Bitcoin Forum

First off, I want to say that I am not an economist so I don't know if what I am going to suggest is viable, but hopefully it will get some discussion started to improve the marketplace for the better.

The big problem as I see it is the extreme volatility of the exchange rate due to it being a very thinly traded market. This volatility is a major problem in conducting business with the currency, as it may lose a significant portion of it's value soon after you buy it. At the moment we have a handful of "reliable" exchanges where the rate is determined in an irrational and speculative way that is open to manipulation by those with excessive purchasing power. This irrational price in fiat currency then becomes the standard "value" many of us attribute to a bitcoin, and make poor buy/sell decisions based on this uncertain information.

Do you think it would change people's behavior for the better if they were guaranteed to be able to sell back any bitcoin they buy for the same price they paid? This ensures that they do not lose any fiat value from the irrational swings in the floating market, giving people a safety net in case the floating price of coin tanks. I think this would cause a paradigm shift in the minds of many. So how to achieve this? Here are my thoughts...

We could conceivably create a not-for-profit exchange that would set a fixed price per bitcoin, well above the floating market rate. This exchange would sell 1 bitcoin at a static price in fiat currency, lets say an arbitrary $3, and charge a small fixed fee to cover expenses. Now, any users who buy bitcoin from this exchange for $3 are guaranteed to be able to sell the coin back to the exchanger for $3 in the future, no more and no less than the exact price they paid for the coin. To do this, the exchange would keep in reserve 100% of all funds. Essentially, we need to create a exchange reserve.

Users of the exchange would only be able to sell as many bitcoins for $3 as they have purchased from the service. So if I have bought 10 coins for $3 each, I am guaranteed to be able to sell 10 back again for $3, by means of issuing guarantee-credits along with the bitcoin. If you want to buy bitcoin to exchange for goods/services, you could also transfer these $3-guarantee-credits along with your purchased bitcoin to the business that you are buying goods/services from so that they could then be guaranteed to sell them for $3. This process could be automated by creating a merchant API.

Price stability AND a merchant API ensures no loss in value, and makes bitcoin much more attractive for new business to adopt.

Once you have exhausted your guaranteed-credits balance, you would not be able to sell any more coins for the fixed price until you buy some more coin from the exchange. If you already have coin, you can simply deposit it with the exchange, and when you want to send coin to a business using the API you would have to pay the difference between market-value and the fixed price to obtain guarantee-credits.

Users are of course free to sell any purchased coins for more if they become more valuable on another exchange. This guarantees people are able to take any appreciation value, but guaranteed not to LOSE any. The static price would obviously be reviewed upwards if the floating value of a bitcoin exceeds the price charged by the not-for-profit exchange.

Any thoughts?

Not necessarily. As I said, if the exchange price rises above the static price it would be reviewed upwards and held at a level constantly above the best exchange rate available anywhere else. This would only apply to subsequent transactions. If someone manages to sell all their bitcoins for more on another exchange, when the price inevitably collapses again, they still have a $3 guaranteed price to which they can sell into by buying coins from cheaper exchanges, thus replenishing the coin reserve.

The key point is that this would be a not-for-profit exchange that will self-regulate and ensure price stability for economic activity. The fees charged would be just enough insurance to cover any monetary losses and expenses. If we could work the system out properly, I think that it could be stable over the long term.

And anyway, there are plenty of people out there with thousands and thousands of coins, early adopters who believe in the currency more than they care about short term fiat profit. We just need some philanthropist to allow their coins to be used for the good of the community. After all, they may become worthless without these controls.

A market this irrational needs to be controlled in my opinion. It is the only way to facilitate good honest economic activity.
In the end, that is what will determine the fate of bitcoin.

This is not about controlling the market, it is about ensuring price stability for consumers and businesses who wish to use bitcoin as a means of exchange. They cannot do that reliably with bitcoin at present, because of the inherent instability of the exchange market.

You say that controlling a market means it is not rational, but what is rational about a free-floating market? What is rational about people buying bitcoin at $30, then watching their investment slowly decline all the way down to $2 without selling it? This is not a rational act. Both of these systems are as irrational as one other, but the latter is much more prone to excessive levels of panic, mania and delusion. With a pseudo-static bitcoin exchange, at least excessive irrationality can not affect the price and you get the added benefit of being able to actually use your coins without risk, because they are backed up by your money via guarantee-credits, so merchants can be sure that their bitcoin can be exchanged back for the same amount of fiat currency.

