics)
Even if somebody wouldn't be likely to have acquired them with the goal to do so but could in fact see this as an opportunity to attempt it.

Makes sense, but what has this to do with my fear of someone with a five to six figure wallet attempting to buy up a chunk of the industry at later levels? (be it one to three magnitudes higher)

Also what you'd have to consider is that if the total percentage in circulation where higher the required price for each bitcoin to archive the same amount of stability is lower.

IF we were to have a somewhat stable price at USD 50 and 3% it should be as stable with USD 3 and 50%.
That being the assumption nearly everybody sell half of their coins over the next period. (Which, I take it is unlikely to happen)

But that said: I don't get the feeling people even want a stable price right now, traders are scalping the shit out bitcoin and don't want to give it up.

That's what we're doing already. You're welcome to join.

+1

im not even convinced a substantial increasing in BTC trade will bring stability. It will bring higher exchange rates, but growing exchange rates will also lure in hordes of new speculators and speculations. As long as the majority of trade is speculative, prices will jojo. It doesnt matter how big the underlying market is, speculators will always be bigger. Look at oil, food, etc.

The only way I see to stabilize the exchange rate is what most people here so despise: regulation (possibly even taxation on transactions, like  a tobin tax) and something akin to a central bank.

Since none of that is likely to happen any time soon, or ever, as a merchant your best bet is hoping for some useable hedging tools, but I wouldnt hold my breath.

lol
Desperate times require desperate measures or what  ;D

I agree with the rest of your post but, as for regulation goes nope you are thinking in the wrong direction.
The reason for the huge price swings is the relative size of the speculative market.

Most people here are way to "bullish" to admit that but there are 2 ways which can stabilize the price or be it more like a product of both.

First there is the part of the world economy bitcoin represents the larger the more stable will the price be which will tend to make prices go higher.
The second part is the part of the bitcoins in active circulation, the greater the percentage the more stable will the price be. More people would have to sell out (currently only 3%) and it would make prices tend to get lower.

We are heading in the opposite direction though on both accounts, reason being that both bulls and bears are waiting for the other group to move first and while this happens bitcoin becomes more and more a forex gambling tool.

Regulation could limit speculation by imposing position limits.

And who decides and enforces these limits?
Doesn't make any sense for me. I'll assume you mean the exchanges should impose them.

Why would they be interested in that?

This is nothing new really; regulation on commodity exchange has pretty much always existed; well, up until it was deregulated (mostly under clinton). and now baby steps are being taken to again impose some limits:
http://www.cftc.gov/IndustryOversight/MarketSurveillance/SpeculativeLimits/index.htm
(thought the exemptions that lobbyists managed to get in will likely make it very ineffective).

If it can be done for oil and food, I dont see why theoretically it couldnt be done for bitcoins.

I agree with all of this except the word "speculation".  We need market makers (https://en.wikipedia.org/wiki/Market_maker), not speculators (https://en.wikipedia.org/wiki/Speculation).  Market makers and arbitrageurs create market depth and liquidity, but neither perform speculation, and they make money whether the market goes up or down.

Indeed, speculation does not create market depth - speculators buy up (or sell) inventory and then hold that position until they capitalize or capitulate.  They do not put it back on the market as they are speculating that it will be more valuable in the future.  They perform an important aspect of price discovery (pricing in the future), but right now it's dominated by people who don't seem to be well informed.


There are plenty of coins in circulation to handle all current business at $1/BTC.  With only 2% of coins on the market (and matching fiat) you'll have over USD$1M of depth.  That's enough to absorb a few days worth of all personal transactions that are occurring without moving the price.  It's not enough to buy a house or do commercial business, but we're not there yet.

The current depth is 0.05%.  That is directly from excess speculation.

Raising the price does not create more fiat depth, and reduces BTC depth.  Right now there are only USD$100k of bids on MtGox.  If you raise the price to $50, there will still only be $100k of bids... Just at a higher price, and for fewer coins.

At some point a higher price is justified to allow more depth and value store, but for current use, we're still order of magnitude past where it needs to be.


It's a lot easier to regulate centralized markets like commodities exchanges.  Bitcoin's decentralized and pseudonymous nature makes regulation much less effective.  Just like the internet, they can regulate all they want, and it will react in similar ways: moving prohibited actions to another jurisdiction; increased use of anonymity; widespread disregard for the law.

Take a look at copyrights.  There is widespread cross-jurisdictional agreement on the terms of what's covered.  There are fairly strong laws to enforce it, and occasionally they bust a few people.  So what do the pirates do?  Build decentralized networks and move all their coordination to more friendly jurisdictions.

That's not to say the regulation will have no effect.  Without regulation copyrights wouldn't exist at all, and content sharing would be much more widespread.  It will just be much harder to do than the SEC's usual fare.

