Bitcoin Forum

Hi everyone, I've been working on the technical aspects of an idea I've been chatting about a little since the whole "market correction" yesterday. The bitcoin economy has grown far too speculator-centric to see much success as a real currency. In order for BTC to truly remain/become useful for purchasing goods and services some level of stability is necessary; a slow steady rise is fantastic, a continuous roller-coaster of huge peaks and valleys is not. Furthermore, as a miner it concerns me greatly to see prices dip low enough to damage my business when these bubbles eventually burst.

So I have a proposal: It begins with the miners since we/they are the initial source of all bitcoins (some 7200 per day, a fairly substantial number) but it hopefully sees adoption by many others too. If you're not a speculator, if you're a miner or someone who does business in bitcoins you want a stable exchange rate that increase proportionally to important factors like adoption levels or hash difficulty (which is actually sort of a factor of adoption levels) not on the whims of a bunch of get-rich-quick investors! If you want bitcoin to take off and stay useful in the long term, to survive the media madness and become a viable dominant e-currency, then we MUST do something about the volatility. The advice to "buy when it dips then resell high" doesn't help the market as a whole, it only helps the speculators who buy into the methodology and eventually, such a low will not have a corresponding recovery. You can only crash a market so many times before it stays crashed.

So I suggest that we adopt a new ideal value for what those of us treating this like a business are willing to accept for 1 BTC. We set up an exchange rate that is pegged to difficulty and assume that to be the value of 1 BTC. If a mountain of miners and traders all decide that 1 BTC = X dollars then speculators will have a hard time increasing or decreasing the value by as much. They have to buy their way through the mountains of BTC available at $X before they can effectively raise the price above or below it. This means that significantly larger amounts of money can move about in the market without affecting the exchange rate. If you look at the market depth data on Mt. Gox right now you'll see two large spikes of sell orders at $25 and $30. These spikes represent such a "wall" and we've seen before the stabilizing effect that such walls can have on value.

I've created a simple web site (changed: http://www.bitcoinreference.com) with a forum attached that displays what I believe to be a fair market value for BTC which is automatically calculated from the current difficulty setting and converted into several world currencies. The data updates automatically so it should change immediately when the difficulty does. Right now I'm using P=D/25000 to set the price, which seems to roughly follow historical data if we ignore the recent bubble and its associated correction. This pegs the price at $22.69 USD currently. I am of course open to suggestions on more accurate or reasonable formulae should you have any input.

If we all buy/sell/trade at this assumed value with at least a meaningful portion of our BTC we can create a new "wall" set where WE decide. We can stabilize the value of the bitcoin, which makes it more attractive to existing and new businesses and gives it the image to match its potential as the new world currency.

Edit 2011-06-13: Changed URL, my proposal wasn't really a "union" per se so bitcoinreference.com is much more appropriate. Site content has not changed, nor has the URL structure, so the API can now be found at http://bitcoinreference.com/api

Edit 2011-06-14: Changed displayed market valuation and API. Site now shows market valuation based on a four-hour moving average and shows standard deviation for the same period. Ranges based on one or two standard deviations from average can be used for a number of purposes as discussed in my post below and on the "how to use this data" page on the site ites.f

Note: The purpose of the site has changed from what is specified in the post above. I am no longer interested in starting a cartel or union of any kind. bitcoinreference.com exists only for informational purposes and I now hope to help stabilize the market through education and dissemination of information.

A gadget or small app to display real price and suggested price would be very nice.

I'm mostly a web guy, not sure my programming skills would be up to this task, but I'm sure there's someone out there who knows Mt. Gox's API to get real price and can also figure out mine (http://www.btcunion.com/api) and whip something up.

I have written a few simple Android apps in the past, assuming it's not too much more difficult to make a Widget I could probably whip something up for that platform at least.

Any takers? Shall we start a bounty perhaps?

My API is ridiculously simple by the way. It's just "value1,currency1;value2,currency2;" etc.

I'm also having some difficulties getting JPY and INR to work properly, I use Google's API for currency conversion and I think I screwed something up somewhere... In any case I'm aware of the issue and working on a fix.

I'm the maker of an Android widget (Miner's Widget). Could you please make your API data available in JSON?

Thanks

It's not a bad idea, and historical data does suggest a strong correlation between difficulty and price (somebody post that chart, can't be bothered to do it again).

I've never worked in JSON. Give me a few to figure out the format and I'll go change my code. Should be easy enough.

Try http://btcunion.com/api/ and tell me if that looks like valid JSON to you. It looks valid to me but again I'm not a JSON expert :)

Cool idea and all -- but here is the part you're missing:

Each time difficulty goes up, it's because there are more mouths to feed from the same pie. The pie gets sliced up into smaller and smaller portions. The size of the pie remains the same (6 blocks/hour), the only question is, will 2,000 -- 4,000, or 10,000 miners divvy up that pie.

The pie gets bigger or smaller based on what the market value of Bitcoin is -- this is where speculation drives up (or down) the price.

But if the price goes up X2, and the difficulty goes up 100%, you'd make the same amount, right? 

EXCEPT there are lots of others getting that same "amount" because they joined in the last week, which is why difficulty went up in the first place.

The question is, how big can that pie get, based on the fundamentals of Bitcoin?

So your formula is too simple. If difficulty goes up by 40% it does NOT mean that there are 40% more dollars willing to be traded for Bitcoin -- which your formula CLEARLY states.

If you don't follow what I'm saying, please ask questions and I'll clarify. It's something I didn't get at first either :)

Then give me a metric for total number of users that I can pull via API and I'll change the formula thusly. I based it on difficulty because difficulty tends to grow proportional to population size (more participants brings more miners). If I had a more accurate metric for the number of active users I could use that, but I've tried to find one and I can't. Besides, difficulty has in fact remained proportional almost since day one.

