Bitcoin Forum

For countries with small economy scale and small amount of currency, they ususally use a USD pegged exchange rate to avoid currency value fluctuate wildly.

So, to be stable in the early stage of BTC, it can use a pegged exchange rate to a basket of world currency and commodities, for example considering such a combination:

USD 10%
EUR 10%
GBP 10%
CHF 10%
JPY 10%
Gold 10%
Crude Oil 10%
Copper 10%
Rice 10%
Cotton 10%

These combined elements will keep the overall exchange rate of BTC very stable, since most of the price movement in these elements will cancel each other

How do you intend to peg the exchange rate of a bitcoin?

Well, it might need to be designed to suit BTC nature, I haven't think a lot about this

Take China for example, their currency exchange rate is controlled by the central bank

If you want to buy some goods from a chinese merchant, you tell your bank that 100K USD is going to merchant A to buy some goods, then the bank will issue a Letter of Credit to merchant A. Merchant A will dispatch the goods and use the shipping order to get payment from a chinese bank designated in LC. After payment is done, your bank will receive the shipping order and you use that order to get your goods.

Merchant A get payment in RMB, not USD, since his chinese bank has already exchanged those USD to RMB with central bank. Therefore, central bank collect USD and paying out RMB to merchant A.

Same, if merchant A wants to import some USD products, the central bank has to exchange his RMB to USD before any purchase action, using a fixed exchange rate.

See this chart (http://4.bp.blogspot.com/_EZMGVwURo3M/SXPkbMjeQ8I/AAAAAAAAAcE/fbNjwTjfPLU/s1600-h/ChineseDollarPeg-784851.PNG).

Chart taken from this article (http://www.marketskeptics.com/2009/01/hyperinflation-will-begin-in-china-and.html).  I don't agree with the conclusions necessarily, but it gives a good discussion of the exchange mechanism and demonstrates how sterilization works in the real world.

Can you spot the one critical feature in the chart that explains how PBC is able to hold a peg?  Do you understand how the lack of that feature will make it impossible for you (or anyone else) to maintain a peg?

Exchange rate is always need to be controlled, no matter a floated currency or a pegged currency. Bank of Japan just did an intervention yesterday

BTC is a distributed currency, and the exchange rate can also be distributed, that makes a composite exchange rate for BTC attractive

the exchange price of a bitcoin. is defined by supply and demand.
it can therefor not be pegged to anything.
example:
you do make a fixed-price exchange. where one can buy 1btc for 10usd.
now if the price on another exchange goes to 13usd per btc.
people will put alot of usd into your exchange, and you will run dry of btc(and your peg is GONE)

sorry mate.

Anyone trying to peg the BTC to anything will get pegged  ;D

To OP's point... have you ever researched what has happened to countries that peg their currency to the US dollar? It works for a while, then it gets really ugly really fast.

China has been pegging RMB to USD for decades, it still goes on

If everyone is honest merchants and the market is enough big, then maybe supply and demand will decide a reasonable price, but for a small currency like BTC, it will take only one hedge fund to push the price to 100+$ and cash out, finally short it to 1$ from there

In a pegged system, the exchange rate is always decided realtime by a basket currency/commodities, so basically all the exchange will have the same rate published.

Of course, if a hedge fund manager put 10 million dollar to buy as much BTC as possible, then exchange will have to provide that amount of BTC to him, since almost everyone is hoarding BTC, exchange simply could not find that much BTC that he can buy, then there will be a liquidity problem

So, for a pegged currency, the exchange should have enough reserve to damp the speculative behavior and keep the promised exchange rate, this role normally is carried out by a central bank

But anyway, with a pegged exchange rate, the worst result will only be liquidity problem, the exchange rate will always keep the same, this will in a large degree discourage the speculation

Because they can print RMB at will.

Expect to see that blow up in their faces in the next 5 to 10 years.

Same as FED printing USD, and that pegged exchange rate is not fixed, I remember it is 3.x in 80s, 8.x in 90s, now 6.x

A pegged system could be aimed by hedge funds. Soros crashed bank of england and some aisan countries, but he was defeated by the HongKong government when he played the same trick, because chinese government had much more USD reserve than he could leverage. As long as an economy scale is small, maintain price stability is difficult

Not even remotely the same thing.  China is printing RMB to balance a massive influx of dollars in a futile effort to keep the value of their currency low to keep sucking manufacturing into the country.  Google "mercantilism".

And a having a peg doesn't mean that you can't change it occasionally.  It just means that the PBC is ready, willing, and able to convert any quantity of USD into RMB (or the reverse) at whatever the official rate is that day.