Think of it as a market that is deluded (i.e. not rational) but in favor of consumers and businesses, rather than speculators.

I understand that this can be done by using an options market (does one actually exist?) but what I want is to create an exchange that takes care of all of this for you and simultaneously facilitates smooth economic activity by providing a merchant API and without the requirement of having a degree in economics just to ensure that you don't lose any of your money after you buy bitcoins to make a purchase. Call it an options market if you want, as I already confessed, I'm not an economist.

I'm not saying all the exchanges should do this, but for businesses who want to accept bitcoin as a means of payment, they could use this exchange to ensure price stability until the transaction is complete. The price paid for a bitcoin doesn't matter so much if this is all you want to achieve. People are still free to trade as much as they want on the irrational floating markets, and the static price of, say $3, would not affect this floating price as you cannot sell into it without having bought at that price first.

It is simply a way of facilitating economic activity without having to rely on a widely volatile and thinly traded exchange markets such as MtGox and others to get your fiat out once the transaction has been completed. If these markets were bigger and had more people and money involved in the collective buy/sell decision making, this would not be necessary. But at the moment, it is necessary, because we cannot offer bitcoin as a realistic commerce solution without the price being stable at least over the medium term.

Why should we let exchanges determine the fiat value of a bitcoin when it is not at all necessary, accurate or for that matter... wise, to do so?

The rational thing about a free-floating market is that the buyer and seller transact at a price that leaves them both better off.

If I judge the value of a bitcoin to me to be $10, and someone else decides that the value of a bitcoin to them is $8, then they can sell to me at $9 and we're both happy.

A market isn't about guaranteeing anyone a risk-free investment, or anything like that.

Why do they both have to be better off after a trade? As long as neither is worse off, bitcoin can be used properly in a real economy. The scenario you are suggesting is fictitious. This is NOT what we have now. Do you think people WANT to sell at $2 because they are better off? Of course not, they have no choice in the matter if they want to remain solvent.

There just is not enough liquidity in the exchanges to maintain stability for it to be feasible as a legitimate means of exchange. The way to get around this is to provide liquidity yourself with your own fiat for every transaction you carry out.

Yes, of course a commodity market is not about guaranteeing risk-free investment. But bitcoin is a currency, not a commodity. It has no inherent value other than it's purchasing power. It's function is to facilitate economic transactions, which themselves may be profitable. It is not supposed to be a tool to reward speculators for hoarding. It is NOT an investment vehicle, and I wish people would get that out of their heads.

These misconceptions are dragging the whole community down, and you have been round the block long enough to know better.

I don't get it. If you have to keep readjusting your price to float it above the market price, then how will it keep a stable price? What is the necessary margin you will need to cover the market fluctuation? You will have to keep adjusting to stay above that margin.

It could just be set very clearly above the market price, lets say around $10, or even $100. It doesn't matter how much the price is, as long as it facilities trade, and the receiver knows he/she will be able to sell it back for a given price that does not fluctuate in the schizophrenic way the floating exchange rate does. The market price is totally and completely irrelevant for the purpose of this service.

Just like a floating rate, the static price of the coin is an agreed upon delusion between the buyer and seller. You pay $10 for a coin, send that coin to a merchant along with a guarantee that they can trade it back for $10. It doesn't matter how many coins we are talking about, or the price of each one, as long as the transaction can be completed without a loss of the agreed upon purchasing power of the bitcoin.

How? If the exchange sells 1 btc and 1 guarantee-credit for $100, where is the incentive to sell it for $2 on the open market? The only way you will get your fiat back is to sell it back to the exchange for $100.

The only people who are going to be hurt by this are those buying it on floating exchanges. Example, I buy 1 btc for $100 (plus a guarantee credit for $100). I take that bitcoin and sell it on an exchange for $2. Then I wait for the price to fall, buy another for < $2 and sell it back to the exchange for $100 again. What has happened? I have siphoned off a little from the market capitalization of bitcoin at the floating exchange. This transaction does not hurt the not-for-profit exchange I am suggesting. Equally, if the price rises, I have to pay more than $2 for my new bitcoin, and I have actually made a loss then.