See, before we had some money coming in for every new miner, so the price of BTC went up even as difficulty went up.
If anything, I was making *more* with every passing week. But as we now know, that was a bubble and unsustainable.

The fact of the matter is, we should be making less and less $ per week the more people start mining (and the more mining rigs are added to the network). Any increases in price will offset this loss of income, but it should be based on true demand for Bitcoin, not speculation. I understand "the market sets the price", but "the market" tends to be driven by speculators more times than not.

Now as mining income goes down, eventually some miners will drop out because their hardware isn't efficient enough, etc. and then difficulty might level off or even decrease. But as long as the Bitcoin network wants to shoot for 7000 BTC a day, there will be less and less money (expressed in BTC OR dollars) for any given 5830.

Matthew

OK so you're not against the math, you're just against the concept? I'm not even entirely sure what you're complaining about here... Yes, as more people join the network, more miners join the network, difficulty goes up, number of BTC mined daily goes down, value of each BTC goes up and we all hold stable. It's not just based in the fact that "gee, we miners would really like to always make stable income" it's based on the basic concept that the pie does in fact get split more ways. If the number/power of new miners is proportional to the number of people joining the community (which it should be, over a long enough timeline) then difficulty is just as good a metric as anything you can provide.

In short, please either provide me with a better method for the measurements I'm trying to take or a concise well-worded argument as to why exactly you're against this.

The value of BTC is driven primarily by speculation right now and that will continue to be the case, exerting fixed price controls for the "good" of the whole market, nothing like driving a strong monopolistic governmental concept into a market which tends to shed such principals.

I guess what I'm saying is that I recognize that the value of 1 BTC goes up because more people are using them and the "pie" gets divided more ways, as opposed to it just being more miners demanding the same money for less product. What I'm also saying, though, is that the difficulty is a measurement of the number of miners and that the number of miners is a slightly varying but fairly steady percentage of the number of users. Therefore, the difficulty can be a good predictor of the user base and is therefore a valid measurement of how many ways the pie is being split. Thus, we can use it to determine a fair approximation of 1 BTC's value at any given time.

No, because the controls aren't forced, merely suggested. Gold miners have to be able to demand a price for their product that pays their cost of living. This represents a "floor" below which the price of gold can't really fall since below that floor no more gold is available - the miners simply take up another profession. Right now BTC's "floor" is zero, which is a game-ending event. Miners are still free to mine however many coins they can and sell them for whatever price they deem fair. This is unlike government regulation because no one is required to follow "controls" I'm merely making suggestions. If a "wall" of BTC exists at a given exchange rate then it becomes more difficult to drive the price above or below that wall via speculation and the currency becomes more stable. If you don't like my idea, don't follow it - you won't hurt my feelings. I'm fairly certain, however, that there are a lot of people who treat this more like a business than a playtoy and I'm pretty sure they'd like bitcoin to behave like a proper currency, only deflationary. Eventually perhaps the market will grow large enough to avoid manipulation and I'll just take down the site, but as was made obvious yesterday there are still individual people who can destroy this thing (even unintentionally) if we don't actually work together to prevent it.

Nope.

The economy works totally opposite. The price of gold determines is it profitable to be a miner. If it's high a lot of people become miners. If it goes low miners flow to other occupations. Moreover the price of the good is not determined by the cost of the good. It's opposite: the price of a given good determines at what cost it's profitable to make it.

So all the efforts to set a "fair" price are ultimately futile¹. If you want to waste your efforts - it's your decision. But you have been warned.


¹. Unless you can introduce the "fair" price by force as some socialist governments do - which is totally against the idea of BitCoins.

Here - I am suggesting you to do something better. Since you don't want to thrive on speculations, create a communist pool. A pool where everyone gets the same reward per block doesn't matter how much computing power he throws in it. That's because basically everyone that spent some money on GPUs actually relied on speculative BTC price at that particular moment. No need to do that. Stop buying that fancy hardware. Get the reward you think you deserve so much as if it is your human right. Get the same reward as everyone else believing in that union. Drive the speculators out. Eheh.

Go read a book, seriously. It's called a tangled hierarchy, multiple things influencing one another in such a way that they sometimes influence themselves indirectly. It doesn't matter which direction you see the causality as traveling in (away from the miner, thus giving him the power or away from the market thus giving them the power) the fact is you've just confirmed my point, even while arguing it - the two are linked. The directionality of the link simply doesn't matter for my purposes. Whether the price drives the difficulty, the difficulty drives the price or some tertiary underlying factor influences both, the fact is that they move together.

As for the "sounds like socialism" guy, I said nothing whatsoever about evening out rewards. More GPU power = more BTC = more USD at any exchange rate, where did you get the idea that I was promoting a communist BTC variant?

Well, I had the same idea but am not a well web coding guy, so I am glad that you did it.
I will now, as a test first but probably going on like this (just not if you make prices really fancy), trade my bitcoins for that price (plus mtgox+exchange fees...)
greets, M

You are promoting the idea that miners profit should be somehow protected from that speculative factor, thus evening out risks. I would argue that everyone invested different amount of money thus taking higher or lower risk. It _is_ communism - I see nothing wrong about someone throwing money into a risky venture such as bitcoin then losing his investments. I see no reason why wouldn't someone profit on speculative margins while others suck it up due their own greediness and stupidity.

