Bitcoins heavy price movements unfortunately show the advantages of fiat currenc

[Nath]

The core idea of (modern) fiat currencies is to provide a stable exchange media which is required for every stable economy. This is done by having an independent organization which controls the amount of circulating money to stabilize it. While it's still possible to speculate with fiat currencies, it's less profitable because of the artificial stabilization through a central bank which often goes against the market. As the result the currency is much more stable which makes trading etc much more predictable if done with a fiat currency. Which in turn leads to economic growth.

With Bitcoin we see what happens if currencies are subject to heavy speculation: The value is changing rapidly, and this makes trading and any kind of accumulation (which is necessary if someone plans bigger investments) with the currency very risky. And this will probably prevent the use of Bitcoin for it's primary use: Trading. People want to trade and people want to speculate. But only very rarely they want to do both at the same time with the same thing. If you have to take currency fluctuations into account to find the right time to buy things, this isn't what most people are willing to accept. As a result they will probably stay at some fiat currency for trading and use Bitcoin for speculative purposes only - which may kill Bitcoin in the end.

Any idea how to overcome this problem?

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[unclescrooge]

The core idea of (modern) fiat currencies is to provide a stable exchange media which is required for every stable economy. This is done by having an independent organization which controls the amount of circulating money to stabilize it. While it's still possible to speculate with fiat currencies, it's less profitable because of the artificial stabilization through a central bank which often goes against the market. As the result the currency is much more stable which makes trading etc much more predictable if done with a fiat currency. Which in turn leads to economic growth.

With Bitcoin we see what happens if currencies are subject to heavy speculation: The value is changing rapidly, and this makes trading and any kind of accumulation (which is necessary if someone plans bigger investments) with the currency very risky. And this will probably prevent the use of Bitcoin for it's primary use: Trading. People want to trade and people want to speculate. But only very rarely they want to do both at the same time with the same thing. If you have to take currency fluctuations into account to find the right time to buy things, this isn't what most people are willing to accept. As a result they will probably stay at some fiat currency for trading and use Bitcoin for speculative purposes only - which may kill Bitcoin in the end.

Any idea how to overcome this problem?

Fiat currencies... like gold?

[Nath]

Gold is no currency. For the same reason: Because it's a limited resource, it's prone to speculation which leads to heavy price fluctuations which in turn interfere with the economy.

Of course this is something relatively new. Before there where global stock exchanges, speculation was much more limited as today and thus price fluctuations because of speculation.

[kjj]

You don't think that maybe the relative sizes of the two currencies might have some bearing on the relative volatilities?  Like maybe since the dollar is used by everyone all around the world (more or less) it might take more effort to swing it than a very recently invented currency used by a few thousand people?

[Nath]

No, because the bigger the market, the bigger the participants of the market.  Also there are well known psychological effects which lead to mass sells/buys in certain occasions.

This is not a problem in some limited sub-market (like a certain part of the stock-market for example), but if it hits the primary means to do trading, it can be very dangerous because it affects the whole economy.

[kjj]

Someone just moved 6.5% of all bitcoins in existence.  I don't think that any person or company has control over anywhere near 6.5% of the world's dollar market.

[Gr.Green]

Bitcoin is only one piece of the puzzle. If shops showed prices in whatever currency they find most liquid to keep the business running, to pay by bitcoin you'd need on-the-fly currency conversion without having to go to the exchange and buy bitcoins.

Speculators and Traders play a very important role in the bitcoin economy. They make sure there's always come bitcoinage available for purchase. Otherwise you'd have to knock on doors of miners to beg people to sell you some (if you knew where to knock).

If you want stability, I'm sure you'll be able to find people who could provide a good stream of bitcoins at prices well above current market rates that are almost constant. For example, if there was an imaginary exchange that only sold USD for BTC at a constant rate of 60USD/BTC (much higher than market value) would you be happier because of stability?

Lack of exchange rate stability only stops people from having fixed BTC prices, which is probably a good thing - hardly anyone has an intrinsic "feel" for how much things should cost in BTC, so a conversion/comparison will be necessary for quite a while.

