Change the rules of Bitcoin money supply to fix the price stability issue!

[PaulDonnelly]

..otherwise it will never achieve its true potential!

Bitcoin needs to have a mechanism that ensures price stability.

The current system has many excellent features, but it is broken in this critical area, and may never achieve widespread acceptance as a consequence.

The system has an inbuilt mechanism of currency destruction - as certain accounts are lost due to system failures, mistakes or death of their owners.
This in itself is not a bad thing, as long as it is balanced with an appropriate level of currency creation.

The ideal would be to manage the supply of currency such that it achieves approximate price stability relative to a broad range of goods and services.
This would increase the use and influence of the currency, and help its many advantages to be enjoyed to the fullest extent.

The current deflationary model is good for promoting adoption because early adopters have a financial incentive to adopt, helping the currency to gain a foothold.

Before very long though, I think the rules should be changed to address the price stability issue.
There ought to be an automated mechanism for doing this..

Anyone have any good ideas on this?

Note: It's not as simple as counting the number and value of transactions because many of those transactions may not be economically meaningful, merely a user shifting funds from one account to another.

Milton Friedman: "I've always been in favor of abolishing the Federal Reserve and substituting a machine program that would keep the quantity of money going up at a steady rate."

[1714154695]

1714154695

[1714154695]

1714154695

[1714154695]

1714154695

[rahl]

Stabilization is chaos! Attempting price stabilization would lead to a very quick end of BitCoin, because it will never work. The task is impossible, no one can no and foresee every BitCoin transaction that will happen. Instead the currency will just get less predictable, instead of a stable value increase there will be times when the demand for the currency is over estimated and the value plummets.

BitCoin is a commodity, an asset. Everyone have plenty of these and them fluctuating in value due to supply and demand issues is a problem every retailer overcomes every day.

How many sane people have thousands of dollars in there savings accounts? People generally want to get rid of any currency subject to price stabilization, they either consume them or invest them in assets as soon as possible. The only reason they can be used for this is that people are forced to accept them as legal tender. Since BitCoin is not legal tender price stabilization would just lead to no one accepting the currency as payment cause it would be constantly de-based and it's value very unpredictable.

[rezin777]

If the Bitcoin community adds any form of currency creation beyond the initial decreasing reward for securing transactions, I will sell all my Bitcoins and move on.

Price stability is a pipe dream of central planners. The larger Bitcoin becomes, the more stable it will become. If you have a good way to force people to use Bitcoin without forcing people to use Bitcoin, please share.

[goatpig]

Oh the graces of the daily newcomer pontificating upon the debilitating flaws of a project he recognizes to have "many excellent features". Frankly, how excellent do you regard those features if you think the system has such an ugly flaw it'll never go anywhere?

You are confusing different notions:

1) Are you saying Bitcoin needs to have a mechanism to stabilize its supply against eventual coin loss?
2) Or are you saying Bitcoin needs to have an elastic supply to accommodate for price stability?

In the first case, how is that a problem with an already deflationary, infinitely divisible currency? In the second case, you don't understand the benefits of deflation.

and may never achieve widespread acceptance as a consequence.

And why should it achieve that? As long as it satisfies its users, why should it cater to those who don't want any of it? If people are happy with inflationary, fiat currency, they can just start their own block chain with those rules. If people are happy with government controlled currencies, then there is nothing Bitcoin can offer them. The very premise that Bitcoin shall take over the world economy or fail to succeed is incompatible with the concept.

[rahl]

Likewise rezin777. However I would probably be willing to accept up to a 1% increase of the total supply (putting it on pair with the increase of the gold supply) if this is necessary to stimulate calculations needed to maintain the system.

I am an economist so I don't know that much about the technical specs but if I understood it right "mining" helps maintain the system and lower transaction times? In this case maybe a 1% increase per year could be justified but no more.

[goatpig]

I am an economist so I don't know that much about the technical specs but if I understood it right "mining" helps maintain the system and lower transaction times? In this case maybe a 1% increase per year could be justified but no more.

There's already a block chain modeled around gold going on somewhere. Dunno if it's still alive or not. The reward for mining will slowly shift from "coin minting" to transaction fees.

[rezin777]

Likewise rezin777. However I would probably be willing to accept up to a 1% increase of the total supply (putting it on pair with the increase of the gold supply) if this is necessary to stimulate calculations needed to maintain the system.

I am an economist so I don't know that much about the technical specs but if I understood it right "mining" helps maintain the system and lower transaction times? In this case maybe a 1% increase per year could be justified but no more.

Well there is a reward built into the system to provide incentive for mining. It's currently 50 BTC per block. As half the coins are created, the reward halves. And again, and so on. The thing is, transaction fees are also included as a reward for mining. The miners receive the fees from the transactions included in the blocks they find. I suppose the idea is that as Bitcoin becomes more widely used, there will be more transactions and more fees that will slowly replace the block reward. Some do not think it will be enough, some do. Time will tell.

