Bitcoin Forum

Central banks intervene on FOREX exchange all the time to stablize the exchange rate of their currency. A good example is the exchange rate between Swiss franc and euro, it stayed in a very narrow range during summer 2012 because of this kind of action

http://photo.mystisland.org/eurchf.jpg

Bitcoiners advocate free market, but if one large entity have enough fiat money reserve, he can manipulate the price and cause large price swing, like we saw last year in china (Chinese have huge fiat money reserve). Because majority of the coins were hoarded, the number of coins circulating on exchanges are small and vulnerable to price manipulation

And, even when each coin worth millions, majority of coins would still be hoarded, thus the outflow of any small amount of those hoarded coins could cause large price swing on exchanges

So, some kind of collective price stabilizing mechanism could be established to reduce volatility. It is a networked society, if everyone is informed and act the same way, it should be as efficient as central bank's action

You can limit the downside risk, but you can never limit the upside risk, because you can have large fiat money reserve but impossible to have large bitcoin reserve, so large price swing to the upside would still happen

If there are enough amount of bitcoin supporters, and they reach such an agreement with enough fiat money reserve, then they can guarantee the lowest possible exchange rate. For example, bitcoin is guaranteed to be above $400 if their collective fiat money reserve is larger than 5.09 billion (12.7 million coins mined so far)

Considering the dynamics, the required fiat money reserve is much less, since the price is decided by the daily coin supply/demand. Supply  is around 5000 to 20000 coins, and the daily purchase of 5-20 million USD will guarantee a price of $1000, requiring only 5-20 USD per day from each bitcoiner, if there are one million of them

This is very useful: Most of the people wonder who is backing bitcoin, and they are afraid that a currency without any backing will crash to zero one day. Now here is a simple answer: Millions of bitcoiners back bitcoin. Bitcoin is people's money, so people back it, instead of central banks or governments. Once people know that bitcoin is backed by millions of bitcoiners with a large fiat money reserve, their acceptance and confidence about bitcoin will greatly improve

Comparing with this method, the merchants who are accepting bitcoin actually don't back bitcoin, since they usually convert the coin to get fiat money. Only those merchant who exclusively accepting bitcoin and never convert them back to fiat is backing bitcoin with his goods/services. That is a long term goal, but might never be reached

It seems MV=PQ formula can show that bitcoin will increase in value with more economy activity, but that only apply to a money which is the only money in that economy. Until there are many bitcoin-only businesses, the demand to get a bitcoin for transaction is minimum (for fiat money it is maximum), so the increase in bitcoin acceptance from merchants will not cause an increase in demand of bitcoin, thus will not help to stabilize its value

The question is how to reach a consensus among millions of bitcoin supporters to step into exchange and buy coins when it fall below a certain threshhold (average mining cost for example). I guess currently the most motivated people are those mining rig manufacturers and mining farm operators, a higher exchange rate will definitely help their business. For other people there is less motivation. Maybe eventually we will have an industry association to collectively guarantee the lowest exchange rate of bitcoin. Without some kind of coordinated action, each single of them will not dare to provide any backing, unlike a central bank who can take action any time

Anyway, with backing, the final uncertainty on bitcoin is gone. It is ready for some serious business

I think this is a great idea. What we need is some kind of website/organizer to centralize a discussion around what kind of pledges (and at what prices) should people commit to.

Essentially, I think something like this is just a way for free market participants to create a global "bid wall" without actually setting one up on any exchange. Just like a normal bid wall on a regular exchange, it could get pulled in principle, but they usually having a stabilizing effect regardless.

No. Utility "backs" bitcoin. Things have value because they're useful in some context. Bitcoin is a tool to reduce the friction of exchange. It happens to work very well for that in our modern internet-centric global instant era. We call such a thing money, or currency.

A couple hundred years ago, gold and silver did that very well. They had properties (scarcity, fungibility, recognizability, durability, divisibility, etc) that made them generally work better than anything else for the purposes of reducing the friction of exchange.

What "backed" gold and silver? The only thing that gave them value was their utility. And so it is, should be, and will continue to be, with bitcoin.

I think you're stuck in the last 200yrs of monetary thinking which has largely been an inelegant stop-gap. Sometime during that period, humans started doing commerce over greater distances and started demanding ability to settle accounts/debts more quickly over these distances. Transporting gold/silver all the time for these purposes started to become a pain. So various entities (merchants, governments, companies, banks, etc) issued their own more easily transportable scrip (paper money), and declared it "backed" by gold and silver.

