A new design suggestion: Pegged exchange rate of BTC

[johnyj]

For countries with small economy scale and small amount of currency, they ususally use a USD pegged exchange rate to avoid currency value fluctuate wildly.

So, to be stable in the early stage of BTC, it can use a pegged exchange rate to a basket of world currency and commodities, for example considering such a combination:

USD 10%
EUR 10%
GBP 10%
CHF 10%
JPY 10%
Gold 10%
Crude Oil 10%
Copper 10%
Rice 10%
Cotton 10%

These combined elements will keep the overall exchange rate of BTC very stable, since most of the price movement in these elements will cancel each other

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How do you intend to peg the exchange rate of a bitcoin?

[johnyj]

Well, it might need to be designed to suit BTC nature, I haven't think a lot about this

Take China for example, their currency exchange rate is controlled by the central bank

If you want to buy some goods from a chinese merchant, you tell your bank that 100K USD is going to merchant A to buy some goods, then the bank will issue a Letter of Credit to merchant A. Merchant A will dispatch the goods and use the shipping order to get payment from a chinese bank designated in LC. After payment is done, your bank will receive the shipping order and you use that order to get your goods.

Merchant A get payment in RMB, not USD, since his chinese bank has already exchanged those USD to RMB with central bank. Therefore, central bank collect USD and paying out RMB to merchant A.

Same, if merchant A wants to import some USD products, the central bank has to exchange his RMB to USD before any purchase action, using a fixed exchange rate.

[kjj]

See this chart.

Chart taken from this article.  I don't agree with the conclusions necessarily, but it gives a good discussion of the exchange mechanism and demonstrates how sterilization works in the real world.

Can you spot the one critical feature in the chart that explains how PBC is able to hold a peg?  Do you understand how the lack of that feature will make it impossible for you (or anyone else) to maintain a peg?

[johnyj]

See this chart.

Chart taken from this article.  I don't agree with the conclusions necessarily, but it gives a good discussion of the exchange mechanism and demonstrates how sterilization works in the real world.

Can you spot the one critical feature in the chart that explains how PBC is able to hold a peg?  Do you understand how the lack of that feature will make it impossible for you (or anyone else) to maintain a peg?

Exchange rate is always need to be controlled, no matter a floated currency or a pegged currency. Bank of Japan just did an intervention yesterday

BTC is a distributed currency, and the exchange rate can also be distributed, that makes a composite exchange rate for BTC attractive

[kokjo]

the exchange price of a bitcoin. is defined by supply and demand.
it can therefor not be pegged to anything.
example:
you do make a fixed-price exchange. where one can buy 1btc for 10usd.
now if the price on another exchange goes to 13usd per btc.
people will put alot of usd into your exchange, and you will run dry of btc(and your peg is GONE)

sorry mate.

[Piper67]

Anyone trying to peg the BTC to anything will get pegged 

To OP's point... have you ever researched what has happened to countries that peg their currency to the US dollar? It works for a while, then it gets really ugly really fast.

[johnyj]

Anyone trying to peg the BTC to anything will get pegged 

To OP's point... have you ever researched what has happened to countries that peg their currency to the US dollar? It works for a while, then it gets really ugly really fast.

China has been pegging RMB to USD for decades, it still goes on

[johnyj]

the exchange price of a bitcoin. is defined by supply and demand.
it can therefor not be pegged to anything.
example:
you do make a fixed-price exchange. where one can buy 1btc for 10usd.
now if the price on another exchange goes to 13usd per btc.
people will put alot of usd into your exchange, and you will run dry of btc(and your peg is GONE)

sorry mate.

If everyone is honest merchants and the market is enough big, then maybe supply and demand will decide a reasonable price, but for a small currency like BTC, it will take only one hedge fund to push the price to 100+$ and cash out, finally short it to 1$ from there

In a pegged system, the exchange rate is always decided realtime by a basket currency/commodities, so basically all the exchange will have the same rate published.

Of course, if a hedge fund manager put 10 million dollar to buy as much BTC as possible, then exchange will have to provide that amount of BTC to him, since almost everyone is hoarding BTC, exchange simply could not find that much BTC that he can buy, then there will be a liquidity problem

So, for a pegged currency, the exchange should have enough reserve to damp the speculative behavior and keep the promised exchange rate, this role normally is carried out by a central bank

But anyway, with a pegged exchange rate, the worst result will only be liquidity problem, the exchange rate will always keep the same, this will in a large degree discourage the speculation

[kjj]

Anyone trying to peg the BTC to anything will get pegged 

To OP's point... have you ever researched what has happened to countries that peg their currency to the US dollar? It works for a while, then it gets really ugly really fast.

