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Author Topic: Bitcoin's largest hurdle as a useful currency  (Read 3208 times)
BitMagic
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September 29, 2011, 07:53:46 PM
 #1

We have heard this argument before, but I had my first encounter with evidence (n=1, so far):

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Then I'll have to pass on that offer, since I can sell on eBay for at least $25. That and the value of BTC is dropping.

This was initially a transaction offered in these forums in BTC that fell apart for the reasons stated. If you didn't believe that volatility was an important factor, here's one example proving otherwise. Largest hurdle? Maybe. Hurdle nonetheless? Absolutely.

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There are several different types of Bitcoin clients. The most secure are full nodes like Bitcoin-Qt, which will follow the rules of the network no matter what miners do. Even if every miner decided to create 1000 bitcoins per block, full nodes would stick to the rules and reject those blocks.
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FreeTrade
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September 29, 2011, 09:57:54 PM
 #2

Bitcoin's strength is as a method of payment. For some transactions, it is superior to any other method of payment. If it becomes established as a popular method of payment, it may go on to become a defacto currency. It won't happen the other way round.

For now I'd recommend pricing in USD, and settling in BTC to help it first become established as a method of payment.

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BitMagic
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September 29, 2011, 10:12:30 PM
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Bitcoin's strength is as a method of payment.

I guess I don't understand the distinction from your use of "method of payment" and any other commodity that can be traded. If I give you a sexy portrait of Mario Lopez for whatever it is I want from you (already a losing deal on my end), is that not "a method of payment?" Or are you referring to the transaction process (i.e. a physical handoff compared to an internet transfer)? If you're saying that Bitcoin has cornered the market on the latter, I would beg to differ. I manage to purchase things easier and faster with USD over the internet.

Basically, the one key element besides wide adoption that really solidifies currency is relatively stable value. My last attempt to purchase something with BTC was nullified because of it's volatility. I think that's a sign that BTC is nowhere near a "currency" at this point.

Thoughts?

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PatrickHarnett
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September 29, 2011, 11:06:17 PM
 #4

On that basis, people shouldn't buy in USD because the value is dropping (or if you prefer, replace USD with some other currency)  Don't buy gold, the price of that is dropping too!?  sure?

So, buying cross border with exchange rates, someone might have bothered to notice there were 5% swings last week in major currencies, I don't think that stopped global commerce. 
FreeTrade
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September 30, 2011, 06:41:15 AM
 #5

Bitcoin's strength is as a method of payment.

Or are you referring to the transaction process (i.e. a physical handoff compared to an internet transfer)?


Yes.

If you're saying that Bitcoin has cornered the market on the latter, I would beg to differ. I manage to purchase things easier and faster with USD over the internet.

No. I'm not saying it has been widely adopted as a method of payment yet. I'm saying it is superior as a method of payment is some circumstances.

The internet is freedom to communicate without permission. Crypto is freedom to trade without permission.

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arnoldrimmer
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September 30, 2011, 07:26:42 AM
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Bitcoin's strength is as a method of payment.
no its not

Here in Europe i need 3-4 Days to get RL Money into any Exchange because there is no Credit Card or Paypal pament method.

The world is bigger than the US
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September 30, 2011, 07:33:26 AM
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Bitcoin's strength is as a method of payment.
no its not

Here in Europe i need 3-4 Days to get RL Money into any Exchange because there is no Credit Card or Paypal pament method.

The world is bigger than the US

'method of payment' has nothing to do with your currency exchange issues.

once you have btc, using them as a method of payment is awesome.
FreeTrade
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September 30, 2011, 07:46:20 AM
 #8


'method of payment' has nothing to do with your currency exchange issues.

once you have btc, using them as a method of payment is awesome.


Correct.

Also, I'm not in the US. Far from it. Indeed the further you are from the US, the more attractive Bitcoin is as a method of payment because the alternatives are fewer.

The internet is freedom to communicate without permission. Crypto is freedom to trade without permission.

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BitMagic
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September 30, 2011, 08:21:33 AM
 #9

On that basis, people shouldn't buy in USD because the value is dropping (or if you prefer, replace USD with some other currency)  Don't buy gold, the price of that is dropping too!?  sure?

So, buying cross border with exchange rates, someone might have bothered to notice there were 5% swings last week in major currencies, I don't think that stopped global commerce. 