Doing this was just a way to hack gold and silver to make them far more conveniently transportable (ie, adding the "backed" paper-money layer to the gold/silver infrastructure). The problem, of course, is the entities guaranteeing the backing. Eventually they always screw it up, and fail to honor their commitments.

Now, finally, after 200yrs of bad money and hackish systems/conventions, we have created something which actually functions ideally as money, natively, in our present economic environment. Bitcoin *is* the scarce asset that's *also* easily and instantly portable over any distance. It does not need "backing". Bitcoin *is* the backing.

I think we're all in agreement here about Bitcoin not needing to be backed by anything. I don't think that was OP's point. He was writing about something less fundamental, which is simply a collective / organized agreement among many participants to stabilize the price of Bitcoin (with a floor, but not a ceiling). Informally, you can refer to this kind of behavior as "backing Bitcoin" but it's really not using the word "backing" in the same category as in the many debates others have about backing fiat/bitcoin/whatever with gold/stocks/whatever.

It sounds like you are talking about an orderbook with a commitment to buy at a certain price.  How about an oderbook with timelocked buy and sell offers?  Maybe this is what youre talking about

Value is not coming from utility, but decided by supply/demand. Utility is only one of the prerequisites for demand, but if the supply is endless, then it will not have value. Email can have great utility but it has almost no value, since it can be duplicated endlessly. Litecoin's utility is as good as bitcoin, but it does not hold 1/20 of bitcoin's value

The value of gold and silver is also backed by supply/demand. If you mass dump all the gold reserves from central banks, the price will crash hard. Today, everything's value is more or less decided by its value on exchanges

This is a win/win, great idea johnyj.
The price will probably rarely hit the floor since so many people will put orders starting "a little" above.

Miners should agree not to sell below certain price. Kind of like Map pricing for retailers. 

I think that even if there was a large commitment to buy Bitcoin at $10, it would have a significant psychological effect. For many people it seems like Bitcoin "could go to zero" but if you had a credible pledge to buy a large amount of bitcoins below $10, then it would be some reassurance (this is also similar to how central banks work when they are a "lender of last resort," ... by promising to mitigate a catastrophe, you can actually prevent the catastrophe from occurring in the first place).

10? Are you mad.  Should be $500

Sounds good on paper.

The higher the price, the less credible the pledge. There's a trade-off.

For example, I can potentially publicize that I will buy all bitcoins sold below $0.001 USD. I could safely stake my reputation on that pledge and many people would believe me... even if it wasn't a really noteworthy pledge. If I tried to say the same thing for $100, without cooperating with a large (and wealthy) community, nobody would take it seriously (unless I was a well known billionaire like Richard Branson).

Pledges are based on trust.  So you believe making a trustless system now dependent on trust and a centralized trust at that is a good thing.  Lets imagine hypothetically this reserve was managed by say MtGox who defrauded the depositors and used the funds to cover losses in other areas.  How much of a psychological effect do you think the headline "bitcoin reserve losses $5B, bitcoins now worthless" would be?

Another scenario would be one or more governments seizing this reserve.  That is ultimately what ended eGold. The US government physically seized the gold bullion backing the currency.   As such the eGold "tokens" were utterly worthless.   

Bitcoin for the first time removes that counterparty reserve risk and the solution to some is to voluntarily reintroduce it.  No I think I will keep my wealth (fiat and bitcoins) under my own control.

There's no discussion about changing Bitcoin in anyway in this thread. I think OP's idea about people voluntarily pledging (which obviously is based on trust) to buy at a certain price has nothing to do with the way you use Bitcoin. You wouldn't even notice if it happened (unless you wanted to). Am I missing something about your complaint?

The OP used the word RESERVE.  I didn't say anything about changing Bitcoin I said "what would be perception if this backing reserve was stolen, seized, and embezzled"?  If the reserves boosts faith and stability then the loss of it would undermine the currency. 

Now if there isn't even a reserve just a pledge well that is even more worthless.  The CHF wasn't held steady by some unbacked pledge.  It was held steady by the government having massive funds on hand (both EUR and CHF) and a willingness to aggressive trade against any movement to hold it steady.   A pledge without any enforcement is worth about as much as an anonymous petition.  I guarantee you the first time the exchange rate falls through the pledge rate that will become obvious.

I'll pledge to buy 1,000 BTC at $1 if the exchange rate falls that far.
I'll pledge to buy another 10,000 BTC at $0.10.
If it drops all the way to $0.01, I'll pledge to buy an additional 100,000 BTC.