IM not sure it would be so hard. The exchange has your identity (if you trade any non trivial amounts), and bitcoins are perfectly traceable. The issue with regulating bitcoins is usually identity, but trading on a (regulated) exchange eliminates that problem. I suspect it would actually be easier to administer than most other commodities.

Of course there would be pitfalls; trade could move quickly to unregulated markets, although Im unsure how much of an effect that would have on the regulated markets.

Anyway, I didnt mean to say regulating would solve the issue in reality, but its one of the few theoretical possibilities at least. A more widespread adoption of bitcoin IMO will not solve the problem, and might even make it worse in the short or medium term if its going through a phase of rapid growth.

It would make it as if it were unregulated. Well, honestly, if you could coordinate a regulatory system world-wide, then it would have some influence towards your desired effect. It would have other side-effects as well though (Why would an entity with such power settle with only regulating the exchange?), to the point that there wouldn't be any reason to use a crypto-currency at all in the regulated side of the market. So, IMHO, if it weren't inevitable for the crypto-currency market to stay unregulated, we wouldn't need it in the first place.


I don't think there can be a concrete solution in the short or medium term that doesn't conflict with the currency's philosophy, and solutions that conflict with it wouldn't work for the reasons mentioned above. Hopefully, with widespread adoption, there will be enough groups with conflicting interests so that their vectors would somewhat cancel out to provide more coherent momenta.

Wow, this topic proved to be super interesting.

I'm a little curious given the conversations about market makers and speculators whether an increase in options trading could stabilize daily price fluctuations by providing market driven datapoints in advance and expectations for trade price.  Options and/or futures trading has frequently done just that for other commodities. 

Although in the rare case that goldman sachs decides to manipulate the market, they can do so in any regard. 

There also aren't consumptive reasons for futures trading... except it could actually be used to insulate exchange factors for BTC based commerce.  If you had a very fluid futures market, there might be a mechanism for a measure of price stability and as such, less risk for selling services in BTC.  Obviously futures do not guarantee stability and without consumption based demand targets might be an incredibly risky investment for individual capitalists... just kind of thinking out loud.

I suppose it would be beneficial for the health of the BTC market that they are used actively in commerce.  It would be incredibly costly for any company that sells physical goods to not peg on the dollar given market instability.

Seems a bit of a catch 22... prices won't stabilize much without trade occurring within BTC and doing so is incredibly risky for any businesses making purchases with fiat.

They have done the exact opposite, they jacked up prices and turned commodity markets in to casino's to the point where sellers and end users of those commodities no longer use those markets to hedge against price swings. More on that, and some startling figures here:

http://triplecrisis.com/food-price-volatility/


Correct,  except IMO prices wouldnt stabilize even if trade picked up considerably. All it would achieve is higher exchange rate followed by more bubbles and bursts as new speculators gamblers enter this booming market.

Not really...  Futures and options help protect you against price instability, but they don't actually improve (and can harm) the stability of the overall market.



+1.  I think this is a design flaw in Bitcoin's economics.

My proposed solution is to use dynamic inflation levels (by increasing coins generated in mining) to prevent excessive price growth against a currency basket until there's enough stored value to provide inherent stability.  This would eliminate: 1) wild speculation in the form of "you need to buy as many coins as you can NOW to own a slice of the world's future currency!"; 2) the "early adopters are unfairly benefiting from the pyramid" problem.

Speculators don't like it because my altcoin is only mildly deflationary during the growth phase (as opposed to Bitcoin's highly deflationary nature).  However, I think it will allow a much more stable value store - by undermining speculative bubbles, you don't have to worry about buying in at the top and getting screwed like the guys who bought BTC at $30.

Interesting idea. But how would you cope with deflation?

I assume you mean devaluation.

Short answer: Same as Bitcoin: you don't.  :)  You can't prevent devaluation of an unbacked currency if everyone decides to abandon it.

Longer answer: I would use a feedback mechanism to detect large devaluations and temporarily reset the target exchange rate to a lower level during the rebound.  This is to prevent losing control of the speculation-damping mechanism.  So, after a crash, it will gradually rise back to the target exchange rate, instead of having a sharp rebound.  (This is a bit oversimplified.  Instead of switching to a "recovery algorithm", it would just be implemented as a weighting factor in the regular inflation-rate algorithm.)

This would actually deal with the current situation better than Bitcoin: during rapid devaluation, it would greatly reduce the generated coins to much lower than 50BTC per block, thus reducing the devaluation rate.  It wouldn't prevent a blowoff as large as we've had the last few months, but the goal is to never have a bubble that big in the first place.

Overall, this would be a very heavily-smoothed, slow-responding mechanism.  This is not meant to provide short term stability or hold a specific exchange rate.  It is only mean to respond to long term trends, to prevent the get-rich-quick problems.

Drastically reducing the block rate could leave the network vulnerable though.. I also dont quite see how you would put this in code, I mean, who will determine the exchange rate? But its an interesting idea nonetheless.

