Stabilize the price of bitcoin by gold

[Justsomeforumuser]

This forum, so many lulz/facepalms per minute.

[gongcheng]

I'd love to see this tried out.

But... what will you do if the exchange rate for bitcoins falls to $10/coin and stays there for a few months?

I will still trade 3 bitcoins for 1 gram gold until my store of gold last.

[gongcheng]

Won't work.

If you want to stabilize the price of btc then we need speculators who actively trade in the markets. If btc drops below a certain price then they will buy and if it goes above a certain price then they will sell. Overall this will get rid of the volatility because speculators will buy up excess supply and move it to periods of high demand. The end effect is more stable prices. However, there could be negative effects especially if there are very few speculators and some of those speculators have lots of buying and selling power. In this case what happens is the speculator has the potential to corner the market.

http://en.wikipedia.org/wiki/Speculation#The_economic_benefits_of_speculation

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

Maybe what you say is correct, but not in this stage.

I think in this stage we need a more stable price for bitcoin economy to grow.

[Forp]

Gongcheng

Why would I want to trust you that I will really get my gold?

If bitcoin crashes, everyone will want his gold back and this will be hugely damaging for you. How do I know that you do not just pull a Maddoff? So it is not about trust in gold, but it is about trust in you.

Why on earth should I trust a single person with a shiny web site more than 10.000 people with their GPUs? Wasn't bitcoin made for exactly that reason - not having to trust in a single person or bank or institution?

Maybe I do not understand your concept, but I cannot see a single reason how this would help bitcoin. Economically, I rather see the contrary: IF such a business opens up then this opens up big possibilities for manipulating bitcoin. We already today see how the Mt Gox case with Mt Gox being one of the largest exchanges, is damaging the reputation and exchange rate of bitcoin. Why would I want additional dependency of a single entity? Assume, you have a car accident; assume, your wife files for a divorce. What securities do I have that your wife does not take the gold into her pension fund? What securities do I have that your employees know the proper passwords? Why would I want to concentrate risk on one person and his promises? I do not see a good reason.

You write. I will still trade 3 bitcoins for 1 gram gold until my store of gold last Thats fine. But what if your store of gold is not lasting any longer? What, if it is stolen? What, if it is confiscated by your ex-wife? How do I know that I can trust you more than these guys in my inbox who every other days want my support to recover the inheritance of that nigerian general?

Oh. I forgot. I do see a good reason.

If someone wants to damage bitcoin, the logical move would be to go for more concentration and for more centralized structures.

If I were Visa or Mastercard: I would use a small percentage of my wealth to do some rollercoaster gameing with bitcoin. Buying some, letting hackers steal some, writing about it, selling a lot to dump the course again. Destroying trust.

So let me see... Just assume you do this business... More and more people buy into that gold backing stuff. And then, one day there is an SQL injection at some Mt Gox 2.0 and the exchange rate drops down. Some people want their gold backing. And, for some very interesting reason you are, umm, just not able to fulfill their demand immediately. DDOS maybe or what have you. 48 hourse of negative reporting ... bitcoin crashes even more.

In the end, at the price of a few kilograms of gold, you have successfully destroyed bitcoin's reputation.

This certainly is better than the perspective of losing the credit card fee business model all together.

Yes. If I were Visa or Mastercard, I would do it.

[killer2021]

Won't work.

If you want to stabilize the price of btc then we need speculators who actively trade in the markets. If btc drops below a certain price then they will buy and if it goes above a certain price then they will sell. Overall this will get rid of the volatility because speculators will buy up excess supply and move it to periods of high demand. The end effect is more stable prices. However, there could be negative effects especially if there are very few speculators and some of those speculators have lots of buying and selling power. In this case what happens is the speculator has the potential to corner the market.

http://en.wikipedia.org/wiki/Speculation#The_economic_benefits_of_speculation

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

Maybe what you say is correct, but not in this stage.

I think in this stage we need a more stable price for bitcoin economy to grow.

Did you not read the wikipedia article or my post? If you want to stabilize the price of bitcoin then we need people to buy when the price is dropping and sell when the price is rising. Thats what stabilizes the price!!!!!!!!!!!

Also forp is right.

GongCheng, I appreciate your idea and effort but it won't work. You are better off gettting 4.8 million then buying when the price drops and selling when price rises. 4.8 million capital will definitely be able to stabilize btc price.

[cloud9]

Glbse ( http://charts.glbse.com/markets/ ) allows for the creation of delivery contracts.  Delivery at expiration date can be in btc based on the day's market rate for btc/gold and need not be physical gold delivery.  Maybe you can create a contract like Gongcheng-Gold-Dec-2011 (symbol GONG-GCZ11)?  Based on your past reputation (based on successful contract delivery of GONG prefixed contracts) the market will find fair value for your contracts through active speculation.  Speculation is something that the bitcoin community is well versed, and comfortable with, it seems.

[Forp]

4.8 million capital will definitely be able to stabilize btc price.

How much is needed to destabilize it?

And how big a share of a major financial institution's yearly earnings is this?

And, given the potential of bitcoin to change the financial world in the internet, would that be a good investment, if you want to keep the fees for traditional institutions flowing?

I am not suggesting to do it. For me, trust just means to think about possible threats. Trust, in the sense of open eyes. So we should know the answers!

[2_Thumbs_Up]

This is like trying to back silver with gold. It makes no sence, and furthermore, you will only create an arbitrage opportunity for savvy investors that will profit from you.