The exchange would not lose money. It receives $100, gives out a bitcoin and a guarantee credit, it then receives a bitcoin and a guarantee credit back and gives out $100. There are no losses. There is no opportunity for arbitrage...

We should get it to google android market, if many of the smart phone application can only be bought with BTC, then it will have some real economy back it  :)

Not quite. It would sell 1btc at a price well above the rate, I don't know exactly what price, but one that would take a significant amount of new money in the floating exchanges to get to. Lets just use $100 as an example, it really doesn't matter.

For your $100, you get 1 btc PLUS a transferrable guarantee-credit that will ensure you can trade the coin back in the future for the price you originally paid.

You can then send the coin, plus the guarantee-credit to a merchant, and they can trade it back using the transferred guarantee-credit for $100. This would all take place seamlessly via a merchant API that businesses could implement on their site.

How are you going to get 1btc for $5 with a guarantee of $100? The only way you will get the guarantee is if you buy the bitcoin from the exchange and pay $100 for it.

You can only sell back however many coins you have already purchased. You can't buy coins from the open market and sell them for $100, as you will not have the required guarantee-credits to do so.

So they buy a bitcoin with a note of credit, really what they are buying is a new currency (your note of credit) with a small token bitcoin tagged on. This kinda removes the whole point of bitcoin being decentralised why not use usd as the holder of your notes cant tell if you are buying off the market and issuing more credit notes for profit.

The new exchange would add massive counterparty risk in my opinion which is the major incentive for using bitcoin.

Again, not quite. There would be no differentiation between individual coins. The important factor is the guarantee-credit. It is transferrable, and is backed not by a central exchange, nor the total market capitalization of the bitcoin system as a whole, but by the fiat currency YOU have paid. You are guaranteeing the bitcoin with your OWN money.

You could do the exact same thing, but get rid of the $5 bitcoin. Just sell $100 credit notes which is pretty much what you would be doing.

Essentially you are correct, but this would all happen automatically under the hood of the merchant API. The end user need not understand that they are buying a promissory note, or transferring it along with their bitcoin via the API. All they need to have is an account with the exchange and some fiat funds.

I get that there is counterparty risk involved, but by making the system transparent and posting realtime statistics, trust could be slowly established. There could not be more guarantee-credits available than there is fiat funds to back them up. Merchants would cash them in immediately. They do not need to exist for very long. As long as both the reserve total and total guarantee credits issued is published in realtime, this will help negate the risk.

Think of it as a transferrable promise to exchange 1 bitcoin for X amount of fiat then.
No new currencies need to be involved.

Linden dollars are exchangeable for US dollars or other currencies based on market-determined rates at currency exchanges. I know nothing about linden dollars other than that. Where is the similarity?

Commerce cannot be carried out with smoke and mirrors. It needs to have a stable means of exchanging value. The decentralized nature of bitcoin has many advantages, but providing a stable means of exchange is not one of them. Bitcoin is failing miserably on this front.

Again, I am not an economist, but I do feel that there is a great need for something along these lines. I am not saying that I have come up with the right solution, but some kind of solution is required if we want bitcoin to be successful.

Ok, so from what I can understand, you want to create options and the means to easily (automatically) transfer the contracts. I will not comment on the sustainability of such a system, which I doubt for the moment, but I think it can be made to work.

My question is this: why would anyone want to transfer the put contract, too? Why would someone voluntarily give up his protection? Because, in the end, that's what an option is...

I see this scenario to be common: user Joe exchanges 300 USD for 100 BTC+ the put contract for 100 USD @ 3 USD. He buys stuff, maybe he also gets some coins by selling. He will keep the contract until he will want to exchange his coins to USD. If the exchange rate is higher than the contract, he will sell at spot price and be happy. If the exchange is lower than the contract, he will exchange 100 BTC at 3 and the rest at spot. If he doesn't have 100 BTC, he will buy at spot and use his option for some quick profit.

