Can we fix excessive volatility?

[TiagoTiago]

If you are going to go down the route of controlling the amount of units in circulation you could go nutz with it ....

Hayek talked about an ideal automated regulator that kept the currency value stable with a basket of goods (gold, oil, wheat, milk, meat, what-have-you, etc) just the usual stuff but the mechanisms he proposed could only be done with something like modern digital currencies that we now are experimenting with ...

... the automated algorithm would have as it's goals the currency's stable value but in order to achieve these targets it would automatically buy currency on the market if the value was dropping below target but here's the kicker, imho, if the currency was becoming over-valued then the system would automatically credit all existing accounts on a pro-rata basis to put more currency supply into circulation, i.e., like stock-holder dividends.

Of course, it would need to be something quite sophisticated in the way of a control algorithm to achieve price stability, figuring out necessary time-constants for the system and etc, but not impossible with a modern multi-variate adaptive controllers I don't think (fuzzy logic or neural net may also be options).

The key here is that to encourage/speed adoption there is an incentive to hold larger account holdings so that as demand for the currency were to increase as it's use spread, then currency holders would be rewarded with more numbers in their accounts. It is, in effect, the same thing that bitcoin causes when demand rises and it's value increases (in the local unit of account) but it is monetised in a different way such that the current holders see a constant value of the unit but they get more units ... same net effect, different mechanism. The currency inflates at the necessary rate to keep the value constant against the chosen basket of market goods/services but the inflation is spread out EQUALLY to ALL present currency holders.

NB: I'm pretty sure that Open Transactions can do all this with it's current functionality. And a few added 'lock 'n leave' controller algos that can be unleashed and keys destroyed so that the tamper-proof machine has control.

But what would the system buy your money with? And who would be sending you the payment?

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[xxjs]

If you are going to go down the route of controlling the amount of units in circulation you could go nutz with it ....

Hayek talked about an ideal automated regulator that kept the currency value stable with a basket of goods (gold, oil, wheat, milk, meat, what-have-you, etc) just the usual stuff but the mechanisms he proposed could only be done with something like modern digital currencies that we now are experimenting with ...

... the automated algorithm would have as it's goals the currency's stable value but in order to achieve these targets it would automatically buy currency on the market if the value was dropping below target but here's the kicker, imho, if the currency was becoming over-valued then the system would automatically credit all existing accounts on a pro-rata basis to put more currency supply into circulation, i.e., like stock-holder dividends.

Of course, it would need to be something quite sophisticated in the way of a control algorithm to achieve price stability, figuring out necessary time-constants for the system and etc, but not impossible with a modern multi-variate adaptive controllers I don't think (fuzzy logic or neural net may also be options).

The key here is that to encourage/speed adoption there is an incentive to hold larger account holdings so that as demand for the currency were to increase as it's use spread, then currency holders would be rewarded with more numbers in their accounts. It is, in effect, the same thing that bitcoin causes when demand rises and it's value increases (in the local unit of account) but it is monetised in a different way such that the current holders see a constant value of the unit but they get more units ... same net effect, different mechanism. The currency inflates at the necessary rate to keep the value constant against the chosen basket of market goods/services but the inflation is spread out EQUALLY to ALL present currency holders.

NB: I'm pretty sure that Open Transactions can do all this with it's current functionality. And a few added 'lock 'n leave' controller algos that can be unleashed and keys destroyed so that the tamper-proof machine has control.

Adding something to each wallet every time the value goes up: The value of the total content of the wallet will also go up. That is not stabilizing, it is what Mises call "renaming of the currency unit". It has been done with fiat many times, it is not devaluation, it is only a practical measure to align the different bill and coin sizes to something practical.

Regulating the value of a unit, that would need the regulator to have some amount of coins, sell when the value is high and buy when it is low. The limit on the low side is the amount of fiat available at the regulator. In case  of a central bank, it is unlimited of course. On the upper limit, on the other hand, nobody has an unlimited number of coins, so when the upward pressure is too high, the limit has to be given up. This is exacly the reason why all pegged currencies are pegged until they are not pegged anymore, and no longer.

What we have is entrepreneurs that buy low and sell high (daytraders and other speculators) The resulting value is regulated to what the entrepreneurs think that the value will be some time in the future. If they are right, it will be more stable than if only regular users set the value.

[DrahogErusiel]

This is an extension of the dollar money system, just like a gift card system. It has to be centralized. You can do it. Thousands of companies already did.