Hi,

why do you base your calculations on the speculators prices ?
10 days ago a bitcoin was worth 8.50 usd, who told it should be worth 20 like today?

did you see how little sales moved the mtgox price down ? i think like 40k coins where needed from price 32 usd to 10.
there are so much coins arround compared to this number, you will always have independent miners undercutting your suggested cartel ( union) price

this is just a plea for miners to price fix right... ? :)

I'm promoting the idea that every user of BTC should be somehow protected by the ability of the speculators to destroy the market. I'm promoting the idea that education about where this currency comes from and the factors that truly drive its VALUE - not its PRICE - might just help stabilize the bitcoin economy. If we all know what a bitcoin SHOULD cost then we can compare that to what a bitcoin currently DOES cost and make better decisions, avoid bubbles and prevent tremendous crashes like we saw on Saturday.

What about lots of people repeating that "price follows difficulty" which is in fact plain bullshit? It's actually difficulty that follows price - and often that's speculative price.


Well, they also "created" this market. More than 90% of the miners wouldn't be there if speculators did not exist.

To contradict something my mother used to tell me: Just because you created something doesn't mean you have the right to destroy it. Murder is murder, even if you're killing your own child.

Speculation within certain bounds is a good thing, without active speculation we wouldn't have Forbes and SmartMoney writing articles about us, but too much speculation allowed to run rampant and create bubbles as massive as this past week has seen create collapses like we saw on Saturday and I for one don't want to see any more collapses that big. It is therefore in everyone's best interest to understand what 1 BTC *should* be trading at and refuse to participate in such speculations. There will always be those who will and small inflationary bubbles and their associated crashes can still occur - I welcome them even, because they mean more investors coming to our community - but we can't allow them to get out of hand like they recently have.

I'm not talking regulation or enforcement, I'm talking education. People are still welcome to make their own decisions, but I'd like them to be well-informed decisions.

History has proven time and again that this sort of manipulation is doomed to failure.  You cannot control the price of a currency unless you can completely control it's supply.  For a recent and famous example, research how Soros broke the Bank of England.

If you do find limited success, it will only serve to worsen the problem.  When the market finally does break you, the dislocation will be many orders of magnitude greater than anything we have seen yet.
This is due to the fact that, the more successful you become at manipulating the price, the more a competitor can profit by breaking your hold.  Markets are designed to make what you are attempting impossible.

Speculators are not a bad thing in a market.  They serve to provide liquidity and price stability.  When they buy low and sell high they effectively put a floor and a ceiling on the market.  Speculators profit on the volatility, and in doing so actually leach the volatility out of the system.  The price swings in bitcoin are fundamental in nature.  They are happening because the actual value of bitcoin is changing very rapidly.  This is not good for people who want to use bitcoin as a currency, but it is unavoidable.  If bitcoin survives, the price will stabilize on its own.

Regardless, I applaud you for actually trying to fix the problem.  Good luck.  Your going to need it.

That is a socialist economic idea.  The Chinese do it [to their benefit since nations continue to do business with them in spite of this], but it would never be tolerated by a smaller entity ... it no longer becomes a free market.  In fact, fixing the price to difficulty would potentially allow the early hoarders who loaded up BIG when GPU mining started and difficulty was low such that they could slowly empty their hoarded coins from their secret purse [wallet :)] at what is probably an inflated price for them, and the sales would not affect the cost of the coin, so the large volume of sales from these individuals would not allow for the market to react to high supply.  THAT WOULD DESTROY THE MARKET MORE ASSUREDLY THAN SPECULATION.  Why bother with bitcoin at all then; using Dwolla or other intermediaries would make far more sense and skip the middle man [bitcoin] altogether.

Well I'm not about to join the argument. I don't think you'll be successful in controlling the prices, but I think it'd be a great idea to add a simple system to reflect upon what the suggested price of BTC is, however I also feel the formula is too simple (as many think).

I also read the part about just getting started and welcome for suggestion. So heres my suggestion, an important factor of how we miner's value BTC is via the difficulty. However, another important factor that can be as easily overlooked is the amount of investment that we put into the equipment, and the operating cost.

I believe the formula would have to factor both of these in as well to come up with a better metric of the value in 1 BTC. Which is to say instead of tackling how many people are mining, go straight to how much it cost to mine in the first place.

Irregardless of how many people is to mining, the difficulty adjusts so that 6 blocks are solve in an hour, that is 300 coins into the system. The person who has high hashing power also had to pay for his equipment and operation cost, also equally the risk he is taking. No one should be complaining about him getting the large piece of the pie imo.

Maybe something like,

Amount of power required to solve a block/50 BTC = Amount of power required to put 1 BTC into the system
Global average cost of electricity x Amount of power required to put 1 BTC into the system = generation cost of 1 BTC
(Remember to adjust when block solve = 25 BTC later on)

then we find the amount of hardware cost (normalised) at current retail price to put 1 BTC into the system, (risk of miners)

if we take what I assume is the most common build around, take it's cost (not forgetting the 5xxx series would phase out soon) divide by the amount of Mhash/s
i.e [ 4x5850 + ~700W PSU + [3SlotPCIex16 + 1SlowPCIex1] MOBO + Avg(Sempron140+Sempron145+Athlon2XII) + 2GB RAM + 8 GB Thumbdrive ] ~ 1.4 GHash/s @ $ x $
I believe almost everyone is averaging between $0.75/Mhash(/s) ~ $1/Mhash(/s)

However, if we include total network capacity, it will not be fair since many people would have broken even and the only cost would be operation. If we were to take for example the last 3 month's increase of network capacity cost weighted maybe it'd be fairer to those who are diving into mining currently since those who are already moving towards breaking even are carrying lesser risk then those who are just starting. (or the newer hardware)

Assuming 3 months window, thus accordingly we should 6 difficulty adjustments (example of weighted, should change to exponential)
cost of increase in network capacity would be
$/Mhash*{
11/36 * most recent adjustment +
9/36 * 2nd most recent adjustment +
7/36 * 3rd most recent adjustment +
5/36 * 4th most recent adjustment +
3/36 * 5th most recent adjustment +
1/36 * 6th most recent adjustment
}