Ok, well the difference as I see it is that there is no central authority that issues anything. YOU make a promise to pay X amount of fiat for X amount of bitcoin, you transfer that promise to someone else along with the bitcoin, and they can exchange the bitcoin for the value of fiat you have promised.

You are the one backing the coin with your own money. You are not relying on a suitably liquid market to sell the coin back into, nor is there a central authority that promises to guarantee against volatility. There is no volatility. There is just the fiat you have promised to pay to your merchant.

Because how else is the receiver of the coin going to exchange it back for the promised amount? And how can he be sure that the promise is good, unless it is locked-in by the exchange?

We need stability, and trustworthy 3rd parties. This is a simple fact. Economics does not work if you don't trust the people you do business with. We need to focus on ways of establishing and quantifying this trust.

But we would only have the exchanges word that they weren't issuing more credit notes it would be impossible to check, and as the value of the note plus the bitcoin would (if everything worked) never change relative to the dollar (providing the change in bitcoin price wasn't greater than the value of the note) you might just as well hold usd which is far more liquid and by definition is less risky.

The fact that the bitcoin price might overrun the note could also be a problem because as the volatility rose the risk associated with this special currency would rise making it beneficial to the purchaser of the currency to ask for more to cancel the risk premium involved. This would mean the value of the currency could fluctuate especially if rumours came out about the exchange itself.

With pure bitcoins the risks are real but visible and observable, with this the risk is still there but harder to quantify and measure as it lies within the exchange and the volatility in the bitcoin itself.

When you deposit bitcoin or fiat money into an exchange right now, you STILL only have the word of the exchange that it is actually there. I understand that there is risk in the system I propose, but there is just as much risk of the existing exchanges doing the same thing, letting people play with bitcoins and cash that are not even really there in the first place. How do we know MtGox doesn't operate on a fractional reserve basis? How do we know if there was a run on MtGox tomorrow they would have enough funds to cover all fiat and bitcoin deposits? We don't, but thousands of people still use the service because they trust them. It is all about establishing trust. If the merchants are able to withdraw fiat on a consistent basis, they will trust the service and keep using it.

You mention about the bitcoin price overrunning the note. Yes, it is possible, but we can make it incredibly unlikely to happen. How much fiat would it take to cause the floating rate of btc to reach $100? We can't even sustain it at $2 right now for crying out loud. There is not enough liquidity coming into the market. Software could be created to monitor the market rate and alert if the floating rate is reaching the static price, and alter it appropriately for subsequent transactions. It doesn't matter if the rate fluctuates, because consumers will just buy a different amount of bitcoin and send a corresponding promissory note. The merchant will still get the same amount of fiat in the end.

Yes with bitcoin the risks are observable. So observable in fact that it might as well slap you in the face, kick you in the nuts and call your mother a whore laughing all the while. No merchant in their right mind would be willing to take these risks if they are operating on slim margins to begin with. We need to think about what is best for the bitcoin economy, not make it trivially easy for currency speculators to take advantage of gullible people.

There is some risk yes, but this risk seems to me to pale in comparison to the level of risk merchants and consumers are already taking.

Well, what I had in mind is not QUITE the same as an options market. It is more about ensuring that a merchant who is offering a good/service can exchange the coin back for the promised amount, not the buyer of the coin.

Lets say I want to send you $50. I buy 0.5 btc @ $100/coin and get a promissory note for 0.5 btc to be exchanged for $50. I send you the 0.5 btc along with the promissory note, which you can then use to trade the 0.5 btc back for $50. Without the note, you would not be able to otherwise trade the coin back for the amount promised. It would be a point of sale transaction only. Once you have spent the coins, why do you still need the guarantee? It is the person who you sent the coins to who would need it then.

As far as I can figure out, there is no reason to use this system instead of just transferring USD. What would the advantage be?

Adam living in the US would deposit $1000 from his bank account to this not-for-profit exchange, and he buys 10 BTC for $100 each and gets his "$1000 for 10 BTC guarantee" with the BTCs. He then transfers the BTCs plus the $1000 guarantee to John living in England. John transfers the 10 BTCs he has received to his not-for-profit account and exercises his $1000 guarantee, thus selling the 10 BTC for $1000, and he now has $1000 in his not-for-profit exchange account. He now withdraws these BTCs from the exchange account to his bank account. Net effect: $1000 from Adam's bank account to John's bank account. Why even get involved with Bitcoins, just do a bank transfer.