The target block rate wouldn't change.  Only the number of coins generated per block would change.

Mining is a great technique for decentralized consensus.  My idea is to mine the exchange rate into the block chain.  Miners can use any source they want.  The rest of the network would evaluate the price quote.  A little tolerance would be allowed due to different data sources, but blocks with obviously wrong quotes would not be relayed, and the next miner would fork the chain from before the block with the lie.

So therefore the profits of the miners, and therefore the hashrate, which could leave the network vulnerable.


Woha. Out of the box thinking there :). Not sure this is a good idea though. Miners would have no incentive to set honest exchange rates, they want to maximize their ROI. They will collude to manipulate it and the result could be far worse than what we have now.

Indeed. It makes holding bitcoins without engaging into short term speculative hysteria so much more rewarding.

Historical charts show quite a bit stability between 0.06 and 0.07  ::)

Correct.  That's one reason that the inflation rate algorithm has to respond slowly and smoothly.  Gradual changes don't break the network - we've seen a 10x devaluation of Bitcoin over the last 4 months, greatly cutting into mining profits, but the difficulty is able to drop fast enough to compensate.



That's why the relaying nodes get a veto: they drop dishonest blocks.  Miners don't want their blocks to be orphaned, so they have incentive to mine blocks that get the best propagation possible.  In fact, getting price quotes from several sources and averaging them will lower their orphaned block rate by reducing the chance that a relay node using a different quote source will drop their block.

It's possible the relay network could be subverted by a large number of colluding relay nodes.  Thus there's a second check:  future miners refuse to include dishonest blocks in newly mined blocks.  If you want your generated coins to mature, your blocks have to be legitimate.

To prevent a 51% collusion attack, a third safety is possible: create a "decentral bank".  This would be a second mining system where people perform proofs-of-work solely to manage monetary policy, which means authenticating price quotes and the inflation rate.

The fourth safety is the strongest: anyone can verify that the price quotes in the block chain are correct, and the inflation rate responds very slowly and smoothly.   If it becomes apparent that the system is being gamed, we'll have time to figure out why and how before coins start being generated excessively. We then release a new version that adjusts whatever is necessary to close the loophole.  In the worst case, we revert to 50BTC per block.

But your proposed system would amplify the problem many fold. If you'd have a long period of sustained devaluation, your algorithm would or should approach zero coins per blocks, essentially making all mining unprofitable. Thats very different as with bitcoin. With bitcoin the hashrate follows the exchange rate, it will never approach zero unless the price of the entire chain approaches zero. In your system the hashrate would follow the derivative (in the mathematical sense) of the exchange rate, and approach zero with just the smallest constant devaluation. Sounds very risky to me.

Moreover, although this is only a secondary effect, but with bitcoin you still get to mine for those 50BTC per 10 minute, and regardless of their value and profitability, Im sure some miners will speculate on future valuation gains. So you will see  people mining bitcoins even if its not profitable, as a form of speculation,  but if you cant even mine any decent amount of coins as in your proposed system, then pretty much no one would.


I like that idea better. Although you would need an incentive for those  miners. One that doesnt create reevalution :).


Hmmm..  not much of a solution IMHO. You're saying if you dont like the monetary policy, then fork, and hope the rest will follow. You've clearly given this some thought, you found nothing better ?

Miners will always earn transaction fees, so it will never hit zero.  We can also set a minimum reward to guarantee security during an uncontrollable crash.

In Bitcoin, the 50BTC per block only lasts another year or so; then your earnings are cut in half.  It keeps decreasing in the future.  Will Bitcoin still be secure once we're past the initial currency distribution phase?


That's included, but I didn't want to go into it here since it's a pretty complicated subject and better suited to the Alternate Cryptocurrencies section.  I'm trying to stay somewhat on the "stability" topic.  :)


You can't make major changes just because we don't like it - the fork wouldn't be followed.  This option only works if the system is clearly broken and a fix is widely agreed to be necessary - in which case it will be quickly adopted.  Again, have a look at Bitcoin for precedent: with the rise in price, 0.01 transaction fees were becoming a burden; Bitcoin 3.23 changed it to 0.0005.  Or look at the plan if SHA256 is broken: cut off block chain at whichever block the developers consider to be the last before the break, change to a new hashing algorithm, then resume the network with the new client.

That's just the nature of distributed networks.  If you can convince a majority of the network that your change is necessary, it's adopted.  If you can't, they go on without you. 

In any case, the fourth "nuclear option" safety is only invoked if we fail at getting the design right.  The better solution is carefully tuning the algorithm so it can't be gamed in the first place.

Also: the dynamic inflation is only intended to get us through the initial growth phase.  If this works as intended, that value growth will be much more even than Bitcoin's price chart.  If it takes off as a currency there will be a very large number of coins available to miners for a long time; then the goal is to gradually weaken the stabilization as the market cap grows.  If it ever becomes so large that it becomes a reserve currency it will end up completely floating; the end game would either be a fixed money supply (all mining profits from fees) or a small, fixed rate of inflation.  (There are other options, but again it's well beyond the scope of this thread.)