[sortedmush]

Some do not think it will be enough, some do. Time will tell.

Yep, and those who disagree with the way the it works are welcome to modify the code and start their own block chain.

[Anders]

Before very long though, I think the rules should be changed to address the price stability issue.
There ought to be an automated mechanism for doing this..

Anyone have any good ideas on this?

See thread: http://forum.bitcoin.org/index.php?topic=9923.0

It's about creating a currency backed by bitcoins. The bitcoins then become similar to gold in currencies backed by gold. The new currency will have great price stability in the sense of being resilient against deflation and inflation.

[cloud9]

Because there are a fixed supply of Bitcoins - Bitcoin value is directly related to the demand side.  It means that the value of Bitcoin adjusts automatically to the value of goods/services traded in the Bitcoin economy - the balanced price is achieved automatically.  Most central banks will adjust interest rates up and down to keep up with inflation/deflation in order to have a money supply of value equal to GDP.

In addition to the adjusted Bitcoin value, Bitcoin miners adjust the Bitcoin difficulty when it becomes more profitable to increase mining capacity, when the Bitcoin price goes up in relation to mining costs.

[grondilu]

Price stability is not dezirable per se.   The idea of controlling prices defeats the very purpose of prices as economic signals.

Many people would like to have stable prices just as many people would like to have nice weather every day.  But it is just a silly wish.

Prices have to vary in order to reflect economic reality.   Trying to interfere to this only sends false signals in the economy.

[smooth]

There is no "built in" price deflation in Bitcoin.  Anyone who is sure BTC will be worth more will buy it now, capitalizing that into the current price.  Anyone who is sure it will be worth less will sell it now, again capitalizing that into the current price.

The current price is ~$8 because that is the consensus expectation of future price, factoring in the structural inflationary and deflationary factors.  If the price goes up, it's because Bitcoin becomes seen as more useful or desirable, not the "built in" deflation.

[grondilu]

A boy, comes into a huge building full of grownups who use it as a marketplace and do their biz there for some time now. Boy shouts: "Hey, you are doing it all wrong! All the tables and the chairs and your nice mining machines should be bolted to the ceiling not to the floor! Than this would be really great marketplace".

Men glance at a boy with amusement and move on doing their usual biz. One man stops and gives the boy a candy.... Than in  a few minutes another boy comes in and shouts the same noncence...

 

[AaronM]

Price stability is not desirable per se.   The idea of controlling prices defeats the very purpose of prices as economic signals.

Many people would like to have stable prices just as many people would like to have nice weather every day.  But it is just a silly wish.

Prices have to vary in order to reflect economic reality.   Trying to interfere to this only sends false signals in the economy.

Well, it would be nice if there were a way to price things in bitcoins that would not be affected by bitcoin's change in value. I shouldn't have to keep lowering my price quote somewhere as bitcoin's value increases.  Why would somebody loan out bitcoin to someone else to buy capital, when there's little certainty about its value when the loan is repaid?

I think the best way to do this would be to establish a basket of commodities that everyone can agree on, and have this be automatically computed and posted in multiple locations.

[grondilu]

Well, it would be nice if there were a way to price things in bitcoins that would not be affected by bitcoin's change in value. I shouldn't have to keep lowering my price quote somewhere as bitcoin's value increases.  Why would somebody loan out bitcoin to someone else to buy capital, when there's little certainty about its value when the loan is repaid?

Right now the price of one bitcoin is not stable because it's such a new currency and very little people know it even exists.   Give it time.   Eventually it will stabilize once everyone in the world will know about this currency.   And then it will stabilize because the overall quantity of bitcoins will stabilize.

I think the best way to do this would be to establish a basket of commodities that everyone can agree on, and have this be automatically computed and posted in multiple locations.

I barely understand what this would mean exactly.  Feel free to elaborate.

[smooth]

Why would somebody loan out bitcoin to someone else to buy capital, when there's little certainty about its value when the loan is repaid?

Sounds like dollars to me.

[Vladimir]

I think the best way to do this would be to establish a basket of commodities that everyone can agree on, and have this be automatically computed and posted in multiple locations.

I barely understand what this would mean exactly.  Feel free to elaborate.

It sounds like he is pushing IMF agenda of replacing about to implode fiat pyramids by a new bigger one... what is the name SM* something...

[error]

Special drawing rights?

[MoonShadow]

Sounds like IMF'd!

[billyjoeallen]

If the Bitcoin community adds any form of currency creation beyond the initial decreasing reward for securing transactions, I will sell all my Bitcoins and move on.

Price stability is a pipe dream of central planners. The larger Bitcoin becomes, the more stable it will become. If you have a good way to force people to use Bitcoin without forcing people to use Bitcoin, please share.

I concur. Price stability is only approximated, and then only by (and some people think this is ironic) speculators.  If bitcoin moves up too much, speculators sell, lowering the price. If it goes down, they scoop up bargains, raising the price.