The only way this not-for-profit exchange would be better is if one existed in every country, and it could pay out without any fees to a bank account in that country. That way the guarantees could be transferred between the not-for-profit exchanges in various countries, and we could avoid the bank transfer fees between countries.

You are just talking about a bank that uses bitcoins instead of internal book keeping and takes up the additional risk of bitcoin price fluxuation. It's like if your bank issued you special gold nuggets at 100x the price of gold instead of a checkbook.

Well, this is the question, isn't it? Why do people want to exchange bitcoin for USD and vice vera? I don't know, but they do. And they do it stupidly. You do realize that your argument could equally be applied to the existing exchanges? At least what I am suggesting attempts to ensure that those who want to use it for legitimate and productive commerce aren't taken for a ride by speculators, who contribute absolutely nothing and just siphon value from the former.


... with the promise to buy it back again for the same price. What is your point?

Yeah basically. Except there's no risk with regards to Bitcoin price fluctuation since it isn't really the Bitcoins that get you USD, it's the transferable guarantees that gets you USD (the Bitcoins you can always buy elsewhere if you wish).

But the large amount of time and money it'd take to create a system like this makes me believe it would never come into existence in a not-for-profit form.

People buy Bitcoins because they can be transferred to a person on the other side of the globe for a low fee almost instantaneously. You can't do this with USD.
If at the same time an exchange exists in both the receiver's and the sender's country, they can withdraw and deposit funds at low fees, thus saving the fee of a bank transfer to the other side of the globe.

So unless your suggestion is implemented in multiple countries world wide, I see no advantage to it over a bank transfer of USD. And even if it was, the real issue would be transferring the USD between the not-for-profit exchanges in various countries. This would still cost money, and thus - unless the not-for-profit exchanges can find a cheaper way to transfer USD to another country - hold no advantage over a USD bank transfer.

You guys do understand that there is no bitcoin 'token' to transfer, don't you?

But the flaw with this argument is that this also applies to the existing exchanges too. They still manage to operate across international borders, albeit not very well. International transfers are still problematic for the exchanges, as like you said, they have to operate in multiple economic zones to be able to work smoothly.

This problem already exists, and is not something that the system I propose would worsen. I live in Ireland, and know first hand the problems associated with it. The euro market is even smaller than the USD one, and now you have to worry about the value of the USD if you are paying for prices linked to the dollar, as well as the value of the EUR and how many bitcoin it can buy you, AND the value of the bitcoin itself once you have managed to obtain one. It's a bloody nightmare.

Maybe it doesn't have to be a non-profit service, if it was worthwhile then I'm sure merchants and consumers alike would be willing to pay a fee for the stability that the service provides. I don't know. I have absolutely no intention of setting this up, this is purely a thought experiment that will hopefully get people thinking more about these issues.

I'm not sure what 'bitcoin token' you are referring to, but if you mean the guarantee credit I was talking about, I meant that this would be transferred to the merchant's exchange account, external to the bitcoin system itself, but all taken care of automatically by the merchant API.

I am well aware of that. I'm not suggesting your proposed system would worsen anything; just that it wouldn't improve on anything.

I still fail to see how your proposed idea is superior to a simple USD transfer. Why convert to Bitcoins in any step of the process if you don't want to risk it going down?
A redeemable Mt. Gox code in USD does what you suggest, I think. Both users create an Mt. Gox account, one deposits $1000 to his account, creates a redeemable Mt. Gox code and sends it to the other person who cashes it in, gets $1000 in his Mt. Gox account, and withdraws them. Doesn't this have the exact same use as what you're suggesting - without getting involved with Bitcoins?

As far as I can tell, the real issue is transferring the USD, not the Bitcoins. Whether a not-for-profit exchange, a regular exchange, or even a regular bank does this, seems irrelevant to me.

This system is mainly for merchant use. I mean for it to be more like a point of sale type transaction, rather than a way for people to buy and sell bitcoin proper. This is necessary to get legitimate business on board with the bitcoin system, as many will not touch it in its current form for all the reasons already outlined.