Well, the USD is decreasing (or increasing) with respect to other currencies a lot, but not in comparison to the local goods it can buy. As I have seen so far, BTC merchants moving serious volume will post exchange rates to USD because that's the measure of stability with respect to the goods they sell. Until that changes, BTC will always be second string (from a US perspective. The perspective that has the largest ramifications for transactions globally).

Correct.

Also, I'm not in the US. Far from it. Indeed the further you are from the US, the more attractive Bitcoin is as a method of payment because the alternatives are fewer.

This is an interesting angle. But I expect that volatility still plays a major role, here. In places where bitcoin is actually less volatile with respect to the local goods it can buy, it's likely more useful as a currency than the native.

Note I'm using 'local' to mean 'accessible'; the medium of exchange for your daily needs like groceries, via grocer or Amazon Fresh, will reflect the most consistency in prices of those needs.

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FreeTrade
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September 30, 2011, 08:42:10 AM
 #10

But I expect that volatility still plays a major role, here. In places where bitcoin is actually less volatile with respect to the local goods it can buy, it's likely more useful as a currency than the native.

Yes, often where a currency becomes hyperinflationary or is not trusted, people start to use, and prefer, a second currency - usually USD.

The internet is freedom to communicate without permission. Crypto is freedom to trade without permission.

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PatrickHarnett
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September 30, 2011, 05:40:24 PM
 #11

On that basis, people shouldn't buy in USD because the value is dropping (or if you prefer, replace USD with some other currency)  Don't buy gold, the price of that is dropping too!?  sure?

So, buying cross border with exchange rates, someone might have bothered to notice there were 5% swings last week in major currencies, I don't think that stopped global commerce. 

Well, the USD is decreasing (or increasing) with respect to other currencies a lot, but not in comparison to the local goods it can buy. As I have seen so far, BTC merchants moving serious volume will post exchange rates to USD because that's the measure of stability with respect to the goods they sell. Until that changes, BTC will always be second string (from a US perspective. The perspective that has the largest ramifications for transactions globally).


Ok, local goods: When I go and buy petrol this morning, do I tell the gas station owner I won't pay his price because it might be cheaper tomorrow?  We have lots of local taxes, but a the underlying is still quite volatile - not necessarily on a day-to-day basis, but often week to week.  - Just providing it as an example.  Countries that import fruit often see similar moves affected by weather (supply/demand stuff).

BTC second string - I don't think anyone has argued it will take over the position of a major local currency.
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October 01, 2011, 12:06:04 AM
 #12

What does it mean for a currency to be stable?  Stable against what?  It seems like every year the definition of the CPI is changing.  The value of real goods and services is always going to fluctuate relative to each other.  Has the dollar been stable against the Euro?  Has it been stable against gold?  Oil?  Corn?  Wheat?  I think the very notion of trying create a "stable currency" is flawed.  Instead why not price your goods and services relative to the things you covet the most in life?  And why not view the prices of others' goods and services as well as your own assets in those same terms?  We have the technology to this and I've just dismantled 50% of the justification for the FED's existence.

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BitMagic
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October 01, 2011, 12:45:50 AM
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Ok, local goods: When I go and buy petrol this morning, do I tell the gas station owner I won't pay his price because it might be cheaper tomorrow?  We have lots of local taxes, but a the underlying is still quite volatile - not necessarily on a day-to-day basis, but often week to week.  - Just providing it as an example.  Countries that import fruit often see similar moves affected by weather (supply/demand stuff).

BTC second string - I don't think anyone has argued it will take over the position of a major local currency.

You're trying to change the subject by pulling an old elasticity switcheroo; regardless of the features of goods, all else being equal, if the price shifts significantly because the value of your currency shifts, you'll opt for a more stable currency where possible. I would also expect that consumer behavior would change as real prices change, whether that's due to goods shortages (your fruit example), or a change in the underlying value of the currency. Simple fact, people will buy less gasoline (or switch to stable currencies to pay for it) as its real cost increases. Point being: BTC will not be elevated to even a useful currency until price fluctuations tame down. This is really holding it back, and why I rarely see raw transactions in BTC (especially large ones) without some pegging to a USD/BTC ratio.

