Is there anything that could be done about this? I know what I'm about to say is impossible, but... if we could make a currency in which one denomination was worth some set amount of value, and no matter what the currency's market cap was, that denomination always had the exact same value or slightly more over time, it would imho be the ideal currency. I know that can't happen exaclty but is there any way an approximation of this could be possible during a rapidly changing market cap? Could Bitcoin's mining difficulty be used somehow to intelligently control the supply to reduce volatility?

Also, jdbtracker, I don't really understand what you're saying. Could you please re-explain your last post, because I can't understand what you're trying to say.

We have to make people want to list their prices in BTC. That means it has to have some semblance of stability. Otherwise it can be nothing more than a proxy for actually stable currencies. Deflation itself isn't the solution or the problem, it's stability. If BTC gained 5% of its value every day, it still wouldn't work as a currency because the value isn't stable. It's gotta do something like only gain 5-10% of its value every year so that people can know the value of a Bitcoin. We need to be able to go to the store and have an expectation for how many BTC a loaf of bread costs without it changing every week.

Without stability, BTC can never stand on its own.

I'm not super knowledgeable about Bitcoin's internal workings, so sorry if this is a silly question:

Could there exist a block whose hash is above the target for every possible value of the nonce? If so, what would happen? Would mining of new blocks just halt for 2 weeks until the difficulty adjusts the target to something above what is possible?

That's very interesting. I'd never heard that before.

I can certainly see the argument that deflation is good for a currency as having merit. I'm not sure I agree with it... but I don't think I know enough to be certain one way or another. We'll probably be able to find out soon because of Bitcoins. 

What bothers me is when people lay out an argument for why they think deflation is bad, using history and macroeconomics, and people dismiss the argument because "Deflation will affect Bitcoins differently" or "These charts are meaningless because Hayek something something". Arguing that it only appears to be deflation causing bad things, or that the role of deflation is misunderstood, I think is a much better argument.

That's a different kind of argument, and not what I was talking about. Asserting that deflation in currency is inherently good is a general assertion, and it's something that can be debated on its own evidence. We can look at how deflation has affected currencies in the past. What I was saying was that IF we look at how deflation affects currencies in the past, and IF deflation appears to negatively affect the economy that uses those currencies, one can't just dismiss the argument by saying "those examples don't apply to Bitcoins because bitcoins are different."

Unfortunately, the only real way to know anything for sure about a controversial topic is to study it yourself.

I would advise you to be skeptical of people that say things like "Bitcoin doesn't apply to these economic arguments, because it's different." A lot of these people are exhibiting special pleading: http://en.wikipedia.org/wiki/Special_pleading. From the article, examples of this logical fallacy include:

• unexplained claims of exemption from principles commonly thought relevant to the subject matter
• claims to data that are inherently unverifiable, perhaps because too remote or impossible to define clearly
• appeals to "common knowledge" that bypass supporting data
• assertion that the opponent lacks the qualifications necessary to comprehend a point of view
• assertion that nobody has the qualifications necessary to comprehend a point of view

Examples of this fallacy on this forum include: "There is no bubble, because Bitcoin is different", "Deflation in Bitcoin isn't bad, because Bitcoin is different than other previous currencies", or "X criticism doesn't apply to Bitcoin, because Bitcoin is different."

It doesn't mean what they're saying isn't true, but the reason will almost never be because "Bitcoin is different," and when it is, if they can't explain why Bitcoin does not belong in a certain category of things that an argument puts it in other than the fact that it's new or unique or people just don't understand it, then it's probably safe to dismiss their argument.

I can see it now: "Easier to buy and use than Bitcoin, guaranteed secure, and exchangeable at any time 1:1 to BTC or cash equivalent. Buy with your credit card."

Somebody's gonna try it. It's only a matter of time.

The difficulty change would get cancelled out when the price went back to target levels. So if speculators priced in this fact, there would be no bubble in the first place and the price would remain stable. Ideally the difficulty would correlate with the rate of change of price: the faster the price (or leading indicator) is rising, the easier it is to mine coins. The faster the price (or leading indicator) is falling, the harder it is to mine coins.

I had the same notion and agree with you 100%. The problem: mining difficulty/hashrate is almost certainly a lagging indicator of price, meaning you could very easily cause a drop in price, followed by a further devaluation because you just flooded the market with new coins. If you could come up with a leading indicator of price and tie the reward to that, I think it would be better.

One difference is people will almost certainly spend less money, and because of this the economy will probably be smaller in real terms. On the other hand, even though everyone would be poorer, it might be safer and more equitable. But I think everyone would end up with less because there's little incentive to invest your money in productive ventures if it appreciates in value by doing nothing.

http://en.wikipedia.org/wiki/Paradox_of_thrift

I don't think it's worth doing if it can't be done on a P2P basis. I don't think anyone will use it if it has any centralized authority, and besides it creates a weakness that can be shut down or dismantled.