[Nath]

Someone just moved 6.5% of all bitcoins in existence.  I don't think that any person or company has control over anywhere near 6.5% of the world's dollar market.

True. But:
- Even much smaller movements can cause enough trouble for a real currency.
- The hen and egg problem: To get Bitcoin into the position as a real currency it first has to prove its suitability - which will be very hard with these huge price fluctuations.
- One of the reasons no single entity besides the central banks controls those huge amounts of money is the central bank system in itself.

[Nath]

If you want stability, I'm sure you'll be able to find people who could provide a good stream of bitcoins at prices well above current market rates that are almost constant. For example, if there was an imaginary exchange that only sold USD for BTC at a constant rate of 60USD/BTC (much higher than market value) would you be happier because of stability?

Only if I would be able to sell them to this prices, too. Which isn't possible, of course.

You (and lots of other people here) make the big mistake to look at BC only from a "consumer point of view". But to make BC succeed, the people who sell things are at least as important, if not even more so.

Now imagine you want to sell goods over the Internet. Do you really want to think about massive price fluctuations of the currency people pay you with? For certain goods (like drugs or porn) this may not be a problem because the advantages of BC are bigger. But if you sell for example computer hardware over the net, you have small margins and need some price stability. If you can use a fiat currency for this and only switch to BC directly before and after the trade (with a reduced risk of losses), this may work.  But how would BC replace fiat currencies, if you still need them as a "safe haven" for trading?

Also people need to consider the emergence of a derivative market for BC in the near future. This would increase fluctuations even more and could lead to additional risks and market manipulations.

[djproject]

- One of the reasons no single entity besides the central banks controls those huge amounts of money is the central bank system in itself.

Lolwut?  Ahh right I forgot, central banks love nothing more than distributing wealth out evenly among all the people.  They would NEVER support a system where a tiny percentage of the people control the majority of the wealth.

[Nath]

Lolwut?  Ahh right I forgot, central banks love nothing more than distributing wealth out evenly among all the people.  They would NEVER support a system where a tiny percentage of the people control the majority of the wealth.

They don't distribute it evenly, the give it the government which uses the additional money instead raising taxes or cut spending. Of course the people who would pay the highest taxes profit most from this, because those people would otherwise pay the majority of the additional taxes, too.

But those people generally don't own much money, they have much wealth. That's an important difference here: Much wealth doesn't mean much money, it just means property which may be sold later for money. But unless someone really does this, there is noone with a huge stock of money. And why should someone trade his wealth for fiat money unless for short-term trading purposes?

[Yuvea]

I don't think that it shows anything else than the shallowness of the market...

With more overall money invested in bitcoins, it'll be comparatively "harder" to make a mark in the global market for a single trader.

[modrobert]

The core idea of (modern) fiat currencies is to provide a stable exchange media which is required for every stable economy. This is done by having an independent organization which controls the amount of circulating money to stabilize it. While it's still possible to speculate with fiat currencies, it's less profitable because of the artificial stabilization through a central bank which often goes against the market. As the result the currency is much more stable which makes trading etc much more predictable if done with a fiat currency. Which in turn leads to economic growth.

With Bitcoin we see what happens if currencies are subject to heavy speculation: The value is changing rapidly, and this makes trading and any kind of accumulation (which is necessary if someone plans bigger investments) with the currency very risky. And this will probably prevent the use of Bitcoin for it's primary use: Trading. People want to trade and people want to speculate. But only very rarely they want to do both at the same time with the same thing. If you have to take currency fluctuations into account to find the right time to buy things, this isn't what most people are willing to accept. As a result they will probably stay at some fiat currency for trading and use Bitcoin for speculative purposes only - which may kill Bitcoin in the end.

Any idea how to overcome this problem?

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.

[Soline]

Someone just moved 6.5% of all bitcoins in existence.  I don't think that any person or company has control over anywhere near 6.5% of the world's dollar market.

