Question from a Bachelor in Econ

[sophyphreak]

(Originally posted in Alternate Cryptocurrencies forum)

I would love to see a P2P currency work, but I have serious doubts about current-day P2P currencies.

The most important thing any currency needs is (at the very least) day-to-day stability of value, and no P2P currency that I know about has that yet.

The best way to create day-to-day stability would be to peg the value of the currency to a big currency or a basket of currencies, which is what most developing and/or small countries do--at least until the currency is stable enough to be allowed to float.

I don't think it would be technically simple to create a P2P currency that works that way.

That being said, does anyone know of a P2P currency that pegs its value right now?

[pletharoe]

I'm no expert but...

I think that the only way to peg a currency to another one is through a legal framework.  Since cryptocurrencies don't fall under any one country's control it is impossible to peg them to anything else.

Prices will only stabilize once adoption is more widespread.  This will damp out fluctuations in the market and reduce the probability of panic buying / selling.

I suggest that you look into the new Auroracoin.  That is a good effort at making crypto more widespread.

[remssik]

From one Econ grad to another, kind of. The closest we have at the moment is stuff like Payeer, PerfectMoney, EgoPay, OKpay, that kind of stuff. Their fees are high and it's not P2P. The problem with pegging is that someone has to back it up. Sure, I could create JimmyCoin and say 1JMC=$1, but if I don't have a dollar in waiting for every dollar in circulation, and therefore can't deliver on my promise to give $1 for each JMC, people get weary, other people offer to buy it for less, and now JMC is just like every other cryptocurrency.

There are two ways around this problem: insurance and a huge stockpile. Insurance (like FDIC for banks) doesn't exist in any reliable form, and likely won't unless cryptocurrency can become more money-like. Right now, merchants are accepting BTC and the like, but not holding on to it. To get them to hold it, we would need stability, but as per your question, stability is the problem already.

This leaves having a stockpile as the most viable option. The problem? Not profitable. This is why PerfectMoney and the like charge fees, because they pretty much have to keep all dollars from currency exchange in a big stockpile.

Anyway, I hope this helps.

[actudoran]

gold is an unregulated comodity too ... so could the BTC be in a different form ... hence neither have anything to go by except for their scarcity value - Economics Alumni  

On the other hand I think it would be safe to assume that current fiat inflation brings about an upward trend for bullion in general; that being said, we often forget that the rate of appreciation a particular thing is not a function of economics !!!! Supply and demand is only an effect and not a cause ... Everyone should get the fact that Kensian economics is dead ... Welcome to the new world of causing such effects - try mass manipulation and perception alteration. ( that's another subject altogether )

My previous point is that we got an inflationary coin like the fiat, a relative stable quantity of gold and a deflationary wannabe.

If you want, that could be your thesis / final dissertation ...

Take care and good luck !
Al

[asfbhero]

I wrote a paper for international econ 340 when I was at Stony Brook where I outlined my idea of the "perfect" currency.  It had to be private, but couldn't be centralized (egold, etc.), had to have either a limited money supply, or a money supply dictated by some kind of ridged application of the fisher equation.  It had to allow for two untrusting parties to deal with each other without risk, no counterfeiting (double spending), and low to no transaction fees.  Now, all I was able to come up with was a decentralized exchange, I envisioned a market that was maintained solely in cyberspace (but I had no way of getting people to support it).  Basically I was thinking of bitcoin, but without the breakthroughs that Satoshi came up with.  My professor told me it couldn't be done when I proposed the project, it turns out he was wrong.  I, and all those before and after me, except for Satoshi had failed at a practical and secure implementation.  In my opinion bitcoin IS the ideal currency, all currencies float, all corporations that do deals internationally have hedging departments to deal with currency exchange risk, so movement isn't a deal breaker by any means.  Bitcoin is truly revolutionary, and new, and while volatile it is INCREDIBLY robust, look how it handled the panic today, the moment the market learned the Mt Gox was lying when they said the protocol was flawed buyers rushed right back in.  Once bitcoin has a few more years to gain wider adoption, a longer track record, and finish with large investors coming in.  I mean when wall street gets involved (Winklevoss ETF among others) the buying pressure is going to be enormous.