Since:
21,000,000 BTC divided by 111,000 BTC per person = 189 people

We can guarantee that the exchange rate will never drop below $0.01 per BTC if we can find another 188 people to make the same pledge.

Right, exactly. Although, I think a system like this requires more than just 188 random people... each person would need to be perceived as trustworthy (a perhaps impossible task). In all seriousness though, if a group of ~50-100 high net worth individuals did a pledge like this you could probably get a reasonable floor in the double digit range.

@Death and Taxes: What the OP is suggesting is a purely voluntary effort. It's not any more centralized than Bitstamp or Coinbase or Mt.Gox are centralized. It's yet another centralized service/concept that exists in the Bitcoin ecosystem. Probably multiple such "reserves" could exist with different agendas that don't cooperate at all.

So a reserve without a reserve and a pledge without enforcement?   That will bring stability?  If anything it confuses the ideal that bitcoin is backed by utility, it is utility not an easily broken pledge which creates value.

I promise (not really) to buy 21 million BTC @ $100 ea.

As you pointed out, anonymous pledges wouldn't work.

If Warren Buffet publicly pledged to buy any amount of BTC @ $100, I would believe him. Ditto with Richard Branson, Bill Gates, etc.

Also... I kind of feel like our conversation is going something like this:

[OP and chriswilmer]: "Hey, let's make an applie pie!"

[DeathAndTaxes]: "Applie pies aren't necessary. Apples are nutritious on their own. Baking apple pies will just confuse people and goes against the principle that apples can be eaten on their own."

I completely agree that any reserve/pledge system is not necessary for Bitcoin to work. However, I don't see how a group acting voluntarily to buy/sell at certain prices in anyway detracts from your ability to use Bitcoin as you like.

For any buy commitment to be meaningful in dampening volatility it would have to be near spot.  Any near spot commitment could still create information asymmetry and susceptible to maniplulation namely pump\dump.

What would work in dampening volatility would be ask/bids to be always funded and locked in for a certain amount of time.  This way buy/sell walls would have more meaning and not just be canceled when market moves.

What are the individual benefits available to a person for making such a pledge?
Which essentially amounts to a market cartel or "trust"   (collusion to not sell a product onto the market below a certain price),  come to think of it.

Volatility and the increased liquidity that results from buyer and seller freedom benefits the exchanges and some traders, financially, however.   Volatility results in bigger spreads and more trades in the short term;   less market freedom implies lower trade volumes,   since buyers simply won't place any orders if they perceive Bitcoin's worth drops below the pledged price  --- it creates a condition where the market gridlocks.

What benefit could be offered in exchange to an individual to compensate them fairly for the disadvantage of choosing to lock-in an ask or a bid,  even after they see the market moving against them?

It is panic that cause price drop in BTC. Most miners afraid bitcoin value may reduce to zero any-day. So when panic strikes that time they start selling.

Litecoin does not have the same utility as Bitcoin because of the simple reason that you can pay / receive payments from a lot more people with the latter. Ultimately any market price depends of supply and demand, but the day we can send/recive/pay most people/companies with Bitcoin is the day we will have stable (and high) prices. Bitcoin will then have higher utility than Visa, PayPal, Western Union, SWIFT etc.

I don't necessarily expect that fiat currencies will ever become non-volatile with respect to Bitcoin.     In the event that the supply and demand of Bitcoin grows;  the supply and demand of the fiat currencies will shrink over time.

You may see price volatility still,  when you are comparing Bitcoins to fiat at that point,  due to the  instability of the value of the fiat currencies as a whole,  and the relative stability of the value of currencies such as Bitcoin that have a physically fixed or mathematically predictable supply -----  and then, demand only fluctuates with the economy and the health of the network.

Yes.   The bitcoin protocol may need some major changes, however, to ever conduct a tx volume approaching Visa or Paypal's; there are surely problems and pain points involved with scaling that will need to eventually be encountered and then addressed by future work in the development of bitcoin protocols and software.

So a positive but manageable rate of growth is key.

More users and more merchants accepting BTC for goods and services coming on board are a fundamental requirement,  before Bitcoin begins to become more mature and more valuable.