Even with bitcoin, transaction fees might as well be zero atm. YACC (yet another crypto currency) will take forever to just reach current bitcoin status, becoming that much more popular than bitcoin today, so that miners could live off transaction fees seems utopian.


At least Bitcoin will be secure for several years to come, as secure as its value rather than its growth, and have a chance to grow as an economy, while being secure. If transactions dont pick up over the next 4 or 5 years to keep enough miners in business, well, it probably doesnt matter anyway. But unlike bitcoin,  I dont think your scheme would overcome the first few years while being even remotely secure, and that insecurity will have an impact on adoption. Catch 22.

You have some good idea's, but I dont think it would work

While these kinds of ideas are interesting, they are rather forced. The system I proposed for EnCoin encourages the people using the system to do whatever is best for the system. Separate mining from trading so that mining does not secure the network. Use a merchant-based system of reputation that is increased only via economic activity in the form of losing money to a transaction fee that is refunded based on increased levels of reputation. As more and more merchants want their transaction fees refunded, the limited pool of reputation awarded per day becomes more and more difficult to obtain, thus making it harder and harder for a malicious group from gaining >50% of the reputation. This reputation is used to secure transactions and mining blocks rather than hashing power. Even if an agency gains 50% of the reputation, the "cloudnet" or average peer nodes (who, with the reduced bandwidth at high transaction volumes vs bitcoin should be available to anyone with a decent internet connection) will reject any bad transaction blocks or modifications to the network. Even non-cloudnet peers can detect malicious modifications and will not transact on the bad half of a network split (something that is possible because of a tiny consensus block in lieu of a gigantic block chain).

The goal is a stable price based on encouraging mining only when it is profitable since it doesn't secure the network. There is no limit on the amount of coins per hour or day, but the system will keep track of how quickly the coins were produced to increase difficulty, as well as fostering competition among more efficient machines by occasionally lowering the award so that improvements in energy usage (or even reductions in the price of energy) can be accounted for in the difficulty, then the award increases again with a new difficulty.

The money supply can grow as the economy grows. If the economy outgrows the supply, hoarders/savers are encouraged to sell for the immediate profit because otherwise many will take to mining and bring the price back in line with its cost to produce. Any unrefunded transaction fees are spread out to all holders of coins so that in the rare case of an economic contraction, those who saved had earned interest previously and will continue to earn interest off of those new to the system who do not care that the value may not be what it once was and will still transact. On top of this, merchants are required to hold a certain amount of coins to become reputable members of the tradenet, so that creates demand and a high cost for an agency wishing to subvert the reputation.

I think it is a system that merits more discussion, especially if you are looking to fork bitcoin to solve its many issues. A stable price is key to getting merchants on board, and merchants are the key to a successful economy.

Coin generation speed could be adjusted based on economy activities, so if more coin is needed in transaction, more coin will be generated through mining, if more coin is transacted per day, less coin will be generated. But the amount of coin will never get less, not like FED can do tightening. But if that function can be merged into transaction, it will be an automatic approach

And just how would you distinguish between a speculative trade and one thats based on an economic transaction of goods or services? If you are going to endlessly increase the money supply based on activity of high frequency trading, I suspect that wont work very well :).

No, I can not, so does FED. You can not really tell people buying a house for speculation or for consumption

By the way, high frequency trading increased money flow speed, thus will cause money supply decrease.

MV=PY, if V increase, M will decrease, given PY do not change

The objection that this doesn't reward miners enough is unusual!  This scheme would take most of the value growth and give it to miners instead of currency holders/speculators.  On average it's much more profitable for miners than the current system...  But it would certainly have greater variance.

Encoin's another interesting take on it...  Sort of a different approach at the same idea, just with some different tradeoffs.  It touches a lot more things... I'm interested to see how it pans out.

No, I know my method isn't yet baked to perfection.. If nothing else it will require a lot of tuning to get a set of constants that result in a stable market.  I still think it's an interesting mechanism that altcoiners should consider.  Even if it's never adopted I hope it'll inspire some more innovative ways to stabilize price.

Acquire 2,000,000 Bitcoins and $40,000,000. Put in a buy order at $5.00 and a sell order at $5.01. Now the price can't go up unless someone else ponies up $10,000,000 to buy all your Bitcoins (and those of any other sellers too). The price can't drop because you can buy every bitcoin in existence without the price dropping. Buying up ~1/3 of all Bitcoins in existence without making them worth $100 each would be the hard part.

And 12 hours later the exchange this is at will be DDOSed to its knees.