Since, Current hash (2**32*Difficulty)/Total Network Speed = 1 blk/10 mins = 50 BTC / 10 mins
600 secs/ 50 BTC = 12 secs / BTC
thus 12 secs of total network speed would generate 1 BTC,

also not forgetting that we are paid to do these transactions taking an average, (although many of us exchange these for less variance, we have to account these in, since they are there to replace the generations when generation starts to decay 50>25>12.5 per block solved)
Fees paid to miners per BTC = Total Transaction Fees/(Total Block Solve*50 BTC)

Therefore,
cost of electricity (Base)
cost of increase in network capacity (last 3 months maybe?)
less transaction fees per BTC (last 3 months maybe)

1 BTC = Avg Cost of Electricity to Generate + Weighted Cost of Inc in Network Capacity - Transaction Fees Per BTC

Also, maybe as more factors maybe included, they should as well be weighted (probably). I think most importantly, what a BTC cost should be heavily weighted by the true demand

I didn't really go into numbers but I think this might be a good start for other people to add onto, the difficulty is already in the network capacity. This concept should be somewhat a fair & agreeable to what a miner would perceive is the price of a BTC. Also, a decrease in difficulty would decrease this number heavily since it'd be the most recent adjustment. In the long run, if the network capacity were to become stagnant, the cost would be calculated as the generation cost less transaction fee. I am negating the rent for the space the rigs & cooling since it isn't mandatory for everyone.

Again, I don't encourage controlling the currency neither do I think it's possible, as mentioned 7200/day isn't a lot to play around the market with especially when there's 6.5 million out there. However, I do think adding some sort of a reflective guide would help vastly in the reduction of speculation (that is beyond reason), since as of now there is no means to measure the true demand. (We don't really see/know it)

Hadn't considered the tiny amount of btc introduced daily versus the sum that's already available. Good post.

Regardless of the problems with my implementation, merchants will not enter this marketplace if they have to change their prices daily - and in the current market, daily wouldn't even be often enough! There is no reason that anyone anywhere should pay 1 BTC for a shirt and then twenty minutes later see a price tag of 0.8 BTC and then 1.4 BTC twenty minutes after that. The issue still remains that this market is too volatile for real commerce and if the only people in the market are the speculators, who thrive on volatility, there will likely never be a sufficient decrease in that volatility to make this a worthwhile mechanism for most businesses to transact in.

I see a lot of people reaffirming that I've spotted a problem and telling me that my solution is stupid, wrong or communist but not a lot of people stepping up to do anything themselves. So until someone has a better idea and wants to implement it, stop complaining about my imperfect solution.

Oh and just to reaffirm that a big enough wall of coins can stabilize the price of bitcoins, anyone else remember the $20, $25 and $30 marks and how we hovered around them so much longer than, say, the $16 mark or the $23 mark? Go look at Mt. Gox's market depth data. See those big spikes at the even $5 increments? That would be the source of that stabilizing factor so yeah we have actually seen that stabilization occur before - it couldn't stop the bubble but it did stall it at $5 increments. Those familiar spikes, by the way, represent about 2,000 BTC each according to Mt. Gox's chart, which is less than 1/3rd the kind of power a united coalition of miners could wield.

i have made an android app monitoring bitcoin exchange rates, it's supporting around 20 currencies. I'm planning to add some more feature about the market in the near future, following this thread.

BitWid (https://market.android.com/details?id=bitwid.qed.net&feature=search_result)

DING DING DING. This is why I price my loans in BTC with BTC in fees. If others with more money than I have ($220) don't have the balls that's their problem.

THIN MARKETS ARE SUPPOSED TO BE UNSTABLE. IF YOU DON'T KNOW THAT, WAIT A YEAR. The time for stability is when those who know the system know how to make it productive. You can't impose stability so you can play miniature golf in sand dunes.

This is like the DNS registrars saying that 2600.org was an unacceptable domain. Guess who won? 2600 kept hacking into the DNS and registering.


Fixing a problem that isn't there is the biggest problem of BTC.


Or someone more enterprising beats them to the punch.

i just want to correct a simple misunderstanding that many people have- it is speculators who bring consistency to a currency.  in the original post you badmouthed people who "buy the low and sell the high", but the more people who do that, the higher the lows are and the lower the highs are.  it is the actual action of price discovery that happens when buyers and sellers meet that decides the value of anything.  the more participants involved, the less extreme the extremes are- i for one know that i can make far more money trading bitcoins than mining them- and that will be where i concentrate my firepower.  i plan on being as large a player in the market as i can, and the only thing my "speculation" will bring is more stability.  as things are currently, it is impossible to short BTC- that being the case the only thing "speculators" can do is force the price higher by their mere involvement (basically why people hate long-only commodity funds currently even though i could prove mathematically that they should depress the front month [cash] markets by their involvement).  i might even start an intra-day BTC valuation thread, we'll see.  anyways, i digress, "speculation" is GREAT for BTC- it draws more attention to it and actually makes the moves on any given day LESS.

So basically a MINERS CARTEL!

All right, fine, just pretend I'm not trying to accomplish anything by putting the information out there then. All I am is a guy who threw out a web site that shows, based on prior trends, what the average exchange rate for BTC should be for a given period as delineated by difficulty changes. Do with that information what you will - I still say it will keep bubbles from growing as large just for people to know exactly how inflated the currency probably is at a given moment.

The difficulty is set to go up about 50-60% in a few days.

Do you really think there will be 50-60% more Bitcoin users than there were 2 weeks ago?