No, it doesn't have to be centralized. It can be a separate crypto-currency, just pegged 1:1 to the dollar by the protocol.

Sure we can fix volatility.

Become a market maker: help bitcoin and earn money for yourself.

https://bitcointalk.org/index.php?topic=187530.20

Sell high, buy low. PROFIT  

I'm helping Bitcoin with buying and holding it.

BTCOOM!!!

[Fugger]

I think the best way to fix the high vol of BTC is to go out and promote the use of BTC. The more merchants accept BTC and the more individuals pay with BTC, instead of using it as a speculative asset class, the less vol we will have. That's because if we have 100 million people using BTC, the impact of buying and selling by those who speculate exchange for fiat will be much less than if we have something like 4 million users.

[firefop]

If you are going to go down the route of controlling the amount of units in circulation you could go nutz with it ....

Hayek talked about an ideal automated regulator that kept the currency value stable with a basket of goods (gold, oil, wheat, milk, meat, what-have-you, etc) just the usual stuff but the mechanisms he proposed could only be done with something like modern digital currencies that we now are experimenting with ...

... the automated algorithm would have as it's goals the currency's stable value but in order to achieve these targets it would automatically buy currency on the market if the value was dropping below target but here's the kicker, imho, if the currency was becoming over-valued then the system would automatically credit all existing accounts on a pro-rata basis to put more currency supply into circulation, i.e., like stock-holder dividends.

Of course, it would need to be something quite sophisticated in the way of a control algorithm to achieve price stability, figuring out necessary time-constants for the system and etc, but not impossible with a modern multi-variate adaptive controllers I don't think (fuzzy logic or neural net may also be options).

The key here is that to encourage/speed adoption there is an incentive to hold large r account holdings so that as demand for the currency were to increase as it's use spread, then currency holders would be rewarded with more numbers in their accounts. It is, in effect, the same thing that bitcoin causes when demand rises and it's value increases (in the local unit of account) but it is monetised in a different way such that the current holders see a constant value of the unit but they get more units ... same net effect, different mechanism. The currency inflates at the necessary rate to keep the value constant against the chosen basket of market goods/services but the inflation is spread out EQUALLY to ALL present currency holders.

NB: I'm pretty sure that Open Transactions can do all this with it's current functionality. And a few added 'lock 'n leave' controller algos that can be unleashed and keys destroyed so that the tamper-proof machine has control.

But what would the system buy your money with? And who would be sending you the payment?

This has actually captured my interest now. What we're really talking about is a single party exchange (funded by investors?) that only trade for coupons that equal 1 usd... and only buy and sell bitcoins with it.

So every node on the network is run by an investor. This investor is effectively creating coupons at will (backed by actual physical dollars?)

So the software could manage the exchange between bitcoins and coupons. It could become the method of choice to move value between the bitcoin exchanges if nothing else.

~

It would require a very high level of trust for people being able to issue the coupons - as they'd have to have cash on hand and be able to deliver it to destroy coupons when people wants to cash out.
I'm not sure it's workable - bitcoiners are inherently against a single entity or small group of players controlling the money supply.

[odolvlobo]

In order to maintain the 1:1 ratio, there must be a decentralized way to exchange dollars and coins in the block chain at 1:1. You need a decentralized way to verify that the dollars used to create coins have been destroyed, and a decentralized way to create dollars when coins are removed from the block chain.

[marcus_of_augustus]

If you are going to go down the route of controlling the amount of units in circulation you could go nutz with it ....

Hayek talked about an ideal automated regulator that kept the currency value stable with a basket of goods (gold, oil, wheat, milk, meat, what-have-you, etc) just the usual stuff but the mechanisms he proposed could only be done with something like modern digital currencies that we now are experimenting with ...

... the automated algorithm would have as it's goals the currency's stable value but in order to achieve these targets it would automatically buy currency on the market if the value was dropping below target but here's the kicker, imho, if the currency was becoming over-valued then the system would automatically credit all existing accounts on a pro-rata basis to put more currency supply into circulation, i.e., like stock-holder dividends.

Of course, it would need to be something quite sophisticated in the way of a control algorithm to achieve price stability, figuring out necessary time-constants for the system and etc, but not impossible with a modern multi-variate adaptive controllers I don't think (fuzzy logic or neural net may also be options).

