A Monetary Authority for Bitcoin

Bitcoin lacks a Central Bank. This is good and bad. A central bank benefits those with political connections. But Bitcoin lacks price stability, this generates menu costs, and incentivizes speculation. I propose the creation of a monetary authority for Bitcoin that sets block reward to a new mathematical formula.

The velocity of the Bitcoins that are in circulation likely approaches 100,000x per year as compared to 1x - 4x for the USD. This in itself is not bad. But given that only 10% to 20% of Bitcoins are circulating, this means that the price of Bitcoin is decided largely through speculation. In fact the price of a Bitcoin is irrelevant to those who use Bitcoins as a currency because it appears the majority of coins being used are immediately being sold and repurchased in the exchanges for the sole purpose of buying goods.

Unless Bitcoins can be used to purchase intermediate goods and have a closed economic ecosystem, Bitcoin will be too vulnerable to speculation and would not be a viable currency. But the development of a closed economic ecosystem is stymied by the uncertainty of Bitcoin prices and speculation.

Fortunately the infrastructure for transacting Bitcoin has long been established, with many major exchanges. Nearly all major exchanges announce recent prices. At the point when a block is generated, the miner will also add the exchange price of bitcoin between various other currencies and crypto-currencies to the blockchain. The exchanges that are kept track of could be hard coded into Bitcoin or the miner could choose, how this works is not something I'm personally focused on.

With every new block, the miner will compare the cumulative percentage change in the exchange price of Bitcoin over the previous 960 blocks. The standard deviation of the percentage change in exchange rates will be calculated. Outliers will be excluded, this is so that in case x-currency suffers from hyperinflation, the x-currency will be ignored. It is extremely unlikely for all the world’s currencies to be suffering from hyperinflation caused by monetary expansion as opposed to a supply shock.

Every 960 blocks the block reward will be reevaluated. For every 5% increase in the geometric mean of Bitcoin exchange rates in relation to the world’s currencies would increase the block reward by 3%. A 5% decrease in the geometric mean of Bitcoin exchange rates will decrease the block reward by 3%. Changes in the exchange rates of less than 5% will not alter the block reward.

The minimum block reward will be one Bitcoin.