When a miner adds a couple rigs, and increases the total network hashrate by 0.5%, do you think that the Bitcoin userbase also grew by 0.5%?

There really is no correlation between the two.

in·flat·ed  (n-fltd)
adj.
1. Filled or expanded by or as if by gas or air.
2. Unduly enlarged or aggrandized; swollen: an inflated estimate; an inflated ego.
3. Full of empty or pretentious language; bombastic.
4. Raised or expanded to abnormal levels: an inflated economy; inflated wages.
5. Hollow and enlarged: an inflated calyx.

I'm going with definition 4 on that one. If we have a baseline measure of average value for a span of time, and the currency is currently trading well above that value, I'm pretty sure the Oxford English dictionary says we get to use the word "inflated." It does, in fact, mean what I think it does.

Then the total processing power of the network magically grew out of thin air with no new interest drummed up in the project whatsoever? Again, people posting crap about how screwed up my methods are without bothering to post their magical fix to the solution. What is your better option?

The hashrate is a product of the number of miners, which is a product of the number of users. The difficulty lags the actual network growths by a bit but yes, since hashrate is (albeit indirectly) a measure of network size/interest, it should raise proportionately with price per BTC which is also largely a function of network size/interest.

Oh, and the network is at 6.550 TH/s right now, to add 0.5% to the network with his "couple rigs" your theoretical miner would have to be pulling 32,750 MH/s. That's something on the order of 61 5970s. Assuming quad-card rigs that'd eat up about 20 kilowatts of electricity, which would be interesting to see outside of a data center since most houses and apartments are fused at 100A (115V * 100A = 11,500W maximum load). That's also not counting the 8 kilowatts he'd have to spend cooling off the 70,775 BTU of heat he's dumping into his house for that "measly" 0.5%. Get an idea of the scale we're working with before you act like you understand things.

I sounds wonderful if it would fix the problem.  BUT, if you would actually sell coins to me for $22 then all I have to do is sell them at MtGox for $24.  Return and buy more coins...  Rinse.  Repeat.

If enough people are selling coins at or around the average market-sustainable rate there wouldn't be anyone to buy them from you at MtGox for $24.

At the very least publishing the VALUE of 1 BTC versus the PRICE of 1 BTC should give an idea of the current status of the market. Try as I might there was no way I could justify $31 per BTC last week. Such a price was unsustainable and as we saw, it caused quite a little weekend crash. Things rebounded this time, but how many crashes can we really have like that without killing the project?

I would be elated if the price just went from $30 to $10 every single day..

I am confused as what we as miners are supposed to do.  I agree it is critical to stabilize the price, but what can I do?  Do we simply sell above 22.6 and buy below?  Hmm, actually, that sounds like a great idea.  (I think the price is should be closer to $25-$30, but anyway.)  

Why don't we just use the 7day average?

We could calculate price with a 7 day average, taking into account the 7day average of mining power (THs). We could use a price/difficulty constant to calculate price.

And we could create a website and a bot to trade all bitcoins automatically at that price. It looks like a great idea indeed and it would stabilize price indeed. But in order to make things more stable we not only have to sell if price rises above the price limit, we should buy bitcoins if price goes down too.

Absolutely brilliant, I love it! Any idea where I could find an API feed with, say, daily average prices for the last 7 days as well as daily average mining power for the same period? Such a value would be likely to increase steadily during each difficulty period which would show much closer to the real trend of slowly increasing value rather than big spikes every time the difficulty goes up. Yes I understand that difficulty lags price (because it's calculated after the fact) but if you smooth the lines of that jagged stairstep they tend to match price quite nicely.

The 7 day average bit is precisely what I was talking about when I was asking for ideas to improve the formula... Now let's try to make it happen lol.

I can't agree more that we need to both buy and sell around the limit, it's just much harder to get people to agree to buy at any given point than to convince them to sell  ;D

I don't know, but I'll be interested in helping with the programming part in 2-3 weeks (I have exams now).

This Trading Bot should be used mostly for savings, Meaning that because we not only sell but also sell, in average you won't be able to retrieve the money exactly at the moment you want, only when price is above the calculated price.

Or we could make two bots, one that only sells and another that sells and buys. But, the problem for the bot that only saves is how to send the money in $/€ to the people... I'd rather we only use a bot that both sells and buys and when people want to retrieve the money they retrieve it in bitcoins...

EDIT: Or yeah, that could mean a miner strike when prices go down! Fuck Yeah!

Best thing I could find is the MtGox "recent trades" JSON feed, which seems to go back about a week. I'm fairly sure I could hack something together to pull that data into a temp database, calculate a moving average and then dump the temp table. I'll have to play with the data a bit but I think an exponential moving average might fit the data better with less lag. I feel like I'm heading dangerously close to speculator territory with the bot idea, but I suppose there's a difference between speculation with my own interests in mind and speculation with the interests of the market in mind.

Solution: Build something that justifies that price. The network gave us a gift. I started coding. Stop trying to make the math work against the math. You'll only drive yourself bonkers.

This thread is getting cluttered with anger, pedantry and semantics. I'm simply not responding to it any more. You can go argue somewhere else if you have nothing constructive to add. Anything that looks sounds or smells like an ad hominem attack will be ignored and, if the attacks get bad enough, reported. I will update the first post as new developments occur on the site and I'll gladly respond to meaningful criticism but I'm tired of playing this game where we all just call each other names and get nothing accomplished. Be constructive, be productive or go home.

I'm not trying to make the math work against the math. I'm trying to make the math work for the people against instability and the formation of market bubbles.

Here is my proposal.  We build something like MtGox with calculated rates and limited trades.