Someone could own that much of the dollar market, but yes this have more to do with there being much more speculators than users of bitcoin who control the majority of the fund. If everyone on the planet only trade fiat currency rather than using it as a currency, you're going to get a lot of fluctuations too.

[Thanak]

I think is more a question of established currency versus a youger less established currency.

I think that as the currency gets more and more used, you are gonna see less concetration in the hand of a few people which will help keep the value stable.

Are the any stats like total number of users, average cash in the account,...   Can we see if the rich are getting richer or is the wealth spreading ?

[Ticker]

Time will probably tell. Its a question of how big the economy behind bitcoins will grow... and of cause the impact that can suddenly arise and totally change the way people trust the currency.

[md2k7]

Nath: I think speculation is necessary to "give BTC value" before much of a BTC-based economy is established. When more and more people start trading for BTC, prices will probably stabilize, especially if one can cover all his expenses in BTC.

Of course, as long as you need to exchange BTC for some state's currency to be able to buy goods with it, the value of a BTC will solely be bound to speculation.

Yours
David

[Ekaros]

There has been hyper-inflations with fiat currencys too. And current practises don't seem too good in long run... Also, I personaly don't belive in USD, it takes only one goverment to crash...

It just takes some time to reach stability, market will find the value...

[Nath]

Someone could own that much of the dollar market, but yes this have more to do with there being much more speculators than users of bitcoin who control the majority of the fund. If everyone on the planet only trade fiat currency rather than using it as a currency, you're going to get a lot of fluctuations too.

That's very hard, because the central bank can hold against it. They generally don't do that if a fiat currency loses against another fiat currency (sometimes a bit, but that's more for psychological reasons), they do it to hold the currency on a small price rise rate (which is seen as useful by most economists). Also as I wrote above: Most people don't have that much money, even if they have a lot of wealth. But with Bitcoin there is no such stabilizing entity, it's all on the market. And markets tend to fluctuate a lot, even with high volumes. And from time to time there is a crash. That's natural. The question is: Is this really something we want for a currency?

Most people here seem to have an "everything will be fine in the long run" attitude. While this is certainly good to get Bitcoin started, I still see the problem, that Bitcoin is to much defined es a commodity instead of a currency. Its design is to mimik some properties of gold in this regard. But while gold has the big advantage to work very good in low-tech situations, it doesn't work that good in a world with world-wide stock exchanges and global trade and competition (that's why it got abandoned as a base for most currencies).

Gold is also still a nice way to store a certain part of personal wealth, and in the case of global economic and technological collapse it may get back it's role as currency. But that's because of it's physical properties - properties, Bitcoin don't have. If "the system" breaks down, Bitcoin will be useless because it depends on todays high-tech infrastructure which probably won't survive a real collaps.

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.

But this only works because we have the Dollar as a relatively stable benchmark. Without such a standard it would be much more difficult to really judge how to fix your prices. You would always have to match it against your purchase and restocking prices. While this would be possible, it opens up lots of potential problems which are hard to handle. Because of this, bigger companies often use futures and the like to protect themself against such currency risks (which do exists in fiat currencies, even if to a much smaller amount an primary in international trades between different currencies). Now imagine, everybody has do do something like this because of much higher currency volatility.

[modrobert]

But this only works because we have the Dollar as a relatively stable benchmark. Without such a standard it would be much more difficult to really judge how to fix your prices. You would always have to match it against your purchase and restocking prices. While this would be possible, it opens up lots of potential problems which are hard to handle. Because of this, bigger companies often use futures and the like to protect themself against such currency risks (which do exists in fiat currencies, even if to a much smaller amount an primary in international trades between different currencies). Now imagine, everybody has do do something like this because of much higher currency volatility.

If there was no currency to relate to there wouldn't be any BTC fluctuations. That's why I also suggested only selling 50% of BTC received from customers. Perhaps some day we can keep 100% in Bitcoins and get rid of currency like USD, but then it has to grow a lot first.