Spread it across exchanges, including foreign currencies.  Adjust to exchange rates to maintain liquidity for international transfers.  Increase spread to beat the fees, and nobody will want to mess with you.  You just made bitcoin amazing.  If your askwalls are taking a beating, move the price up a little.  It should last quite a while if it is managed properly, and the stability will bring enough volume you can catch the full spread occasionally.  You might want to spend a small amount of that money developing the software to keep track of and adjust your positions.  Something that flags out of sync exchange rates and bid/ask wall exposure.  You don't want to automate the adjustments (unless maybe if you add some nondeterminism in your decision).  If you always adjust at 10% or something decipherable you will get manipulated.

This works great as long as you have someone with $40M who's willing to burn a good chunk of it solving this problem.  They will be operating at a loss since this goes against market forces.  I don't have that kind of change in my altruism budget.  Do you?  :)

My altruism budget would have almost no effect on bitcoin.  Ten percent of a small number is a smaller number.  However, if I did, and I had the time to manage it, I think I could manage to bleed very slowly.

Actually I don't think the price of BTC is an issue

If someone traveling abroad wants to have some local currency to spend, he could easily exchange money to BTC from his home country and exchange BTC to local currency at once, if the whole process do not take more than 1 hour, the price change can be ignored

I can even see BTC as a good utility to wash money, so those exchanges will be the weak point of BTC, a decentralized exchange system is needed

The reason for pricewalls (assuming you want to throw the money away to help the cause) is more to provide liquidity.  Right now, you can't move large amounts without affecting price.  Imagine if all the foreign students in the US quit paying western union's high fees and used bitcoin instead.  Of course, that in itself would probably provide enough liquidity, but it's a chicken and egg situation.

Bitcoin will never be able to expand outside black and grey markets as long as there are fiat currencies around because of Gresham's Law.

Ever heard of the System D economy?

All this theory doesn't help as long it doesn't manifest.

No, but I am assuming it is the counter-economy, and yes this is where we should develop bitcoin but it doesn't take much in terms of marketing efforts which was the proposal. The people engaged in it are looking for solid untraceable irreversibly payment systems already.
What BitCoin would benefit greatly from however is more user-friendliness in terms of wallet protection, SCIs and mass payment processors for dummies...
 
Still a lot of people will prefer to just use cash or there own accounting systems/local currencies in face-to-face free business but I still see a lot more potential in BitCoin then e-Gold ever had for instance.

Maybe you should reread that law.

"When a government compulsorily overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation."

People want to get rid of there inflationary overvaluated fiat first so it will drive out any market priced non-inflationary currency like BitCoin from circulation in white markets ... it is pretty straight forward. The second part of the law with an undervalued money can't happen anymore, paper money will always be overvaluated because of legal decree (either by price fixing or just by being forced into circulation thru being legal tender and the only currency the government and legal financial institutions will accept) as long as it is circulated at any value above that of toilet paper...

There is no compulsory exchange rate for bitcoin. Its value floats, as does that fiat currency. Gresham's law applies to gold or silver coins with a face value that doesnt match its intrinsic value, or it applies to currencies with artificially fixed exchange rates that dont match market supply/demand. It doesnt apply to bitcoin or dollars/euro's.

I think Gresham's law applies to monies that have predominantly the same properties - like silver coins and gold coins and so compete on an equal footing. However Bitcoin and government money have different properties (for example in how they can be transferred), so they compete on more criteria than expectation of future value alone. The degree to which Gresham's Law holds depends on the similarity of the properties of the two currencies.

tc,du; I might want to keep my Bitcoin, but it might be the only option for payment if I wish to buy a hand-made porcelain bowl from Sudan over the internet.

Floating fiat currency are not subject to free market pricing since they are still forced into circulation they are artificially overvalued and will drive out any "correctly" priced alternative.

This is not what law says specifically but it is an indirect application of the law.

All what it takes to drive btc prices up is a few investors buying btc with 200-300 k$ funds each.

It's simple: the higher the price, the more stable the price. The higher the price, the more money it will take to move the price. Buying for $100,000 Bitcoins right now (at ~$3/BTC (or $0.00000003 per base unit) would cause a massive increase in the price. The price would go up to about $3.8, which is a 15% increase. This is because at $3/BTC the market capitalization (total value) of Bitcoins is about $25M. 100k out of $25M is a lot!

If Bitcoins were worth, for example, $300,000/BTC ($0.003 per base unit) right now, the market capitalization would be ~$2.4 trillion. Someone buying BTCs for $100,000 would be a drop in the ocean in a market this big. This is why gold is so relatively stable in price. In the single year that has passed since mid-December 2010 and now, gold is up by 20%. By comparison, Bitcoin is up 1300% in one year.

High price: someone with lots of BTC can move the market easily
Low price: someone with lots of USD can move the market easily

It is the depth of market that really counts.  The more people willing to buy/sell at a certain price, the harder it is for manipulators to push the price around.  If you want to stabilize the price without trading at a guaranteed loss, set buy orders 10% below market, and sell orders 10% above market.  This makes it harder for the price to move.