Here is how it works.  Pools can add an optional fee that will automatically transfer bitcoins to this new trading site.  (non-miners can just contribute in a non automated fashion.)  These coins are available for purchase at the 7day average of the other exchanges+10%.  When coins are sold, the miner that contributed them (selected round robin) gets 3% into their account.  The rest of the money goes to buying bitcoins.  Bit coins can be sold at the 7day average-10%.  Again, the bought coins go back to the miner who sold his coins that generated the cash that was used to buy the coins.

The non-contributors (i.e. speculators) have the option to buy and sell at these fixed rates.  However, their max volume is determined by a percentage of available funds left at the trading site.

What I think this will do is cause normal people to reconsider if they really want to buy at more than 7day+10% or sell less than 7day-10%.  "I can go to MtBitcoin and buy from the miners for less."

Also, I think we should try to get stores to use a stable rate of 7day (+/-5% which they choose).  If I had my store up and running I would seriously consider trying it.

talked about miners union days before. anyone laugh. now - nobody laugh.
talked about distributed marketplace - anyone laugh. now [almost]anyone programming engines for it.
talked about telecom investments - sceptics eyebrow. now satcom sales high as never before.

How about this, then... I've agreed before that speculation within certain bounds is good and CAN have a stabilizing effect, but that much of the speculative trading that is occurring today is doing little more than creating unsustainable bubbles and profiting from both their rise and their crash. What if we find a way to create a reasonable valuation of 1 BTC, perhaps an exponential moving 7-day average or something. We publish this information in an easy to find easy to use manner and suggest that people buy when the market dips more than a small amount below and sell when it climbs more than a small amount above. This would still be a profitable trading scheme, though riding the bubbles and crashes is potentially moreso. The major benefit to this scheme is that if enough people trade around a reasonably estimated average price for a given day, their trades will help correct the trading price back toward the average. Given enough users and enough time this should lower the obscene variances at least enough to make it usable without being pegged to a fiat currency in a much shorter timeline.

I would have no problem with this kind of a system and it doesn't have any of the dramatic components people have complained about before - no controls or demands, merely information and education as well as a set of recommendations that can be profitable for those who follow and are good for the market as a whole. Given a bit of time I could whip something like this up from MtGox's API feed fairly easily. Questions/comments/complaints?

To the OP (original poster):

Regarding difficulty and the value of BTC: You are confusing "accidental" correlation with "essential" correlation.

Yes, up till now there has been an accidental correlation between increasing difficulty and more Bitcoin users. But it's not essential.

It's essential for a computer to have a CPU -- without one, it's not a computer.
Having lots of LEDs is "accidental" -- that is, it's just icing on the cake. It doesn't take away the fact it's a computer if it's lacking that feature.

A man having red or brown hair is accidental.

Anyhow, it's more likely that someone with 20 rigs added 3 rigs, than finding 3 new miners to add 3 rigs. As time goes on, this will be more and more likely. When someone has 20 rigs, they have lots of money coming in and adding a rig is nothing. It's harder to find 3 more people who are interested in mining.

Anyhow, just because 10 miners add a rig (with 3 cards) and raise the network hashrate by 0.3% doesn't mean that the Bitcoin base went up by 0.3% -- it's not essential. Even if it's gone that way up till now, it won't in the future.

Matthew

@Angelus: There is also an upper limit to how many rigs the average miner can sustain. Not many people are mining out of data centers right now and believe me you start running out of available electricity after a point. Assuming ~400W for a decent rig and ~1300 BTU/h of heat that will need to be removed via additional air conditioning at average efficiency levels, we're talking ~550W per rig. If you're lucky and live in a house or a decently large apartment you might have a 100 amp main breaker, meaning ~11,500 watts are available to your entire house. Roughly enough to power 21 rigs if you had no other power consuming devices to run and no other heat producing devices to cool off. According to the US Dept of energy the average U.S. household consumes ~14,000 kWH per year, which works out to about 1600 watts at any given moment, averaged out. That leaves enough room for 18 rigs if you're average and I'm guess most miners were above-average power consumers long before bitcoin existed. There is an essential upper limit to any mining operation. Most are not willing to lease a separate space to expand operations so once they hit the power/heat ceiling they are unlikely to continue expanding. To this end, yes some portion of the difficulty increase will always reflect old miners buying new rigs but I'm willing to bet that the better portion of it is new miners. Also, old miners couldn't buy new rigs without demand for the currency which I still believe is coming from growth of the network more than speculative demand (especially now that the $31 bubble popped)

@chodpaba: I agree that darkpools are frustrating and bad for the market. The whole system was built on the concept of "open but anonymous" transactions. Since those dark pool transactions still require a transfer of BTC between accounts, perhaps we could combat this by using blockexplorer to compile the total BTC transaction volume for a given day and find some correlation to average price for that day which fits? That would almost certainly be a more accurate measurement than what MtGox chooses to give us via the API, though considerably more complicated to gather data on :)

Of course we could also vote with our feet and just start using TradeHill. I have the feeling there will be a fairly meaningful migration once TH's API becomes available...

Oh, and that's if you're lucky enough to have a 100A main breaker. If you live in an apartment (like me) or an old house, you might get stuck with 50A (like me) or 60A main breakers, so cut that in half.

I pop breakers all the time :(

All right, consider it done! Well... Give me some time to write the code and figure out how/where to keep it running without hammering my poor little shared hosting box and THEN consider it done!

Stability comes from anchoring to productive transactions.

The right way to do this is to take the gains, be productive, and refuse to trade coins below what the work is worth.

Stability does not come from numbers. It comes from valuation in terms of work.