My opinion isn't gospel by any means, but creating a bitcoin was a focus of my research for a few years, and when I saw it materialize I got involved and am fully committed to professional mining, among other facets of the Bitcoin economy as a career path.  I think this is the one.

[asfbhero]

What's with all the desire to PEG to the dollar?  the point is to create a means of exchange free of the manipulations of governments.  Bitcoin gains it's value through it's unmatched transactional prowess---that can be paralleled with the REAL nature of gold (really just a chunk of shiney metal, it's industrial uses only make up ~20% of it's price) the reason gold was picked as a currency instead of some other metal or stone is the impossibility of counterfeiting (double-spending).  Bitcoins got that too.  Gold is a bitch to transport, measure, trade with, whereas bitcoin does all those things incredibly well. 

When placed against the USD or other fiats, BTC is also better in terms of transactions, better in terms of inability to counterfeit.   USD is inflated away just like all fiats, so bitcoin wins again.  The only thing bitcoin needs is time for people to get used to the idea of a currency that isn't controlled by a single govt or entity.  Which is actually a positive thing.

If Bitcoin were pegged to Gold, or the USD I wouldn't be interested.   again, I could be wrong, but when designing the perfect currency, it was in the abstract, Bitcoin.  Bitcoin is just real, better, and not a theory in an undergrad econ paper.  I'm a believer.

[donut]

It's being worked on: https://en.wikipedia.org/wiki/MintChip

[keithers]

As an econ major, you should know that the intrinsic value of a US dollar fluctuates vs. all the other world's currencies by the day/hour/minute.   So even if it was pegged to the dollar, it still would fluctuate in value.  There isn't really a feasible way to peg it to an exact dollar value, otherwise it would just be sending money...or pretty much paypal..

[subcoin]

day-to-day stability of value

BTc will become more stable once it is more openly traded (i.e. Winklevoss fund).

[keithers]

day-to-day stability of value

BTc will become more stable once it is more openly traded (i.e. Winklevoss fund).

It will be more stable when the market cap altogether is much bigger, and then news positive or negative will have a smaller effect on the overall value of 1 btc.

[teukon]

(Originally posted in Alternate Cryptocurrencies forum)

I would love to see a P2P currency work, but I have serious doubts about current-day P2P currencies.

The most important thing any currency needs is (at the very least) day-to-day stability of value, and no P2P currency that I know about has that yet.

The best way to create day-to-day stability would be to peg the value of the currency to a big currency or a basket of currencies, which is what most developing and/or small countries do--at least until the currency is stable enough to be allowed to float.

I don't think it would be technically simple to create a P2P currency that works that way.

That being said, does anyone know of a P2P currency that pegs its value right now?

The mechanics of maintaining a currency peg call for control of the currency being pegged, control which is naturally absent in a true P2P currency.

Your best bet is to look into faux P2P currencies, currencies that try to capture some of the value of decentralisation while making concessions for some specific purpose.  NoFiatCoin, for example, operates in a P2P fasion (based in Ripple) but is backed by gold.

[sophyphreak]

I will address the numerous good points made here because they are worthy of being addressed; however, first I have a proposition.

BitCoin has proved that an P2P currency-like thing can exist and work; however, chronic instability is an ongoing problem.

I'm not a programmer, but consider a P2P cryptocurrency with an initial centralized online exchange that the P2P program runs. The program gives more Coins to miners when the price of the cryptocurrency is deemed too high and gives fewer coins to miners when the price is too low similarly to how a government might do so. Thus, the program is able to peg the currency value and maintain long term and short term price stability.

[sophyphreak]

Update, 2-12-2014:
I realized that all my links have been replaced by the message "Suspicious link removed" because they were all shortlinks (for aesthetic purposes). I have sense changed them all to long links.