The most effective way to stabilize BTC price is speculation. A speculator, if he wants to be successful, has to buy low and sell high, which means exactly that he stabilizes the price. And he makes money on the side as well.

Another interesting aspect is that poor speculators, who destabilize the price, quickly go bankrupt and remove themselves from the market, so it is the good speculators who stay and stabilize.

We are already observing that. The first speculative price bubble, the one that took the price over $30, is past us and has removed a lot of bad, destabilizing speculators from the bitcoin market. The better ones who remain will make sure that it does not happen again.

Of course there are new speculators pushing in. Those may perhaps cause a second speculative bubble, but if that happens, I will laugh all the way to the bank.

The nice thing is that ultimately bitcoin stabilizes itself that way. The remaining price movements will only reflect changes in actual and expected bitcoin use and will thus be justified.

::)

And here I was, thinking that bitcoin constituted the absolute perfect proof that excessive speculation doesnt stabilize. It provides liquidity yes, and it helps assessing future value provided speculation is not bigger than actual trade. If speculation becomes more important than underlying trade, you dont speculate on future value but you speculate on short term speculation. Thats inherently unstable, as bitcoin so nicely illustrates.

Short term, I agree. Long term, the bad speculators will go bankrupt.

If by bad you mean unlucky; yeah sure.

No. I'm sure by "bad" he means "stupid".

It is actually very simple. The good speculator must buy low and sell high, which stabilizes the price and at the same time earns the speculator a deserved reward.

The bad speculator buys high and sells low, thereby destabilizing the price, and losing his money. He deserves to go bankrupt and to disappear, which he inevitably does.

As to the correct price of bitcoin, that is also very simple. The "true price" of a bitcoin is the dollar (plus other currencies) value needed by people for the purposes of real-world trade and of storage of value, divided by the number of bitcoins.

So far, so simple, but of course the "true price" has to be extrapolated into the future. The "true price" of bitcoins is the value described above, but expected in the foreseeable future, i.e. a number of years hence.

This is where the speculator comes in. He has to do the tricky work of foreseeing the future and direct the price towards his expectation. If his expectation is good, he will be well rewarded. If it is bad, he will go bankrupt too.

Many of the bad speculators are trend followers: "Oh, oh, it's going up! I must buy!" "Oh, oh, it's going down! I must sell!" These people go bankrupt fairly quickly. They do not learn from past mistakes. They keep driving the price up and down in idiotic waves. They feed the micro-stabilizer bots (which do a pretty good job of reducing the micro-volatility, while making good money for their operators). And the bad speculators readily give their money to the good ones, who do their best not to let the price rise too high or sink too low.

So here is my very simple advice. Look at the bitcoin price curve. Calculate a long-term average, at the moment perhaps over the last half year. Do a conservative estimate of a long-term trend, but don't get over-enthusiastic.

That is a ballpark figure for a reasonable bitcoin price. If today's price is much higher, sell your bitcoins. If it is much lower, buy them up again. This is an easy recipe to collect some gain over time, as long as there are so many crazy speculators in the market, eager to hand over their money to you.

Of course the really good speculators do some more homework. They try to obtain as much useful data from other sources and correlate them with the bitcoin price, thus enabling them to arrive at a more precise estimate and stabilizing the price to a finer degree, but that requires some mathematics, clear thinking, good ideas, and quite a bit of hard work. For the time being you can still make money as a speculator with just a decent amount of common sense.

I have an idea/proposition - although it may be a little late for bitcoin. I think Deepceleron and ElectricMucus are on to a really good idea, or at least generally speaking, on the right path. Given that the network needs to be secured and that means that "transaction handlers" or "miners" need to be incentivized, what if a decentralized digital currency were to arise wherein all of the coins were pre-mined (say 21 trillion) and simultaneously a decentralized exchange was created (initially central as are all start-ups)? Then set the buy order at $1.00 and the a sell order at $1.01. The buy/sell order wall cannot change until all 21 trillion are spent into existence, after which, it begins to float.

All of the coins are pegged at these values until the entire total is bought up. You gain long-term and instant stability, or at least until USD or some other fiat currency-peg inflates beyond the $21 trillion. The money produced from the fixed/pegged value market-makers would be distributed amongst the security providers (miners and transaction-handlers), the exchangers and the currency author. This .01 coin spread is given to the security providers of the network and the exchanges. The author could retain the first 10,000,000 coins as his incentive to start (this is an abitrary value as is the 21 trillion coins).

Nobody, including the author/originator of the currency, gains a significant "first mover" advantage. The "manipulator" is a known quantity and the market isn't abritrarily swung in any direction by a few people with large resources. Once the 21 trillion coins are spent into the economy it would be hoped no one individual or group of colluding individuals can manipulate the market. The market is stable and money which already exists, grows the market externally. It would also seem that you waste fewer resources (GPU's, FPGA'S and their attendant electricity and hardware costs and externalities.)