OK I think I have some good data sources and sound math to work with now, give me a few days to figure out a proper volume/price ratio with standard deviations and make sure the calculated curves fit within some reasonable distance of reality and I'll bash out some code to produce new improved numbers which should update with every block instead of every difficulty change - much better resolution :)

Exactly right, that's what my current work is all about, knowing what the work is worth. You can't "refuse to trade coins below what the work is worth" if you are legitimately missing that data. Give me a bit to find some math that matches the data and we'll all know what the work is worth.  ;D

You're just going to get buried in the rabbit hole.

What you want to do is to define your parameters:
How many hours can you put up with being distracted from family and community?
How long do you think the money you make should last?
How much loss of purchasing power and earning power are you willing to sacrifice for exchanging into fiat?
How much personal energy will you have left to be active in what you care about?

Work is worth what amount of time you have to put into it aside from other things you need to do.
Time is worth what you could be doing with it and how much more time that will take if you are distracted.
Money is worth whatever amount allows you to live at those parameters above.

Labor is a commodity. Work is not. Let's start acting like it.

Rather than suggested price, it should be reference price, window of variation that will not interfere with the above, the change in value of the fiat as well, and whether the price is moving in the wrong direction.

All this tweaking needs to include the tweaking by central banks.

And what we really need are trade recycling patterns. Using the same BTC 5x to buy a car by cycling them through the community. That's how you get stability.

Then I guess bitcoinreference.com is an appropriate domain  ;D

But in all seriousness, yes I intend to work out something volume-based from what I can mine out of block explorer's API. Speaking of which, anyone else having trouble getting to block explorer right now?

These are the kind of questions one might ask when deciding whether to accept a job offer. The data I'm trying to come up with is a reasonable estimate of what that job might pay with a shelf life of more than 20 minutes. I also believe that if people are aware of a reasonable, expected average then they are more likely to trade around it. If you recognize what the current valuation of a commodity should be and see that it is actually trading significantly higher, you might recognize a bubble more rapidly and responsibly sell. Enough responsible selling will suppress the bubble without causing drastic market corrections. The same works in reverse - if you recognize that a commodity is under-valued at the moment, you would certainly be best served to buy some and then re-sell when it becomes correctly or overly valued again.

The big problem that I think we've come to an agreement on is that factors like MtGox's dark pools, unmonitored black/gray market exchanges and transactions etc. make it very difficult to determine proper valuation of bitcoin as an asset. Thankfully we all have the ability to peek directly into the block chain and attempt to extract data from the transaction database itself. This is what I'm currently attempting to do (or what I will be attempting to do once blockexplorer comes back up).

True, but they have a really handy API and I don't feel like re-inventing the wheel at this exact moment. Eventually yes I'd like to start parsing the blockchain myself and not be reliant on BE, but until I've at least proven my math I don't want to re-write that amount of code.

Of course if anyone has a code snippet or knows of an application that will let me peruse my local copy of the chain and perhaps run some basic analysis that'd be more than welcome too  ;D

The value of a bitcoin from a job is the same as that bitcoin spent on a product. You're looking for a distinction where there is none.


FUUUUUUUUUUUUUUUUUU. Dammit.

All righty. Lemme try a different approach.

I spent zero minutes looking at prices when I created my lending structure. I price in BTC and expect fees in BTC. Nothing else matters. Dollars don't figure in one bit. Exchange rates are not a problem until I get to bitmunchies.com and diapers go up in BTC because somebody tripped up a bunch of bots.

And the irony of it all is that you can actually build bots with their own circuit breakers. No change to the exchange is needed.

When the day comes that I can pay my electric bill in BTC then I'll be able to do all of my accounting in BTC and no exchanges will be necessary. Until then, I need a reliable way of finding out whether my mining operations will be profitable today and it might be nice to know roughly how profitable, too.

I already do. :)

I skipped the thread, but hopefully someone has pointed out that what you're suggesting is a cartel. You're the millionth person to invent such a thing. They sound great in theory, but they don't (generally) work.

The reason is that it's profitable for people to cheat the cartel and therefore, inevitably, someone will. You're trying to resist the natural forces of the market.

Cartels can work when they're made up of a very small number of people (the handful of controlling interests in OPEC, the only two gas stations in a small town, etc) and/or when there are effective methods to punish cheaters who must be traceable. Bitcoin mining is almost the perfect example of a scenario in which cartels can't and won't succeed.

Yeah you shouldn't have skipped the thread, lol. That may be how this all started off but I'll admit when I'm wrong. I did the math, I ran the numbers and I figured out not too long after the original post that it was highly unlikely I'd ever get enough of a power base to pull such a thing off. I've shifted focus on my site. I'm working on extracting data from the blockchain that, combined with data from the MtGox API, might be able to give a meaningful prediction of BTC/USD value expected for a given period of time - something like an exponential moving 24-hour average but smoothed or modified by factors not necessarily available directly from MtGox. For example, I should be able to correlate transaction volume from the block chain to transaction volume as reported by MtGox and sizable differences in volume may be noteworthy predictors of dark pool action.

I plan to spend the next week in deep analysis and hopefully can come up with not just a more accurate price index for this market than the standard analysis tools might provide but also EMAs for the standard deviations such that we can try to predict the likelihood of market movement in a given direction and make the most intelligent trades possible.

I feel pretty certain that people following their natural instincts can stabilize this market over time, but that time might be shortened by smart traders having good data and THAT is what my efforts have now been turned to.

I recently started to accept Bitcoin as a merchant, and it was the same day BTC went from 18 to 31 and then dropped off pretty low against the USD due to heavy sales. ;)

So what I did was making the order processing partially automatic; the customer select Bitcoin during checkout in the online shop and gets information how to proceed in the order confirmation email automatically. When we receive an order I browse through the recent currency trade stats/graphs for the past days and reply with an offer via email which is time limited depending on how big the BTC currency fluctuations are against US Dollar. This is also a good way to get experience with BTC, and maybe at a later stage implement fully automatic handling.