[andes]

Honestly it makes no sense.
(1) It goes against the descentralized quality of bitcoin.
(2) How can you choose an appopiate market cap? This market should keep growing dramatically. Why 4.8 million. You cant pick an arbitrary number.

Then only sure way to stabilization of price, is when bitcoin reaches the stage where you can buy most things directly with it. Then the value of bitcoin will not be compared to other fiat currencies, but to the purchasing power of bitcoin itself. It will end being a speculative comodity, and  really become a wide accepted currency.

[cloud9]

Those who believe in gold will speculate for gold, those believing in silver will speculate for silver, those believing in btc will speculate in btc and those who believe in fiat will be in fiat.  Creating a trading opportunity for all these parties to counter trade with btc will be priceless and stabilising for btc and will also add even more liquidity as forex markets do for fiat.  Arbitrage opportunities exists in all marketable goods as a price finding mechanism.  It is a win-win opportunity when one who needs potatoes can exchange to obtain it from someone at the other side of the world by giving that person btc.  Both might have had a vested interest in btc or potatoes before the trade.

Depending on your need at that stage and the relevant commodity/good fulfilling that need:

Potatoes - Making potatoe chips / feeding your cattle / use as a food additive, etc.
Gold - Use as an age old store of value / electronics / decorative use

or

Bitcoin - Use as a safe, secure, frictionless globalised accounting digital good system for the private key holder, paired with a publicly accessible key

[brendio]

I had a slightly different idea for a way to help stabilise the market. My idea is that cooperative of Bitcoin merchants, who would be eager to see a more stable BTC price to encourage its use in commerce, would act as market makers by selling BTC when the price rose too quickly and buying when it drops too quickly. It would need to be well backed financially and would need to be well managed to predict a realistic long term BTC price based on market uptake and usage statistics. If run well, it should make a handy profit by buying low and selling high. Better than just one such "central bank" would be a number of competing cartels that could each base their actions on their own predictions for BTC.

These corporations could contract with mining pools to ensure a steady flow of bitcoins and could also write put options to merchants worried about a falling exchange rate. There are a number of different income sources for it. The major risk to such a market stabiliser would be a continued fall in value such that it eventually ran out fiat with which to buy BTC, but the presence of a well enough capitalised cooperative should inject confidence in bitcoin and help guard against this.

Thoughts or criticisms?

[cloud9]

(1) It goes against the descentralized quality of bitcoin.

Andes,

Can't you just register Andes-Gold-Dec-2011 (symbol ANDS-GCZ11) at Glbse.com and Gongcheng register Gongcheng-Gold-Dec-2011 (symbol GONG-GCZ11) contracts?  Based on both of your (and other users) reputation for contract delivery will the decentralized market not decide whose contract to counter trade on?

[cloud9]

Is it a contradiction in terms - but the more upside and downside opportunity there are for speculation - the more stable the value of a speculated good / commodity would be in a decentralized free market?  Given all players having different views?

[brendio]

I think the issue is liquidity. Bitcoin prices swing wildly when there is low liquidity and so relatively large orders have the ability to move the market significantly.

[Havoc]

Will you only offer to *buy* bitcoins for 1gg/3 BTC or also to sell bitcoins?

If you just offer to buy it will only place a price floor, providing you are trusted. The value of a bitcoin would not be stabilized at any level above you buy price.

[westkybitcoins]

I'd love to see this tried out.

But... what will you do if the exchange rate for bitcoins falls to $10/coin and stays there for a few months?

I will still trade 3 bitcoins for 1 gram gold until my store of gold last.

Glad to hear it.

Be sure to let us know when you have it up and running....

[BCEmporium]

I guess these "backings" make no much sense.
It's like backing silver with gold. What for? They're both bullion, can't back each other...

[kwhcoin]

Hi, all.

     I just got an idea to stabilize the price of bitcoin by gold. I want to establish a company to backup bitcoin with gold. I will give the promise to exchange 3 bitcoin for 1 gram of gold. I will not call bitcoin a currency, instead I will call it a virtual commodity.

     I have done some homework, I think in order to keep the promise, I need to prepare 100 kilograms of gold, that is 4.8 million US dollar.   

     I believe that this will be benefical to the bitcoin economy. Also by doing so, I can make some profit by charging transfer fees like MtGox.

     So what you guys think? Any good suggestions?

I think your plan would be good for bitcoins, but I don't see how you could profit from your idea. If 3 bitcoins are more valuable than one gram of gold then nobody is going to exchange their bitcoins for your gold. If 3 bitcoins are less valuable than one gram of gold then your promise would cause you to exchange your gold for bitcoins at a loss compared to what you could get by selling your gold at market price and buying bitcoins at market price. It seems there is no way for you to win, but there is a way for you to lose.

[alexbasasa]

The point has already been made that BitCoin is in fact a commodity, there's no need to make it a commodity. And probably one of its most valuable intrinsic qualities is decentralization, so in a sense Forp does a have point in being all suspicious:

If someone wants to damage bitcoin, the logical move would be to go for more concentration and for more centralized structures.

But he's not considering that single guy doing something for the first time is not forcing centralization. Even if MtGox was the most centralized part of the BitCoin economy for a while, recent events are making the community go to new exchanges, making BitCoin more and more resilient.

So basically what I'm saying is that I hope competition will eventually come up guaranteeing 1gg for 2.99 BTC, and that BTC for Gold exchanges become decentralized. In the meantime, Gongcheng, I wish you luck and hope you make a good profit for being the first one to take the risk.

[d3wo]

     I have done some homework, I think in order to keep the promise, I need to prepare 100 kilograms of gold, that is 4.8 million US dollar.   

usd is backed by bullets