That is the core point that I wanted to float. Now for your specific points:

I think that the only way to peg a currency to another one is through a legal framework.  Since cryptocurrencies don't fall under any one country's control it is impossible to peg them to anything else.

...

I suggest that you look into the new Auroracoin.  That is a good effort at making crypto more widespread.

I think it might be illegal to have a pegged P2P currency, however, I believe it is far from technically impossible. Other posters talk about services that currently fix the value of their online currencies.

I checked out Auroracoin, and it looks interesting. Though it seems to be unrelated to the original subject at hand.

The closest we have at the moment is stuff like Payeer, PerfectMoney, EgoPay, OKpay, that kind of stuff. Their fees are high and it's not P2P. The problem with pegging is that someone has to back it up.  

...

This is why PerfectMoney and the like charge fees, because they pretty much have to keep all dollars from currency exchange in a big stockpile.

Thank you for this helpful list of online currencies. But as you say they aren't P2P and thus kind of defeat the purpose. Furthermore, their fees also leave their currencies with something to be desired.

However, I disagree that the only way to peg the value of an online currency is a big stockpile of money. See my proposition at the beginning of this post.

On the other hand I think it would be safe to assume that current fiat inflation brings about an upward trend for bullion in general; that being said, we often forget that the rate of appreciation a particular thing is not a function of economics !!!! Supply and demand is only an effect and not a cause ... Everyone should get the fact that Kensian[sic] economics is dead

Just to be upfront about this now: I am absolutely a Keynesian; it's absolutely not dead (http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?pagewanted=1&em), a discussion for another time.

It is unlikely that bullion appreciation is a sign of fiat currency inflation. If you look at any measure of inflation outside of bullion alone there is no sign of inflation that bullion appreciation might suggest. Consider CPA, cost of living increase, median or mean wage increases. Consider numbers collected by the government or by non-governmental organizations. By any reasonable data-driven analysis bullion's massive appreciation is not a result of fiat currency inflation. It is far more likely that the price of bullion has simply risen a lot, as many financial things do from time to time. It could even be a bullion bubble, after all there was a bullion bubble that grew and burst already (http://www.google.com/imgres?safe=off&sa=X&hl=en&biw=1366&bih=679&tbm=isch&tbnid=QEM9gqyYdTKlaM:&imgrefurl=http://seekingalpha.com/article/256917-riding-the-second-gold-bubble&docid=3yb2AlBObawVxM&imgurl=http://static.seekingalpha.com/uploads/2011/3/7/520519-129951866516192-UltraLong_origin.jpg&w=933&h=586&ei=xuv5Ut68Mcnj2wW0wYGgAg&zoom=1).

In my opinion bitcoin IS the ideal currency, all currencies float, all corporations that do deals internationally have hedging departments to deal with currency exchange risk, so movement isn't a deal breaker by any means.  Bitcoin is truly revolutionary, and new, and while volatile it is INCREDIBLY robust, look how it handled the panic today, the moment the market learned the Mt Gox was lying when they said the protocol was flawed buyers rushed right back in.  Once bitcoin has a few more years to ... finish with large investors coming in.  I mean when wall street gets involved (Winklevoss ETF among others) the buying pressure is going to be enormous.

The more moving parts in a business, the more cost of doing business, the higher the entry cost into the market, the higher the prices for the consumer. I see no reason why instability in the value of a currency could be considered not a bad thing.

Furthermore, is see no reason why the Mt Gox panic and recovery should be considered evidence that BitCoin is "robust." The 2010 Flash Crash (http://en.wikipedia.org/wiki/2010_Flash_Crash) wasn't evidence of the "robustness" of the US system, and the Mt Gox story isn't evidence of BitCoin being "robust."

Finally, there is no reason that wall street will make the currency a better currency. More investors (aka speculators) is bad for stability and bad for BitCoin as a medium of exchange. Speculators increase instability. There is no reason to look forward to wall street investment.