Suppose that you need bitcoin to do cheap money transfer, but you still need to convert them back to fiat money to spend, this will not help to stabilize the market price since you first buy certain amount and then sell same amount at the other end, creating corresponding sell pressure on exchanges

If bitcoin is the only money in circulation and enterprises use it to pay salary and purchase everything, then the utility of bitcoin will definitely help to stabilize its value. But it is not the case today

There is another reason for creating such a backing: Central banks/governments around the world will not be happy about this competing currency (It means they will lose the power to tax people by inflation through using fiat money)

The first thing they will try (when they were threatened) is to prevent fiat money flow into bitcoin, like what Chinese central bank did. It already showed its effect

If that does not work, to be more aggresive, they could use their large fiat money reserve to first buy lots of coins slowly, and dump them all on exchanges in a very short time. They can even use lots of fiat money as collateral to borrow coins and short the market. That will crash the market

Because most of the people don't care to maintain the exchange rate for bitcoin, thus under such a scenario, the price could go down to almost zero, thus totally wipe out the bitcoin economy (bitcoin economy is very fragile, because it is mostly dependent on the exchange rate, if exchange rate goes down to $1, then millions of bitcoin holders will lose most of their wealth

Of course, if you have some large enterprise provide bitcoin only sale at a fixed bitcoin price (for example a Tesla costs 100 coins no matter what the exchange rate is), then exchange rate will be pushed back by large amount of car buyers if it drops too low. So another way to stabilize the exchange rate is lots of bitcoin accepting business with fixed bitcoin price. But so far we have not seen any such business

So the most effective way to stabilize the exchange rate is to directly provide buying support on exchanges

Recently the price is way too stable....yawn.
However, it's hard to be against a solid floor price.

These are good considerations... I think, eventually you have to trust something, in bitcoin you have to trust the cryptography behind it won't break and the hash power is distributed enough to avoid a 51% attack, so it is not trustless

Fiat money reserve can be distributed, spread among millions of users, so the risk of confiscation is zero. But to guarantee the validity of this reserve is difficult, to make sure this distributed reserve is buying when price dropped to the threshold is even more difficult. I remember that someone has mentioned a P2P artificial intelligence code that will accept bitcoin and automatically clone itself, maybe these kind of code could be setup for each one who are providing the backing for bitcoin, so the code use exchange's API automatically buy coins when the threshold is hit  ::) ::)

But anyway, such a backing, even orally promised, could greatly improve the credibility of bitcoin. This is similar to FDIC promising that account holder will have enough insurance coverage when a bank went down. In fact, if many banks went down, FDIC won't have enough money to cover it. But with this promise, majority of people won't take out their money in the banks when a crisis hit

The money is all about confidence, banks using many tricks to improve people's confidence, so should we. And the strongest confidence will come from a large group of people who are willing to back it with fiat money reserve

Currently we have the largest network back its security, but there are nothing back its value. Unless it becomes the only currency in circulation or a popular investment target, the demand is very uncertain. For normal people, it always feel that the value of bitcoin is floating in the air: can be anything, can be nothing. With a backing, such uncertainty is gone

In the long run it's actually not interesting if it's volatile in respect to fiat, what's interesting is stability in respect to the goods I can buy. Maybe in the (distant?) future, the tables will be turned. We will know more or less what we can buy for one Btc, whereas we really don't know what one usd will will buy us. That's when the old farts and laggards finally cave in and give up on fiat. Here's to hoping ;)

Obviously the best scenario is when people both get paid and in btc and buy goods with it. But that will probably not be common in at least 5-10 years. Meanwhile it certainly doesn't hurt if people use it to transfer fiat rather than as a currency. Even if converted back to fiat, at any given time bitcoin will be on its way between users, so the netto effect is still increased demand. And maybe more importantly, more people will be introduced to and familiarized with Bitcoin.

Do we need a setup like this? The last time that China cried wolf the price dropped a whole $10. Seems pretty stable to me!

You don't really need such a setup right away, but you first need to establish such a general consensus or oral commitment that this can be done when a crisis hits, most of the time the market is good enough to maintain a reasonable price

The one who care most about the price floor is the mining equipment maker, since this directly impact their sale and profit. Mining farm owners will also reduce their coin supply on market if the price is too low. If the difficulty keeps rising while the price keeps dropping, soon we might see some reason for them to act together

OP wants to make Bitcoin not Bitcoin anymore.

I defer to DeathAndTaxes' aforesaid summary of the issues.

What is it with comments like these? There is nothing in OP's idea about changing Bitcoin... NOTHING!

It's just another centralized service that exists within the Bitcoin ecosystem, like a Bitcoin exchange or Coinbase. Does the existence of Bitstamp make "Bitcoin not Bitcoin anymore" ?

ok. I see your point. I was referring to the spirit of bitcoin. I understand the OP had no intention to change the Bitcoin protocol. I also understand that layers of services may be added atop Bitcoin. That's fine.