Personally I think it would be enough to just prevent the price from rising too quickly. Some way to preempt speculative bubbles by decreasing mining difficulty at the right time, then gradually increase the difficulty back to where it was, such that the net effect is that supply increases in sync with its increase in market capitalization, aka demand. But you're right, that doesn't solve the problem of decreases in demand. I don't think people would be willing to bear any demurrage or fees, but perhaps mining difficulty could be increased to very high or infinity in the event of inflation? This would temporarily cap the supply, which would raise the value, but it would be a lot slower than the other direction. Still, if it could be done I think it would work pretty well.

The problem is, how does one measure a currency's value (or change in value) without comparing it to anything else? Are there any measurable, intrinsic monetary indicators that correlate with a currency's value?

Also I think I agree somewhat with the idea that the inability to speculate on Bitcoin's future price makes its price discovery less efficient than it should be. Right now if all people think the BTC price will be $200 tomorrow, it will be about $200 today. But the opposite is not as true... if all people thought BTC would be $1 tomorrow, it will take time to fall because people can't short BTC or buy BTC options. At least not easily.


A larger market cap will help the problem but not fix it. In my opinion, the high deflation of Bitcoin is part of the cause of its speculative bubbles... If people thought it would retain its approximate value over the long term, or gain value slightly, they wouldn't speculate on it and hoard it to make more dollars. They would use it like money directly. Think about how much more useful a very liquid instrument that gets at or above US security rates would be. It would be amazing.


I have an idea to tie the price to the generation difficulty... but I can't figure out how to measure BTC value in a decentralized way that could be captured in an algorithm. The closest I can think of is bitcoin days, but I suspect that's a lagging indicator of price, and what we'd really need is a leading indicator.

According to this : http://www.quora.com/Economics/Why-are-bitcoins-more-unstable-than-fiat-currencies-like-the-USD
Bitcoins are volatile in part because they have no real futures market, so people can't easily short BTC.

According to me, it's because Bitcoins have been designed to increase greatly in value over time, which encourages hoarding. I can't believe people actually think that massive sustained deflation a good thing for a currency. Nobody can put prices in or truly conduct commerce in BTC. Merchants that use BTC now don't actually use it as a currency... they conduct the transaction in BTC and then immediately exchange it for USD. They shouldn't have to do that, but they do, and they will continue to have to do that for the forseeable future.

In my opinion, there will be another cryptocurrency that is designed to be more stable over the long term than Bitcoin. A Bitcoin killer. I do not think any of the existing alternative coins fulfill this goal, but I at least hope that it will happen someday. Something that takes what Bitcoin got right, and fixes several of the things it got wrong. This currency would be designed to be very nonvolatile in value, or to perhaps deflate at a slow and predictable rate over time.

Would it be like a better quality Bitcoin Forex that's a lot like the current ones, except that it doesn't crash? Or would it be different somehow? If different, how so?

So, I have no idea how to actually do this, but what if someone created a Bitcoin-like cryptocurrency that tied the mining difficulty to its value? Meaning coins get easier to mine when the value increases over some target value, and harder to mine the more the coin's value is under target value? This would have the effect of making the value of the currency trend towards a pre-determined rate of change over time. The hard part would be measuring the real value of the currency in a decentralized way, apart from any other currency value. That's what I can't figure out how to do.

Edit: if we can do this, the currency would be resistant to large fluctuations in price by design. It's like a built in self-correcting system because the supply will change to match the increasing demand.

This is the best post.

I'll be sure to throw away my cans, acquire a beach house, and get an areal family. Then, perhaps one day, STLmisc, we can be bros.

This may be true when Bitcoin's price stabilizes years from now, but it's certainly not the case now. And imho, it won't be the case for many more years. As long as BTC's market cap is growing, which if we want it to succeed we should be hoping for this, its price will be rising. And since the rate of BTC generation has nothing to do with the demand, the bigger BTC's market cap, the more BTC will be worth. That's the way it was designed. The faster the adoption rate, the faster the increase in value. Doubling in ten years' time comes out to about 7% annual increase in value. If this was actually how it worked, it would be great. But from what I've seen, the increase in value is much, much faster. And if you expect more people to use Bitcoins, the value MUST increase by a large amount simply due to demand.

With Bitcoin's prices rising (and sometimes falling) the way they are, who in their right mind would lend or borrow Bitcoins? Imagine if you borrowed some and then the price went from $100 to $150 over those 30 days. You'd be screwed.

Yes, that will certainly help, but imagine I decided to start selling, say, computer hard drives in BTC, and only in BTC. How often would I have to change the price? Probably daily. That's... less than ideal for a currency. That's not a stable or predictable store of value. If I neglect to change my prices frequently enough, nobody will buy the hard drives because they'll cost too much.

Now imagine that I'm renting an apartment from someone, and I'm using BTC to pay for it. I sign a year lease for BTC7. At the end of the year, that BTC7 could have increased in value several hundred percent. That could be disastrous to me.

So BTC's price volatility is actively working against it becoming a more useful currency.