Businesses don't give a crap about the bitcoin in the end, as they will exchange it for the currency that they need to pay their bills in. Yet, we still need them on board to ensure that bitcoin economy can grow successfully. In order to attract them, we NEED exchange rate stability.

I can't think of any other way to achieve it that doesn't involve some type of overbearing central-bank type institution. Thats probably why they exist in the first place. I think if we mean to continue with the exchange of bitcoin for other fiat currencies, something like this is going to have to evolve or else it will fail over and over again.

Maybe what I am suggesting is not up to scratch, but does anyone have a better idea?

IMO, if a business doesn't want to expose itself to the fluctuating exchange rate of BTC to USD, don't buy BTCs. Just keep all transactions in USD; complete exchange rate stability.

What I am saying is that your suggested payment system is no more than a transferal of USD, with Bitcoins going along with the USD for no good reason.
Ie. it is the transfer of the "guarantee credit" (which is in USD) that is the issue. Transferring Bitcoins along with it does not make that easier.

So we should alienate the very people we NEED in order to make the project successful? Great idea.


What I am saying is that this is already the case.
Business don't care about the bitcoin. They care about paying their bills and their taxes.
We need price stability, or else we're screwed.

We don't need people who can't accept fluctuations in the exchange rate of Bitcoins. Thank God, or we'd be screwed! We just need an increase in the number of merchants that provide goods and services in exchange for Bitcoins.
I believe this can only happen slowly, one step at a time. IMO there is no quick fix to this chicken-and-egg problem.

The fact that we even need to worry about the transferal of USD is the problem IMO. If people only want to use Bitcoins as a way to transfer USD, Bitcoins hasn't succeeded as a currency
I think price stability will come with increasing size, a $15 million asset is bound to be volatile. Just look at small cap stocks.

I wholeheartedly agree with you on both points.

But the problem is that we DO have people here who want to be able to accept bitcoin as payment, but cannot tolerate fluctuations in the exchange rate as they pay all of their expenses in fiat currencies. They have tried, and got their fingers burned. They won't be eager to try again until some semblance of stability is achieved.

Once people have a guarantee that their bitcoin value is safe, they may become less likely to want to exchange it for fiat currency. What I am trying to suggest is a means of providing people with this safety, and slowing winning them over to the idea of conducting 100% of their business in bitcoin. Like you said, it's a chicken and egg problem, but we still have to figure out a way of getting from where we are now, to what we all hope is the case in the future.

We can then laugh about how ridiculous it was to even think about converting our precious bitcoin into worthless fiat.

Lets hope you are right about the stability coming with more market capital. Looking at the state of global economic affairs today though, I am not brimming with confidence. Thats what we have been thinking since the 70's and look where it has got us.

I agree with you that the fluctuations in Bitcoin prices aren't desirable, but I really think that put options are better handled by the market than by a supposedly benign exchange that does it to stabilize the price of Bitcoins.
In essence, I think any single entity doing anything to stabilize the price of Bitcoins is futile. Only an increase in the price of Bitcoins (resulting from an increase in the utility of Bitcoins) will bring about this stability. Bitcoins recently went from $5 to $2.5. When, or if, Bitcoins hit $50 per coin, they will be more unlikely to suddenly drop to $25. And when, or if, they hit $500 they'll be more unlikely to suddenly drop to $250. And so on.
That will be the self-reinforcing solution that we need, and I think it will happen very slowly, and there's not much we can do to change that (unless we have large amounts of cash we are willing to use).

I guess I'm more inclined on not doing much, except letting the market work slowly but steadily towards using Bitcoins as a currency.
In the end I believe the issue of volatility will solve itself, if Bitcoins prove useful for trading.

Now I'm tired and I will go to bed. Good night :).

The proposal is the equivalent of a central bank that pegs Bitcoin to the USD, only in an automated fashion via third-party exchange. There is no need for this. While the idea of stability is nice, the suggestion highlights misconceptions about capital flows.