What's with all the desire to PEG to the dollar?  ...

When placed against the USD or other fiats, BTC is also better in terms of transactions, better in terms of inability to counterfeit.   USD is inflated away just like all fiats, so bitcoin wins again.  ...

As stated before, stability of value of a currency is highly important for the viability of that currency. Pegging the value of the currency creates stability of value. Without reasonable stability of value, BitCoin cannot function as a viable currency (see http://www.theatlantic.com/business/archive/2013/12/why-bitcoin-will-never-be-a-currency-in-2-charts/282364/ for another argument on similar grounds).

Fiat currency is not "inflated away." Inflation is not at a high level, and a low level of inflation is good because it prevents deflation and it gives people motivation to spend their money and thus help the economy.

It's being worked on: https://en.wikipedia.org/wiki/MintChip

Not sure yet if MintChip answers my question, but it is definitely interesting and worth looking at closer. Thanks for the heads-up!

the intrinsic value of a US dollar fluctuates vs. all the other world's currencies by the day/hour/minute.   So even if it was pegged to the dollar, it still would fluctuate in value.  There isn't really a feasible way to peg it to an exact dollar value, otherwise it would just be sending money...or pretty much paypal..

Of course the dollar fluctuates in value. That's the point of a floating currency. But consider this, on Jan 1, 2014 the USD changed 0.15% of its value against the Euro with no big intra-day fluctuation while BitCoin lost 4.2% of its value in three hours. That's not even a remarkable single-day price change for BitCoin. A tiny blip of a day on the radar that I chose purely because it was a day of non-significance for BitCoin as a financial instrument.

The reason a pegged currency would not be the same as paypal is because the value would still fluctuate, but the system would gravitate toward a pegged exchange rate (or relative exchange rate against a basket of currencies).


Finally, the biggest point being brought up is the biggest point that I have a problem with.

Prices will only stabilize once adoption is more widespread.

gold is an unregulated comodity[sic] too ... so could the BTC be in a different form

Once bitcoin has a few more years to gain wider adoption, a longer track record, and finish with large investors coming in.

BTc will become more stable once it is more openly traded ....

It will be more stable when the market cap altogether is much bigger, and then news positive or negative will have a smaller effect on the overall value of 1 btc.

There is a belief in the BitCoin community that a large market cap or widespread adoption and becoming more like gold will magically bring stability to the value of the currency, but there is no data to support this. After reading these responses I realized that I should have linked the first post to the original forum (https://bitcointalk.org/index.php?topic=458083.new#new). Here is the jist of why a larger market cap/wider adoption probably won't bring stability:

Let us assume that gold is a currency in the world, similar to BitCoin, only with much wider adoption and a much longer history. The gold market cap according to the guy on the previous forum's source...

http://www.numbersleuth.org/worlds-gold/

...is $8.5 trillion. To better understand the enormity of this number, the market cap of US dollars in circulation is $1.2 trillion (http://www.federalreserve.gov/faqs/currency_12773.htm). Thus, the current value of all the gold in the world (aka market cap) is about 7x the value of all the US dollars in the world.

This being said, the value of gold has had an annual inflation rate of 8% per annum over the past 5 years while it has simultaneously had a deflation rate of 23% over the past year (http://goldprice.org/gold-price-history.html). And this does not begin to amount to the historical instability of the price of gold since it was untied from currencies during the Great Depression.

Compare this to the US dollar (http://www.usinflationcalculator.com/inflation/historical-inflation-rates/). Its worst years of inflation were when it was tied to gold, as were its worst years of deflation. Since the end WWII there have been exactly 5 years of 10% inflation or more, and in the current era of post-Stagflation American Macroeconomics we have seen zero years of inflation breaking 6%. Furthermore, we have seen one deflationary year since 1950 when deflation reached 0.4% in 2009.

The dollar is far more stable than gold while gold is more widely used and gold's market cap is far larger.

There is no reason to believe that wide BitCoin use or a large BitCoin market cap will make it more stable.