The key here is that to encourage/speed adoption there is an incentive to hold large r account holdings so that as demand for the currency were to increase as it's use spread, then currency holders would be rewarded with more numbers in their accounts. It is, in effect, the same thing that bitcoin causes when demand rises and it's value increases (in the local unit of account) but it is monetised in a different way such that the current holders see a constant value of the unit but they get more units ... same net effect, different mechanism. The currency inflates at the necessary rate to keep the value constant against the chosen basket of market goods/services but the inflation is spread out EQUALLY to ALL present currency holders.

NB: I'm pretty sure that Open Transactions can do all this with it's current functionality. And a few added 'lock 'n leave' controller algos that can be unleashed and keys destroyed so that the tamper-proof machine has control.

But what would the system buy your money with? And who would be sending you the payment?

This has actually captured my interest now. What we're really talking about is a single party exchange (funded by investors?) that only trade for coupons that equal 1 usd... and only buy and sell bitcoins with it.

So every node on the network is run by an investor. This investor is effectively creating coupons at will (backed by actual physical dollars?)

So the software could manage the exchange between bitcoins and coupons. It could become the method of choice to move value between the bitcoin exchanges if nothing else.

~

It would require a very high level of trust for people being able to issue the coupons - as they'd have to have cash on hand and be able to deliver it to destroy coupons when people wants to cash out.
I'm not sure it's workable - bitcoiners are inherently against a single entity or small group of players controlling the money supply.

No. In my scheme the issuer of the currency is an automaton. It can hold effectively infinite balance to issue as many units as necessary to keep growing demand satisfied such that the price is stable (recall that growing demand for the currency is effectively quenched by being paid out to the current holders in the form of a direct dividend to their accounts). When demand is weak, i.e. price dropping, then it buys back at the market to stabilise the price. Obviously, the latter case is the more tricky to deal with since demand for the currency may completely collapse in which case the automation runs out of funds to buy the currency in the market, at which point the game is over anyway.

So what all this means is that it requires a large pocketed backer, or group of backers, who front up with the initial pool of funds that the automaton holds to bootstrap the currency. These initial investors put other reserve currency(s) (bitcoins?) into the pool that the automaton uses to effect open market operations, and in return receive an equal amount of the new currency in return (this is the 'float'). If the currency is a desirable product and adoption/usage spreads easily then the volume of funds held by the automaton will be stable as all it has to do is issue the necessary currency into holders accounts to keep market price stable. If demand for the currency weakens then the algo has to buy back at the market to strengthen the currency, if the market supply becomes overwhelming then the currency has problems ... the backers, and latter adopters, would be aware of this and are also incentivised to effect their own market operations to aid the automaton's algo and defend their currency.

[edmundedgar]

If you are going to go down the route of controlling the amount of units in circulation you could go nutz with it ....

Hayek talked about an ideal automated regulator that kept the currency value stable with a basket of goods (gold, oil, wheat, milk, meat, what-have-you, etc) just the usual stuff but the mechanisms he proposed could only be done with something like modern digital currencies that we now are experimenting with ...

... the automated algorithm would have as it's goals the currency's stable value but in order to achieve these targets it would automatically buy currency on the market if the value was dropping below target but here's the kicker, imho, if the currency was becoming over-valued then the system would automatically credit all existing accounts on a pro-rata basis to put more currency supply into circulation, i.e., like stock-holder dividends.

Of course, it would need to be something quite sophisticated in the way of a control algorithm to achieve price stability, figuring out necessary time-constants for the system and etc, but not impossible with a modern multi-variate adaptive controllers I don't think (fuzzy logic or neural net may also be options).

The key here is that to encourage/speed adoption there is an incentive to hold large r account holdings so that as demand for the currency were to increase as it's use spread, then currency holders would be rewarded with more numbers in their accounts. It is, in effect, the same thing that bitcoin causes when demand rises and it's value increases (in the local unit of account) but it is monetised in a different way such that the current holders see a constant value of the unit but they get more units ... same net effect, different mechanism. The currency inflates at the necessary rate to keep the value constant against the chosen basket of market goods/services but the inflation is spread out EQUALLY to ALL present currency holders.

NB: I'm pretty sure that Open Transactions can do all this with it's current functionality. And a few added 'lock 'n leave' controller algos that can be unleashed and keys destroyed so that the tamper-proof machine has control.

But what would the system buy your money with? And who would be sending you the payment?

This has actually captured my interest now. What we're really talking about is a single party exchange (funded by investors?) that only trade for coupons that equal 1 usd... and only buy and sell bitcoins with it.

So every node on the network is run by an investor. This investor is effectively creating coupons at will (backed by actual physical dollars?)