USD has fluctuated by about 11.2% over the past 90 days (~7.5% up, ~3.7% down). The Australian dollar has ranged approximately 20.8% during the same time period (~12.1% down, ~8.7% up). Both have central banks. Price stability does not exist anywhere right now. It won't exist for Bitcoin unless items are valued in Bitcoins. Attaching the price of Bitcoin to the USD in any form simply introduces USD volatility into the Bitcoin economy for all currencies other than USD/BTC.

Volatility in BTC valuation in relation to USD (and other currencies) is a result of the size of the market. It is not a deficiency in the Bitcoin system. USD is much larger than Bitcoin, so minute flows of USD into Bitcoin will cause major fluctuations in Bitcoin value with no discernible impact on USD. The same principle applies to gold and silver. There is no need for a central bank to manage precious metals, either.

In addition, present inflation of the Bitcoin unit base through block generation will cause individual BTCs to devalue by an amount relative to the increase until the asymptote is approached. If this were an experiment conducted in a completely closed and controlled economy of static size and using only Bitcoins for exchange, BTCs would still be depreciating in value in proportion to the block generation rate.

The currency with the best balance of convenience and functionality will win. Bitcoin is still in its infancy. If you want price stability, increase adoption by making Bitcoin accessibility and use easier. Everything else follows growth, as runeks suggested, including relative price stability. The Bitcoin system will live and die based on its structural merits and deficiencies, not its exchange rate compared to other currencies.

Speculation on open exchanges facilitates price discovery and stability. Central banks, which are essentially dark pools, introduce distortions that lead to pricing displacement and instability.


Fluctuations in relation to another currency are not Bitcoin's concern. How many more people are there who got started when the rate was <$1 per BTC? They haven't been burned. Did people who bought gold at $1,900/oz get "burned"? What about those buying USD three weeks ago?

Yes, runeks is right. Just be patient - these things move on scales much greater than people can easily perceive.

An excellent post with many valid points. My knowledge of economics is, admittedly, far from academic. I am the first to admit that. But watching this tragedy unfold and sitting back in my chair thinking "these things operate on different timescales" and "this problem will solve itself", well, that is just not credible and is a shrugging-off of responsibility. I mean, I would happily do that if I believed that bitcoin was a self-organising system that obeys the laws of evolution and natural selection, but that is not what it is. Not yet at least.

It relies on us irrational humans as actors to take market information and make decisions based on it to refine the system. Right now, the market is telling us that we need to fix a problem, otherwise the bubble would not have occurred. The currency itself will not just serendipitously stumble upon the answer without people discussing ideas and making subsequent improvements to the system. No amount of extra fiat in the market will solve the problem, because it is the exchange of bitcoin and fiat currency that is causing these problems in the first place.

Without attracting more businesses to use bitcoin, there will be no growth in the economy and thus no stability will emerge. Speculation will not get us stability, just cycles of bursting bubbles and bad PR. Like you said, other currencies that operate this way can not guarantee price stability, and the only way forward is to price in bitcoin. We cannot get to that point until more merchants accept bitcoin, but in order for that to happen, some type of "transient safety net" must be put in place to win people over to pricing solely in bitcoin. I mean, we have to be realistic about it.

Maybe enough capital will provide a transient period of stability, but what happens when the capital inflow begins to dry up again? What is to prevent another slow-motion market crash all the way back down to the bottom, leaving a lot of unwitting people holding the bag. Maybe I'm completely wrong, I'll admit it, but I don't see any semblance of stability emerging any time soon without putting some sort of means of modulating the system in place.

Is it a tragedy, or growing pains?

Bitcoin is self-regulating. It won't survive without participation, but the concepts behind it attract participants regardless of momentary value - they have vision enough to see the potential value. It's hard for many to see that potential. My miners have been running non-stop through the entire decline so far, yet many have thrown in the towel. Fine with me, I got a block from solo mining.

Patience comes into play when remembering this saying: you can lead a horse to water (http://idioms.thefreedictionary.com/You+can+lead+a+horse+to+water)...


The problem has been fixed: a potential bubble grew and burst quickly. Self-correcting/regulating. It wasn't Bitcoin's doing, but a pattern of behavior that emerged from individuals participating in a functioning market.