I wonder though, what's the point of the OP's suggestion, when we already have such currencies that are 'backed' as he wants them to be? In other words, why not just use government fiat currency? Why bother with bitcoin at all?

Also, the OP greatly over-simplifies the forex markets and how currencies trade against each other. It's not nearly as simple as he suggests.

My gripe is with people who think the legitimacy of bitcoin, and services thereof, ought to be based upon centralization.

It's a philosophical stance, i.e., one that prefers trusting an open-source protocol to trusting a closed-source human brain. Ultimately, there has to be trust with money at some point in commerce and finance, including bitcoin, but eliminating the human aspect as much as possible is a worthwhile endeavor.

In an ideal situation when every market participants are rational and independent, a distributed backing is not necessary. But in reality, most of the market participants are speculators who are lacking of confidence and emotional, so the market manipulator will easily slaughter them and make the bitcoin market a speculation heaven with great volatility

Exactly!  :)

It is also worth noting: Fiat money usually have a large economy (lots of goods/services with fixed fiat money price) backing it, so any change in exchange rate of a currency will be stabilized by the corresponding export/import in international trading

For example, if JPY exchange rate drops, then there will be more export for their cars to US, then more US dollars will purchse their JPY to purchase their cars, this will in turn increase the JPY exchange rate, to counter the original effect

But for bitcoin economy, there is no goods/services with fixed bitcoin price label. If exchange rate for bitcoin drops, the price in bitcoin for goods/services at those bitcoin-accepting business also changes, you need more bitcoin to buy the same goods, so there is no corresponding counter effect to bring up the bitcoin exchange rate

So bitcoin's price is very dependent on exchanges. It requires extremely care in this area

Congratulations, you've realized that all backing is fake and relying on some "trusted" entity's promise.  "Price stability" is simply large actors attempting to manipulate the market forces in such a manner as to reduce variance, by altering their promises in order to change the psychology of smaller market actors.

But to me, that just means "I may break my promise at any time."  Thanks but I'll take the free market every day of the week.  If you want price stability, I'll happily sign a contract with you to purchase some amount of bitcoins for $50 in a year.  As long as I am reliable, you have a guaranteed floor of $50 on your bitcoin.

There, now you get it...  Futures markets are how the free market does price stability.  And at least with futures market you've signed a contract that's better than "I reserve the right to change my mind" from some large untouchable mafioso.  You actually have legal (or if not that, moral, and importantly, pragmatic) ability to either get what is owed to your or punish the person when he renegs on his contractual promise.

Again, that's far better than the empty promises I hear for nation-state level price stability.  Price stability via inflation and promises is like a gambling game with no variance where the game is the government just takes 7 cents on the dollar.  Bitcoin is like flipping a coin but getting paid 60-40 in your favor.

I'll take the variance, especially when the government's promissory inflation only increases the value of the bitcoin.

Such trust could be transparently tracked, even anonymous.

People pledge toward a floor price. Each is given a random fraction of a dollar price to set their buy price (ie $100.1032). Everyone can see that the buy price is filled on the exchange and can collectively say "1000 people pledge $1,000 toward keeping the bitcoin price above $100 for a total of $1,000,000 backing a $100 floor".

This would create confidence that the Bitcoin price will not crash below $100. But only as much confidence shown by those that have put in their bids. If someone pulls their bid, it is shown as less confidence, if people add to it it shows more confidence.

This would also be a way to do as many Austrians call for and peg the price floor to gold. But that would be more difficult as people would need software for their own bids to follow the gold price.

At point when price will be more stable it will be more attractive for consumers. On other hand we have inflation for generations and it might be very confusing for everyone when bitcoin price will change towards dollar one way or another.

Actually if it would be constantly stable we would determine wealth base on bitcoin, not on gold.

Agree, it will be good for retail business if price aren't that volatile.

I think this could be achieved by some kind of insurance: Bitcoiners purchase an insurance to make sure the bitcoin price won't drop below certain level, when insurance company collected enough money, those money could build a huge wall on exchanges and immediately show the guaranteed price floor

Interesting idea, but it might make the markets seem a little artificial.

Normal sheeples will just get panic and dump their coins if manipulators mass dump the coins and bring the price down to single digits, especially if they cut the fiat money inflow channel for exchanges, so there should be some fiat money reserve already on major exchanges

Anyway, exchanges are too vulnerable, they will be hit for sure, just a matter of time. But currently the distributed exchange has not been built up very well, so it is very difficult to fight against market manipulation