China has been pegging RMB to USD for decades, it still goes on

Because they can print RMB at will.

Expect to see that blow up in their faces in the next 5 to 10 years.

[johnyj]

Because they can print RMB at will.

Expect to see that blow up in their faces in the next 5 to 10 years.

Same as FED printing USD, and that pegged exchange rate is not fixed, I remember it is 3.x in 80s, 8.x in 90s, now 6.x

A pegged system could be aimed by hedge funds. Soros crashed bank of england and some aisan countries, but he was defeated by the HongKong government when he played the same trick, because chinese government had much more USD reserve than he could leverage. As long as an economy scale is small, maintain price stability is difficult

[kjj]

Because they can print RMB at will.

Expect to see that blow up in their faces in the next 5 to 10 years.

Same as FED printing USD, and that pegged exchange rate is not fixed, I remember it is 3.x in 80s, 8.x in 90s, now 6.x

A pegged system could be aimed by hedge funds. Soros crashed bank of england and some aisan countries, but he was defeated by the HongKong government when he played the same trick, because chinese government had much more USD reserve than he could leverage. As long as an economy scale is small, maintain price stability is difficult

Not even remotely the same thing.  China is printing RMB to balance a massive influx of dollars in a futile effort to keep the value of their currency low to keep sucking manufacturing into the country.  Google "mercantilism".

And a having a peg doesn't mean that you can't change it occasionally.  It just means that the PBC is ready, willing, and able to convert any quantity of USD into RMB (or the reverse) at whatever the official rate is that day.

[Babylon]

BTC are not centralized, so pegging them to anything would be impossible.

However, feel free to create a new cryptocurrency pegged to whatever you would like.

[johnyj]

BTC are not centralized, so pegging them to anything would be impossible.

However, feel free to create a new cryptocurrency pegged to whatever you would like.

That is what I mean, if you do not have a centralized authority, the pegging system would be based on totally another set of rules independant of central bank, this might bring BTC some advantage against fiat currency, whose value changes a lot nowadays

If BTC value is very unstable like we have seen, then only speculators will be interested, no real economy will grow out of it

[memvola]

That is what I mean, if you do not have a centralized authority, the pegging system would be based on totally another set of rules independant of central bank, this might bring BTC some advantage against fiat currency, whose value changes a lot nowadays

Yes, but the real problem is how to accomplish that (Please consider that this is a recurring proposal in the forum.). Maybe a totally different system with WoT and trusted arbiters and IOU's and whatnot but it would be totally alien to the Bitcoin technology. And I don't see the upsides. If the intention is moving funds beyond borders, you could easily use those currencies directly with a system like Ripple.

If BTC value is very unstable like we have seen, then only speculators will be interested, no real economy will grow out of it

It's unstable because it's small. But it's growing. We need more speculators, just as we need more vendors and offered services. I've been here for almost a year now and it has grown considerably. And, believe it or not, got more stable (check the logarithmic charts). I think it is very probable that a "real economy will grow out of it", since it seems that it has uses that gives it value, even with all the volatility.

[Babylon]

BTC are not centralized, so pegging them to anything would be impossible.

However, feel free to create a new cryptocurrency pegged to whatever you would like.

That is what I mean, if you do not have a centralized authority, the pegging system would be based on totally another set of rules independant of central bank, this might bring BTC some advantage against fiat currency, whose value changes a lot nowadays

If BTC value is very unstable like we have seen, then only speculators will be interested, no real economy will grow out of it

So start pegging it.  Offer buys and sells at the rate that you feel is a fair peg.

I think you'll discover the disadvantage of that system very quickly, but at least you will have learned something.

[Nagle]

Well, it might need to be designed to suit BTC nature, I haven't think (sic) a lot about this

It takes a lot of financial strength to peg a currency or a commodity. However, it can be done for short periods as a convenience to markets. The price of gold is "fixed" twice a day, by five big banks, in London. Before trading became so fast, there were more currency pegs. See the Bretton Woods agreement.

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This really should be added to the FAQ.

[johnyj]

If the exchange rate changes wildly, it is a gamble
If the exchange rate rises continously, it is a bubble
If the exchange rate drops continously, it is a trouble

Either way, not suitable for serious business

[kokjo]

If the exchange rate changes wildly, it is a gamble
If the exchange rate rises continously, it is a bubble
If the exchange rate drops continously, it is a trouble

Either way, not suitable for serious business

and...?