It is possible to use cryptography to create a federated network of "trusted" market makers or exchangers to peg the price to a known fiat currency. It would work similarly to the way the bitcoin network already functions. If you think about it, you have to trust the top 4-5 exchangers to handle your BTC/fiat exchange anyway. How is this that any different than what I've proposed?

Were the bitcoin economy to even remotely resemble the amount of market capitalization of even a small country, the first group of "miners" could be a serious "force" to be dealt with. To be clear, I have nothing against the "first adopter" advantage, but somebody who has a few $100 billion equivalent USD in BTC purchasing power to throw around makes me a bit nervous as a merchant, speculator, or just your regular "anybody" for that matter.

I withdraw the "wasted" comment since it isn't really what I intended to express. I understand that a certain amount of resources will always be required to secure the network (the more computation effort, the stronger the network). I was just suggesting that resource allocation could be spread out and smoothed, hence less asset risk exposure if the price were pegged over a longer term. You would more easily be able to allocate your resources and anticipate the market if it was a steady growth to a $21 trillion market, instead of a fluctuating market which has seen as little as $30,000,000 USD and as high as $100,000,000 USD in the last 6 months (and almost zero if you look at the pre-2010 era). A lot of miners and merchants tend to get burned in those kinds of markets.

To be crystal clear again, I have no bias towards early adopters or free markets. I personally believe you can do anything you like as long as those who you deal with, agree to the terms (uncoerced). Some ideas work well, some work really well. Nothing is perfect. Nearly everything can be improved upon. My whole point was that you want to placate your merchants (who you want and even perhaps need), not chase them off by hourly and dayly yo-yo price gyrations. Was bitcoin designed or intended for speculators and manipulators only?

The way bitcoin operates is a form of participatory "regulation". To wit, everybody decides to regulate the production of bitcoin thru their participation in a crypto-mathematical "creation" process. So what? Nothing wrong with that. I don't care one way or the other, any more than I do any of the other alt-currencies that come along.

I was merely suggesting that by initially pegging your newbie currency to a quasi-stable fiat currency you can gain quicker adoption rates with less price fluctuation and market manipulation. Again speculators are great to have, just maybe not when you're just out the starting gate. My idea is as equally a free market as the bitcoin market is, and you can't say otherwise. I prefer decentralizaion and federated trust servers to central point-of-failure designs too. Am I explaining myself clear enough for you yet?

By the way, I own several hundred bitcoin and run a 3 Ghash/s miner, so I do have skin in the game.

Bitcoin is only as "free" in so far as it can be traded for something else without external interference. My "bitcoin2.0" proposal is even more free than you think. If you purchase digital coin, your coin (BTCx) can be spent to anyone, anywhere, and at any time sans exchange interference. The only difference is if you cash it in for fiat with any of the "federated trust" coop exchangers it will remain at a constant pegged $1 (at least until all are spent into the economy). After which it would float, and hopefully with less volatility.

Small countries do this sometimes (peg to the dollar) because their own fiat has little to no acceptance, value or trust. I would think we would want to integrate into the current economy initially and then cut ties when the level of participation increases to the point where the exchange volatility is less of an issue. People still think in dollars, they rarely think in bitcoin. It's a paradigm shift for many. Let's ease them into it.

And no, it is not true that I want just one market maker (you call them manipulators, but whatever). I want as many market makers as are willing to participate insomuch as they all agree to be bound to the $1 pegged value and that they all spend an exacting portion of the spread/fee to the miners/brokers/authenticators to secure the network. Once all of the pre-mined coins are spent into the economy does it float against all the other monies out there. This can be done with smart contracts. See the following link for details.

https://en.bitcoin.it/wiki/Contracts (https://en.bitcoin.it/wiki/Contracts)

Of course pegging the bitcoin to fiat is manipulation. I never said it wasn't. And despite that obvious fact, mining an exact amount of bitcoin per hour is also manipulation, but then again, who cares? And I do believe it could be considered more benevolent or neutral if a pegged price is the specific expectation of the exchangers until all coin are distributed, at least for initial exchange stability.

Either way, if you upset your clientele, they'll bail. It would be akin to paypal arbitrarily quadrupling their fees. It's probable you'll have detractors. It might even sound their death knell. We can only hope. However, if you use "smart property" where the trust has to be shared (the pegged price agreement), it's not likely any one or all the exchanges will collude to screw everybody else. The same could be said for the bitcoin network. No one group is typically large enough to affect the rest, and they aren't incentivized in that way in the first place. Better have something, than risk everything for nothing.



Did you you read the smart property or digital contract proposal? It's shared federated trust servers. The Open Transaction project by Traveler could work in a similar fashion. The single entity with all the initial coin will be mitigated by the aformentioned arrangement (he would seek federated partnerships to protect against centralization whilst simultaneously gaining limited liability from aggresive government control).