So the software could manage the exchange between bitcoins and coupons. It could become the method of choice to move value between the bitcoin exchanges if nothing else.

~

It would require a very high level of trust for people being able to issue the coupons - as they'd have to have cash on hand and be able to deliver it to destroy coupons when people wants to cash out.
I'm not sure it's workable - bitcoiners are inherently against a single entity or small group of players controlling the money supply.

No. In my scheme the issuer of the currency is an automaton. It can hold effectively infinite balance to issue as many units as necessary to keep growing demand satisfied such that the price is stable (recall that growing demand for the currency is effectively quenched by being paid out to the current holders in the form of a direct dividend to their accounts). When demand is weak, i.e. price dropping, then it buys back at the market to stabilise the price. Obviously, the latter case is the more tricky to deal with since demand for the currency may completely collapse in which case the automation runs out of funds to buy the currency in the market, at which point the game is over anyway.

So what all this means is that it requires a large pocketed backer, or group of backers, who front up with the initial pool of funds that the automaton holds to bootstrap the currency. These initial investors put other reserve currency(s) (bitcoins?) into the pool that the automaton uses to effect open market operations, and in return receive an equal amount of the new currency in return (this is the 'float'). If the currency is a desirable product and adoption/usage spreads easily then the volume of funds held by the automaton will be stable as all it has to do is issue the necessary currency into holders accounts to keep market price stable. If demand for the currency weakens then the algo has to buy back at the market to strengthen the currency, if the market supply becomes overwhelming then the currency has problems ... the backers, and latter adopters, would be aware of this and are also incentivised to effect their own market operations to aid the automaton's algo and defend their currency.

I don't think you even need a large-pocketed backer to bootstrap . Let's assume we've got:
- A way of trading in and out of this currency (maybe a decentralized exchange to trade with BTC).
- A way for the network to check the exchange rate of the currency.

The protocol would have a method to encourage people to keep the rate stable, namely:
- If the coin is too weak, anyone can destroy their coins in return for a voucher allowing a share of future money creation.
- If the coin is too strong, anyone can cash those vouchers in and get some newly-printed money.

So you start with 1 coin and 1 money-printing voucher. Maybe it opens at $2 (I'd pay that, it's worth a shot). People cash in their vouchers until there are 5 coins in circulation and it drops to $1. Then maybe the initial hype wears off and it drops to $0.90. We start buying vouchers and it goes back up to $1.10. Everybody knows there's going to be enough money printed or destroyed to bring it back to $1, so speculators should buy and sell anywhere far outside the target price and it should end up only a shade higher or lower than $1 at any given time.

What it relies on is that people think there may be a need to print money in future to maintain parity with USD, without which the money-printing vouchers are worthless. But that isn't too high a hurdle as the currency you're pegged to is getting debased all the time, and I think you have that problem even with initial rich bootstrapping backers.

[Ira H. Fuchs]

I had a revelation the other night - why don't we build a decentralized, open-source crypto-currency that is pegged (protocol-wise) to the US Dollar, which could anytime be bought with and sold for Bitcoin automatically (and perhaps exclusively), so to speak? It would be exactly like Bitcoin, with confirmations and all that, but with no mining and with an infinite supply.

Just imagine a separate downloadable client with a BTC address that would keep the received bitcoins in it's protocol (hell knows how, but it doesn't sound impossible) and provide you with a corresponding (at the then-current exchange rate) number of "coins", each of which you can always "cash out", again within the client, for $1 worth of Bitcoin. Whenever you cash out, you get paid automatically in Bitcoin at the current BTC/USD exchange rate, so you end up receiving the same exact money you brought in.

I could see this working flawlessly when the BTC appreciates, but when it depreciates there would be a deficit of BTC in the system. Here's an example:

John has 1 BTC (current price $100) and buys 100 Virtual USD coins with it. In the meantime, the BTC appreciates to $200 let's say, and when he (or anybody else, really) "cashes out" to Bitcoin, they receive 0.5 BTC, with half of the Bitcoin staying in the system.

And here's the counterexample, John has 1 BTC (current price $100) and buys 100 Virtual USD coins with it. In the meantime, the BTC depreciates to $50, and when he "cashes out" to Bitcoin, he must receive 2 BTC, when bringing in just 1 BTC. Is it possible that the first situation counterbalances the second one? In other words, can mass adoption solve this clusterfuck? I bet it can, if Bitcoin stays deflationary

Can a sustainable crypto-currency be built on the description above, and if yes, wouldn't this solve the volatility problem we have with Bitcoin, replacing it as a transaction currency and leaving it be a commodity, next to gold and silver?