Chicken & egg (http://en.wikipedia.org/wiki/Chicken_or_the_egg). The Bitcoin economy can still grow without increasing business activity. Its cash equivalency will be valued, particularly as situations such as Louisiana banning cash transactions (https://bitcointalk.org/index.php?topic=49201.0) develop. If there are paperwork barriers introduced to using paper cash, you can bet people will opt for a more convenient option that doesn't involve paperwork. Convenience trumps decree (http://twitter.com/#!/NobleNomads/status/127234579831586816).

Imagine capital controls on money transported across borders being tightened. If I'm limited to $1,000 and I want to bring $25,000 with me, I can risk jail time and/or potentially significant fines - or I could use Bitcoin, which provides an ideal solution. Some of the funds that flow into Bitcoin for purposes of escaping totalitarian regimes will remain in the Bitcoin economy. There are a number of nations that have no restrictions on usage of whatever money an individual chooses.

Bitcoin's "killer app" may be one that is considered illegal by (absurd) official decree in some jurisdictions.


The same thing that happens in any other currency: the ebb and flow occurs within a range as market participants in aggregate reach points where they consider Bitcoin to be over- or undervalued. I think we've approached or entered the range in which long-time Bitcoin users feel comfortable - the rise was too high, too quick and the same applied to the decline. At the ~$2 range, BTC is now about in-line with where the gradual inflow would be had the spike never occurred.

Your fears are well-grounded. It is possible that Bitcoin could fall to $0.01 or even less, but does that really matter? Is the USD-denominated value of Bitcoin a representation of what Bitcoin provides? It is exceedingly difficult to place a value on an idea until the idea has spread widely enough for a consensus. This is why growth is the primary factor above all others, and that simply takes time.

Persistence and patience will prevail because:

• Bitcoin and crypto-currencies similar to it are based on a solid concept.
• The Bitcoin system has been proven to work and scale reasonably well.
• Fiat currencies controlled by increasingly restrictive governments are becoming less desirable.

There are other reasons, but those are at the top. One of the main barriers to growth right now is accessibility. Even with the proliferation of technology, how many people can run a command-line application or even download and start a graphical one, much less understand what it's about? A mobile app (https://market.android.com/details?id=de.schildbach.wallet) would be far superior, especially as NFC (http://en.wikipedia.org/wiki/Near_field_communication) availability increases.

If a person so chose to, he would never need to carry physical cash ever again. That appeal is even greater than the switch from metal coins to paper bills - all that's needed is a smartphone or similarly-capable device. Adoption would easily explode, making Angry Birds (http://en.wikipedia.org/wiki/Angry_Birds) seem quaint by comparison. This is a Facebook-level phenomenon.

Edit: forgot to add link for mobile app; corrected.

For me it seems that there are 2 things mixed.

• The exchange-rate: bitcoin and other currencies
  Every company which does international business copes with it.
  One strategy is to handle the risks, with reserves, so changes can't harm.
  The other one is to hedge it. Like airlines: They are buying futures for oil. So they fix the price of the product for several month. They are not fixing the price for the money they are using.
  
  Customers cannot handle the risks. So they decide to buy in the other currency, or not.
  As customer you normally not notice the exchange-rates. You are using euros, and thats it.
  
  Even if the merchant fixes/hedges the prices, the price for the customers changes.
  The best practice for the merchant is to track the price. The costumers buy bitcoins for a given price and pay the product.
  If the merchant is able to buy his products in bitcoins too, he will use them, because then he doesn't take exchange-rate-risk
  
• Insuring/Backing up the value of bitcoins
  The question is: What happens, if the coins loose their value?
  
  When you don't want to loose all the value then: Sign an insurance! Options/Futures are normally for the buyer of products.
  
  The suggested exchange is an insurance, which secures a given price for an amount of bitcoins.
  Nearly the same was already suggested.
  
  One thing to take care about:
  The customers only will sign insurances, when the situation is insecure. So it's quite difficult to take the risk for this short time.
  
  I would suggest:
  You pay an amount: for example 10Euros to secure 10 bitcoins for 1euro, in the first year 2 bitcoins are secured, in the following 4 ...
  After some years all 10 bitcoins are secured.
  
  If there is money left in the case of a melt-down: the rest is shared with all customers.