The idea is to quickly disseminate and put into the hands of as many exchangers the entirety of the coinage, and then force them to authenticate each other when they spend (via fiat) the coin into the economy (or they can't spend it at all). It certainly simplifies things when you have one price. No need to second guess, speculate, have charts, do averages, hedge, or leverage. In addition options and futures contracts come much later if even needed.


Really? How's that possible? You'll have $21 trillion worth of coin floating around. Nobody's going to push that around very easily. Contrast that with now and somebody with 100K BTC. It's easy to manipulate that market. Are you counting on somebody cornering 1 trillion or two to create similar volatility. Sure...


Unfortunately, I'm going to have to brush up on my math skills or hire somebody to hammer out the details. Just trying to improve the opportunities and wrest the power away from the state. No small task I would assume. Discussion always gets me thinking.

Enlighten me. Why is pegging bad? I'm familiar with fiat currency issues, but that's not exactly what were talking about here (fiat to fiat pegging is what you're referring to). How is the imbalance created? Who is creating this imbalance? How is bitcoin different than that? Why is it the most destructive thing you can do?

I'm not seeing it. Almost all of us have converted between bitcoin and fiat, so it seems were all causing some kind of indirect harm. Should we not convert to fiat at all?

Give references please. I can be persuaded.

You probably didn't see Bitcoin coming either (or for that matter PayPal), and yet here it is. Be open minded. There's nothing wrong with an idea, especially one that incorporates slow transitioning, integration and familiarity.

Who has cornered the market? In fact, if you look at bitcoin, the early adopters have cornered the bitcoin market but I say who cares? I know I don't. That isn't my concern. I'm merely trying to smooth the volatility out and convince more businesses to use bitcoin and simultaneously avoid volatility issues. It isn't like they'll be blindsided when the unpeg happens. Everybody will decide to price bitcoin however they want at that point. Some will stay, some will go. Will we all be sheep and follow the first guy over the cliff? Whatever.

Why would they all run for the exits when the exchanges "unleash" the market and let if float? I guess I don't see the panicky-crazed, yell fire in a theater, deer-in-the-headlights issue here.

It's not like the world came to an end in 1971 when Nixon unpegged the dollar from the gold standard. I'm not suggesting we're doing the same here by the way. He blatantly stole the gold and that is a completely separate discussion better suited for the "politics and society" forum.

Except that all that bitcoins are are representative tokens or certificates for redemption (fiat in this case). If I mint 21 trillion coins, I'm already fully liquid. I'm merely exchanging one token (fiat) for another token (bitcoinX) until I run out. By pegging you guarantee a par-value price match until you run out of bittokens, at which point you float.

The exchanges hold your fiat dollars in reserve whilst you use your bitcoin in trade and when they want to exchange them for fiat again you give their fiat money back to them. There's nothing mathematically impossible about it at all. It's a lot like GoldMoney. It's no different - it's effectively bailment until you run out of tokens.

Not to mention, the fees and/or bid/ask spread fund the security of the network. The source of that incentive comes from direct exchange (USD<->BTC or BTC<->BTC) not mining, exactly as it would were the bitcoin network no longer mining coins. This is an eventuality anyway, why not deal with it now instead of later? Even Gavin Andreeson is concerned about it.

At that point (floating unpegged) everybody has a small percentage of the total bittokens in circulation which individually or even collusively are difficult to move the market in any one direction. I must not have explained this very well. I've written a point by point description of this here and in one other thread.

Thanks for the vote of confidence  ::)

To recap, I'm effectuating bailment with a fixed quantity of digital tokens, afterwhich the entirety of the tokens price-float against the worlds currencies. It's merely transititional with most of the components functionally similar to bitcoin. It's still deflationary and decentralized, but also connected to the rest of the world.

The money material is merely transferring wealth to a different token type (BTCx in this case) as opposed to fiat tokens. It would be kind of like a hybrid paypal/bitcoin or paxum/bitcoin or dwolla/bitcoin situation but decentralized and open source.

I would like to think we could just dispense with the fiat conversion altogether because that market has taken a bit of a beating lately and could use a face lift, but it seems we have a bit of an attachment to fiat currencies we're unwilling to give up readily.

With both a open source digital currency and a open source trust-exchange environment I bet you could do wonders. Open Transactions comes to mind.

The workings of MPOE stocks/bonds/options will probably go a long way towards stabilising the BTC price in USD.

Don't know about MPOE (just discovered) but an options market would definitely have a stabilizing effect.

+1 

Alsoa lot of people running pairs trading algorithms will help. 

Of course since the btc supply is inelastic there will still remain a potential for large variations due to mainstream/usd interest. Until at least 1/10th of people know about bitcoin you never know how fast the number of people that do know grows. Once it becomes a household name real stabilisation can begin.