Would be interesting to see what you guys think

good evening. It begins with having deep knowledge of bitcoin network design, especially block chain protocols. The higher education projects we support fill the largest gaps in the blockchain. More research needs to be done to follow international laws especially ones having a wide impact. We have massive funding so there is no fear of bitcoin being wiped off the map..Ira

[petrjanda]

1) Proper trading tools are a good start to lower bitcoins volatility.
2) Exchanges have to work closer together. Inter-exchange trading is a must imo. All exchanges should be using the FIX protocol.
3) Futures trading.
4) Wider acceptability of bitcoin.
5) Incentives for people to keep bitcoin instead of trading between fiat and crypto.
6) Investment

[Wary]

Margin trading will fix the volatitility.

Most of BTC business is speculation. When the speculators get proper financial instruments (which, I hope, pretty soon), they will start margin trading. With leverage 100:1 price swings will decrease hundredfold. Say, BTC market is $1B. Then another media hype happens and another $1B comes. But since they be used not for direct BTC purchace, but for margin trading, the price of BTC will raise only by 1%.

So, to really help BTC, VC should develop tools for speculants, rather than for "real economy".

[DPoS]

If you are going to go down the route of controlling the amount of units in circulation you could go nutz with it ....

Hayek talked about an ideal automated regulator that kept the currency value stable with a basket of goods (gold, oil, wheat, milk, meat, what-have-you, etc) just the usual stuff but the mechanisms he proposed could only be done with something like modern digital currencies that we now are experimenting with ...

... the automated algorithm would have as it's goals the currency's stable value but in order to achieve these targets it would automatically buy currency on the market if the value was dropping below target but here's the kicker, imho, if the currency was becoming over-valued then the system would automatically credit all existing accounts on a pro-rata basis to put more currency supply into circulation, i.e., like stock-holder dividends.

Of course, it would need to be something quite sophisticated in the way of a control algorithm to achieve price stability, figuring out necessary time-constants for the system and etc, but not impossible with a modern multi-variate adaptive controllers I don't think (fuzzy logic or neural net may also be options).

The key here is that to encourage/speed adoption there is an incentive to hold larger account holdings so that as demand for the currency were to increase as it's use spread, then currency holders would be rewarded with more numbers in their accounts. It is, in effect, the same thing that bitcoin causes when demand rises and it's value increases (in the local unit of account) but it is monetised in a different way such that the current holders see a constant value of the unit but they get more units ... same net effect, different mechanism. The currency inflates at the necessary rate to keep the value constant against the chosen basket of market goods/services but the inflation is spread out EQUALLY to ALL present currency holders.

NB: I'm pretty sure that Open Transactions can do all this with it's current functionality. And a few added 'lock 'n leave' controller algos that can be unleashed and keys destroyed so that the tamper-proof machine has control.

baked in inflation is what btc is trying to get away from..  that automatic buyback would be totally gamed as well on the other side of it.

money is very hard for people to get their head around.  it took me a few years to really understand the subtle and psuedo nature of it.
currently, the USD is totally worthless on bookvalue. Anything automatic to correct it would shoot off the charts. But, when you understand velocity, you can see that when only the small amounts get moved around it can't really create inflation.  When the big piles flow fast, as when TARP et all happened, then you saw some very rocky moves in the value of anything per the dollar.  That is the real linchpin, currency crisis.

Losing faith from the top side of the money piles is where money beings to die.  Not from the ground up since there is never enough velocity to push prices up relative to the whole amount of outstanding units.  Regualr people are just too cash poor to move prices in an ocean of trilllions of outstanding units.  But when you have that funny money derivatives, et all..  it can happen in an instant

PS- back to the value of a currency.  That used to be things like gold or oil, which are never worthless and would allow you to exchange the currency easily for the backed commondity.  Of course now the dollar is backed by bombs which is mob style. But you have the BRICS doing about 20% of world trade now outside of the dollar and growing.  If oil breaks free from the dollar (USA runs out of bombs) then you get massive defaults and death to the currency.   BTC is interesting since it is digital gold.  So it is like the gold dinar that Gaddafi died trying to introduce; the currency is backed by itself. Let the free market decide how much people value btc. That is the only way it can and should survive anyway.  Remember, even if the dollar strengthens, and rates go up and people want that return, the banks can bail-in, corzine, vaporize your cash like cypress  (it happened in the 80's with the S&L crisis too.. bait with 12% returns and then poof!)