In addition to this, in a way to even out the BTC currency losses when customer "gets too good rate", we keep some of the customer payment in BTC (eg. like 50%), and exchange the rest to USD. Since I believe the Bitcoin will increase in value against the USD eventually, even if it takes a month of swinging up and down, half of the customer payment will then increase enough to cover any losses we had at the time of purchase.

To survive as a merchant these days you have to improvise and adapt, this is nothing new for us. I think the people worried mostly about currency fluctuations are miners here in the forum, funny that they seem so concerned about merchants. My advice; when the the rate drops down, stick with your Bitcoins, don't panic. Hasty decisions are rarely good.

I've just updated the site (and API feed) with new code. It now displays the most recent price, a four-hour moving average price and the standard deviation for that same four-hour span. I'm suggesting that merchants list their items at the low end of either the 68% or 95% (1 or 2 standard deviation) brackets since that's the lowest value BTC is likely to swing to before you get a chance to cash out.

For investors, buy when the market is more than 1 SD under average and sell when the market is more than 1 SD above average (use other tools and knowledge obviously, but this is something worthwhile to put in your toolbox).

Similarly, miners should hold coins until value is above the 1 SD range (or above the 2 SD range if you're really patient) to sell.

Finally, the standard deviation itself can be used as a tool to measure market volatility - a high standard deviation indicates a high degree of volatility while a small standard deviation indicates a rather stable market. I'm doing my data-gathering now to determine what a "good" SD (as a percentage of variance from baseline) is for this particular market and I'll be developing an implied volatility algorithm from that in the near future.

Enjoy :)

Gotcha, I suppose it would make sense to treat the market more like a resonant circuit than any kind of normally distributed system - it is a sort of feedback loop after all.

Of course I haven't used anything with the name "Lorentz" attached since college so I'll be out for a bit brushing up. Then I'll have to see if my mediocre PHP skills are sufficient to actually implement whatever my refresher course turns up  ;D

http://upload.wikimedia.org/math/c/2/0/c20c295d95a9bb416922020313ac0331.png

 :o

Yeah I can't do that in PHP. I could maybe do that on paper if you gave me enough time, but I'm a database admin, my programming abilities have very real and finite limits :P

How about using this to "suggest" profitable pricing of items rather than trying to make the market "behave"? Fixers invariably have this fantasy target in mind after which every new target is just a new target. They never have to admit they needed to adjust.

Difficulty goes up in less than a day. Bottom prices will rise and consolidate. Top speculation will panic and fall. This is a consistent stabilizing pattern.

Another better way to do things is to sell low price items at high traffic against the BTC and high price items at low traffic against the dollar (in BTC). I don't care if pay $13 for .5 BTC pencil. I just do not care. But I do care if I pay $80 for 5 BTC in diapers.

I believe that the market should set the value for BTC, not some guy trying to setup a cartel of miners. We already have been dealing with the Federal Reserve and the banking cartels long enough, I think it's a horrible idea to start yet another freaking cartel.

If someone is willing to sell coins under what he believes is a 'fair market value', he is free to buy them and resell them for his 'fair market value'.

"fairness" is an arbitrary concept that is improbable to be agreed upon by a large population.

awesome site =) awesome idea =) speculators are ruining bitcoins for a quick buck

They should be allowed to fail if they choose not to do their homework, like everything else in life. In a free market, no transaction is made unless both parties benefit, they aren't forced to sell their coins and they should not be forced to hoard their coins by some cartel either.

The inexperienced traders will eventually fail, lose their time and or money and move on. Let them go gracefully. Leave nature alone. Haven't we learned enough already from the past?

When you try to make things idiot proof, mother nature comes along with a better idiot, and you end up causing more damage than if you just left things alone.

There is no fair value. You cannot take something that occupies space and pin it to a dimensionless point. A rock takes up volume. It is in a trillion infinitesimal coordinates corresponding to that volume.

I would focus on the moving pricing window of bitcoins. The challenge is nailing that to an abstract quantity. Like if I have a bag of coins, I'm willing to sell some of it if the price increases and willing to buy more if the price decreases, relative to what I can purchase. The analog for market price would be the two points at which I'm willing to sell the whole bag of coins or willing to double it with yet another axis of prices (velocity thereof) at which point I may be willing to increase the number of coins per bag or decrease them, and finally the acceleration at which I would be more likely to increase the amount of bags of coins in play versus decreasing.

That's the kind of trading market I would design. Using the dynamics of options in the context of actual trades.

Haven't had a chance since a day ago. But I'm glad he's listening.

My pivot points would be based on such a chart, but you never get to see my chart. And the boundary points for price, velocity, and acceleration... I would have to come up with vague but representative details that give more information without giving away market position and security. Of course I have no problem selling a feature that "attempts to undo" the obfuscation.

I'm always happy to listen to constructive criticism. Unfortunately that's not usually the kind of criticism I get  ;D

Oh and on a side note, many thanks to stickystyle for spotting an error in my JSON feed. It's been fixed and you should have no problem parsing the data now.

API is down right now, you're dividing by zero. You need to DIVINE by zero: http://thedailywtf.com/Articles/Divine-by-Zero.aspx

:)

This has been a very interesting thread! The opening arguments reminded me of the historic arguments for the creation of the US federal reserve, to smooth out market volatility, in essence to tame the boom and bust cycles through monetary policy.

Now it's seemed to evolved into some kind of RSI-style metric to let traders know when the market is oversold/overbought, now that is something that I think people could find quite useful.

A word of warning from our good friend Hayek seems apropos,

"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design." FA Hayek, The Fatal Conceit