Thanks for reading.

[asfbhero]

if you look up the volatility of all the currency pairs on the forex market, you will see that those with the highest trading volume sure the least volatile  the market in bitcoin is just too thin at the moment, and as time goes on and it becomes more widely used, trading volume will go up and stability will increase.  you mentioned the flash crash.  that was the result of all the high frequency traders, the speculators, the market makers pulled out, and there wasn't the usual liquidity, and as the sell orders came, the bids just dropped off the whole order book.   i was doing manual HFT for a small hedge fund at the time, that's what happened.

You have it backwards.  Gold is much more stable than the dollar. everything is just a ratio its XAU/USD when that goes up, it could very well be the dollar going down.  Which you can tell that it is because if you chart gold against other commodities and assets, you will find that the assets are correlated with gold, not the dollar, so it is the dollar that's really doing the moving. We have seen a 94% devaluation in the US dollar.  Money is supposed to be a store of value, not  a secrete government tax machine.  How do you think the government funds wars bail outs etc.  it prints money, which is taking away value of your money, so everything costs more.  the CPI leaves out fuel and food so much of the inflation is missing.  also check out shadowstats.org the calculate the CPI and unemployment the way the did up until clinton.  Bush changed it which essentially cooked the books.

A little bit of deflation can be a good thing, in an economy that doesn't wildly print money,and fuel a highly leveraged fractional reserve banking system.   People don't need to be forced into spending money, whenever the government is trying to stimulate consumer spending, it's in a time when the consumers need to ne saving, and recovering, people buy things and invest all the time.  Also as for bitcoin, if the whole world used bitcoin, and everyone just stopped spending it the global economy, it's wealth would stop growing, incentivizing people to do all the things that the fed pretends to need to control.

There's more to economics than what's written in a textbook by Mankiw, your professors don't know everything.  Though in the end you are a Keynesian through and through you are going to have problems with a currency developed expressly with and on  Austrian Economic ideals and principals.  When it works the Keynesians will see you don't need a central authority manipulating, and distorting the economy, which always leads to disaster. Central bankers are part of the government, and thus they will always have political pressures and motivations, leading to, say holding interest rates down at 1% after 9/11 way too long and creating a huge bubble.   

nd the reason we aren't seeing crazy massive sick nasty inflation from the money the banks are printing is because it's being hoarded by the banks, then lent back to the government  through treasury buys so the banks can heal and make money on the intereest rate spread from the fed to treasuries.  Which is just taking that value away from every other holder of the us dollar.  If that money comes out there's gina be big trouble.  Though the fed thinks they can thread the needle and stop injecting the economy with monetary cocaine, just when its cracked out enough to move it's broken ass on its own, right before its (our economy's) hear explodes.

[Carlton Banks]

I'm not a programmer, but consider a P2P cryptocurrency with an initial centralized online exchange that the P2P program runs. The program central bank gives more Coinsfiat money to minerscommercial banks when the price of the cryptocurrencyfiat currency is deemed too high and gives fewer coins to miners when the price is too low similarly to how a government might do so. Thus, the program is able to peg the currency value and maintain long term and short term price stability.

There's your problem.

The users of SophyphreakCoin have to trust that the intervention in the issuance rate won't be manipulated by the markets. The miners would be in prime position to do so, seeing as they would be privileged to receive all additions to the money supply. This can happen now, but the rate of issuance cannot be affected by price manipulation (or at all).

I think you're having difficulty reconciling a different model with the one you know well. Yes, the Satoshi model has price instability, but so do other small currencies. And to make matters worse, this is a grass roots project, implemented with highly novel software design. The sheer scale of differences in this system when compared to the incumbent system causes alot of the uncertainty.

The solution, then, is for people to learn about and adopt this model, and for the necessary time to pass as required by the former. Don't forget that there is a real possibility that the incumbent fiat currency system will not be in a stable condition by the time bitcoin volatility is tamed.