BTC are not centralized, so pegging them to anything would be impossible.

However, feel free to create a new cryptocurrency pegged to whatever you would like.

That is what I mean, if you do not have a centralized authority, the pegging system would be based on totally another set of rules independant of central bank, this might bring BTC some advantage against fiat currency, whose value changes a lot nowadays

If BTC value is very unstable like we have seen, then only speculators will be interested, no real economy will grow out of it

Yes, but the real problem is how to accomplish that (Please consider that this is a recurring proposal in the forum.). Maybe a totally different system with WoT and trusted arbiters and IOU's and whatnot but it would be totally alien to the Bitcoin technology. And I don't see the upsides. If the intention is moving funds beyond borders, you could easily use those currencies directly with a system like Ripple.


It's unstable because it's small. But it's growing. We need more speculators, just as we need more vendors and offered services. I've been here for almost a year now and it has grown considerably. And, believe it or not, got more stable (check the logarithmic charts). I think it is very probable that a "real economy will grow out of it", since it seems that it has uses that gives it value, even with all the volatility.

So start pegging it.  Offer buys and sells at the rate that you feel is a fair peg.

I think you'll discover the disadvantage of that system very quickly, but at least you will have learned something.

It takes a lot of financial strength to peg a currency or a commodity. However, it can be done for short periods as a convenience to markets. The price of gold is "fixed" twice a day, by five big banks, in London. Before trading became so fast, there were more currency pegs. See the Bretton Woods agreement.

This really should be added to the FAQ (http://en.bitcoin.it/wiki/FAQ).

If the exchange rate changes wildly, it is a gamble
If the exchange rate rises continously, it is a bubble
If the exchange rate drops continously, it is a trouble

Either way, not suitable for serious business :)

and...?

The problem with BTC is not the exchange rate of it for fiat currency. The problem is that it's a pain in the a** to actually USE it to exchange BTC for goods/services.

Are you kidding?  I've found that using BTC to pay for stuff online is vastly more pleasant than using paypal or a credit card.

+1

I think most of us are looking from the perspective of already having credit cards and paypal accounts, and already knowing how to use them. Besides the fees, and the fact that you have to register a bank account to get them, which is a pain if you are an expat, they cause additional problems. For instance, a couple of months ago, my bank decided to replace my credit card because of a security issue (the fact that I used it abroad), and it caused a lot of grief, such as paypal not being able to pay for my domain updates. These things happen regularly.

I don't mean that Bitcoin doesn't have it's own issues parallel to these, like having to secure your wallet, but the payment system itself is almost without any problems. We just lack a few tools that will fix some of the unpleasant things we have to deal with.

Pegged distributed currencies (the descendents of bitcoin) are quite possible, and they are on the way. Check out this thread:

https://bitcointalk.org/index.php?topic=29135.0

I had my own schemes for how this could work, but I've decided that morpheus' idea is the best way to do it.

These new block chains will be highly dependent on bitcoin, for price discovery and for mining (using merged mining). If you (like me) think they will be ridiculously successful, it's time to buy some bitcoins.

May want to consider getting an education before posting. You are off-topic and out of your depth.

Well, if you say it, it must be true.  Thank you for setting me straight.

You might consider donating to show your appreciation.

I hate it when people run out of logic and resort to insults. Anybody know a way to send negative bitcoins?

kjj, I think your reply showed class.

Sometimes I'm so exasperated by stupidity that I lack the patience to use reasoning. Sorry, I'm not perfect.

Meh.  Don't worry about it.  I do the same thing too.  In fact, I have a bit of a reputation for it.  I don't let it get me down when people do it back to me.

By the way, if you can think of anything actually wrong with my arguments, feel free to jump back in.

I still maintain that China is printing massive piles of RMB in an effort to maintain their dollar peg.  Their peg isn't completely hard, in that it floats a tiny little bit in the short term, and can move quite a bit in the long term.  But it is still a peg in that the price is set by policy rather than by the market, and there is no conceivable amount of either USD or RMB that could be dumped on PBC that would move the price by more than a token amount.

This is only possible in that situation because they can create one currency at will (and then sterilize it to hide the inflation), and they have an enormous stockpile of the other that they can draw down for a while if it ever becomes necessary.

I'm glad you guys were able to make up.

I was shocked to realize that I actually DO have a way to send him negative coins (well, something very similar anyway). By not paying him 0.1BTC he would otherwise have won, I effectively sent him -0.1 BTC here: https://bitcointalk.org/index.php?topic=31057.msg443612#msg443612

I just couldn't resist the opportunity to follow-through on what I originally thought was an empty threat! :-P