[asfbhero]

My MacroEcon 303 prof was a Keynesian, and I would disagree with him all the time about the economy, what direction it was going in, and why.  How government, nd fed's the fiscal and monetary policy would effect the economy, right or wrong, nice, but with a price to pay later down the line.  At least one a week I would end up getting out of me seat grabbing chalk and writing on the backboard arguing my point of view.  For example, in 2007, I thought that Greenspans 1% interest rates were left too low too long which enabled the funding of the housing and derivative/credit bubble once congress opened the door when they let banks play hedge fund with their depositors savings at 40:1, and that housing bill.

I thought that bernanke's raising interest rates would continue pushing housing prices down by that magic 2%, that would push Bear Stearns, or Lehman, or JP, or Goldman( prob not tho cause they basically are the NY fed) at their 40:1 leverage into margin call causing a cascade effect across the banks and whole economy, a crash... as the leverage upon leverage, all these malinvestments, that couldn't have been made unless the monetary and banking system had been distorted in the first place by the fed playing with interest rates.

He was a Keynesian, you actually reminded me of him.  He disagreed citing all the reasons you've cited for a central bank being a good thing.

I paid for college off those trades.  Now I'm investing my future into bitcoin with similar conviction, and surety that I'm not gambling, but investing in a macroeconomic near inevitability.
The same Austrian principals and knowledge of K, neo-K, and  informed by all the other heterodox economic theories I've studied ...are what are informing my reasoning behind my opinion, and willingness to put 20k, my lifes savings into starting a bitcoin business, because of how sure I am that there's going to be a growing, evolving, massive, and world changing bitcoin economy out there, and I wanto 1 be a part of it, and 2 get in on the ground floor.  This is definitely the ground floor.  <$100 was the basement.  We've got a long way to grow.

[teukon]

I'm not a programmer, but consider a P2P cryptocurrency with an initial centralized online exchange that the P2P program runs. The program gives more Coins to miners when the price of the cryptocurrency is deemed too high and gives fewer coins to miners when the price is too low similarly to how a government might do so. Thus, the program is able to peg the currency value and maintain long term and short term price stability.

It's difficult to understand what you mean by "initial centralized online exchange that the P2P program runs".  My best guess is that you'd like to consider an entity X that the P2P protocol recognises as special for a limited time.  X would have the job of controlling the rate of issuance of the currency.  Of course, at any time when the cryptocurrency is losing value against your reference currency, X would be helpless to maintain the peg (it could not reduce the supply), but we'll ignore this weakness, settling for the idea that some control is better than no control.

What you have in effect is what's known as a 100% pre-mine.  We begin an alt-coin where X has all of the coins and the network is sustained by transaction fees alone.  X then gradually injects these coins into the economy, adjusting the rate in an attempt to limit the value of a unit of the alt-coin in terms of a reference currency.

The closest example to this I'm aware of is Ripple.  X in this case is a company called Ripple Labs (formerly OpenCoin).

[Undone]

There is a belief in the BitCoin community that a large market cap or widespread adoption and becoming more like gold will magically bring stability to the value of the currency, but there is no data to support this.

That's completely false. Yes, there's a century's worth of past stock market trading data to suggest that a larger volume makes for a more stable market.

[aminorex]

The most important thing any currency needs is (at the very least) day-to-day stability of value, and no P2P currency that I know about has that yet.

The exchange value of bitcoin is not pertinent to its utility as a means of executing and recording transactions.  The value of bitcoin is not relevant to a user who merely wants to send money.  It is relevant to people who wish to invest in the technology or speculate on its price-changes. 

[Abdussamad]

The most important thing any currency needs is (at the very least) day-to-day stability of value, and no P2P currency that I know about has that yet.

The exchange value of bitcoin is not pertinent to its utility as a means of executing and recording transactions.  The value of bitcoin is not relevant to a user who merely wants to send money. 

Sure it is. A volatile price means greater risk on the part of the user. So he thinks maybe this is not such a good thing to use. Maybe I should use something that does not carry that risk.