What does it mean for a currency to be stable?  Stable against what?  It seems like every year the definition of the CPI is changing.  The value of real goods and services is always going to fluctuate relative to each other.  Has the dollar been stable against the Euro?  Has it been stable against gold?  Oil?  Corn?  Wheat?  I think the very notion of trying create a "stable currency" is flawed.  Instead why not price your goods and services relative to the things you covet the most in life?  And why not view the prices of others' goods and services as well as your own assets in those same terms?  We have the technology to this and I've just dismantled 50% of the justification for the FED's existence.
...

It's obviously not some key target, it's relative (to, again, the goods it can buy), which is how Gresham's Law works. More stability is a better feature for a reliable store of value, a major component of having a useful currency.

Remember what we're talking about here: USD prices increase 3% per year. We've seen 600% swings in BTC value over 3 months. Tell me which one you'd want to use to buy your food: The one that gets you a loaf of bread yesterday, today, and next year for somewhere around $5-$5.15, or one that gets you a loaf of bread yesterday, today, and next year for anywhere from $.16-$30?

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October 01, 2011, 04:48:52 AM
 #14

It's obviously not some key target, it's relative (to, again, the goods it can buy), which is how Gresham's Law works. More stability is a better feature for a reliable store of value, a major component of having a useful currency.

Remember what we're talking about here: USD prices increase 3% per year. We've seen 600% swings in BTC value over 3 months. Tell me which one you'd want to use to buy your food: The one that gets you a loaf of bread yesterday, today, and next year for somewhere around $5-$5.15, or one that gets you a loaf of bread yesterday, today, and next year for anywhere from $.16-$30?
It's a fair point and I do agree that the volatility of bitcoin at this point in time impairs its usability.  However, I wouldn't advise using dollars as a store of value.  I'd rather have a diversified mix of assets that preserve their wealth better than dollars.  Bitcoin won't become as stable as dollars relative to the price of a loaf of bread until people start using bitcoin for pricing loaves of bread.  Another possibility is that we experience high inflation with the dollar and people switch to setting prices based on indexes to real goods.  With the technology we have today, it's conceivable that this could be made so easy for merchants that we see a permanent switch from setting prices in dollars to setting them based on such indexes.  If a shift like that were to occur, the FED will have a much more difficult time maintaining the stability of the dollar...prices will be much more sensitive to fluctuations in the money supply.  Then bitcoin might start to look a little more favorable when compared against the dollar in terms of volatility.  But, the most likely scenario is that bitcoin simply keeps rising in value over time and people want to hold some of it for its ability to retain value...and the more people that have a few bitcoins, the more likely we are to see commerce in bitcoin.  And the more commerce we see in bitcoin, the more people start to perceive value in relation to bitcoin, and that will lead to greater stability.

In the mean time, you can deal with the volatility of bitcoin through dollar cost averaging into and out of it as needed (tools on the exchanges that make that easier and more automatic would be nice).  It's a hassle, but it works.

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PatrickHarnett
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October 01, 2011, 09:39:00 PM
 #15

I did a post including the example of Stockton CA property noting the price fall in the GFC.  People make commercial decisions based on needs and wants, but even in property transactions some buyers would want to pull out if they suddenly thought the price was suddenly higher than their perceived value.

Even at a small scale, I had some computer components I was buying via auction and the seller had a fit because the winning bid was less than he thought it should be.  They failed to complete the sale, but they were 15 years old and an $80 loss was way to big for him to suffer (I just had to find a different set of SCSI discs elsewhere).  Nothing to do with value of coin, but just arsehole traders.

So, if we can fix the problem with people doing the buying and selling backing out of commitments, then we could look at volatility of the payment method.
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October 01, 2011, 10:54:10 PM
 #16

I am not following the volatility argument: if my transaction is settled (confirmed) after one hour, as a buyer, I can buy back the same amount of coins I just sent for payment for the same amount in dollars.
The seller also can sell the coins to get the same amount of dollars, presumably on the same forex.
So we traded in bitcoins instead of using a bank card scheme.
How much volatility is there over one hour ?

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October 02, 2011, 01:28:38 AM
 #17

How much volatility is there over one hour ?

you must be new here.

A: with bitcoin, the price could easily swing 50% or more either way in just an hour.

BitMagic
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October 02, 2011, 01:52:35 AM
 #18

With the technology we have today, it's conceivable that this could be made so easy for merchants that we see a permanent switch from setting prices in dollars to setting them based on such indexes.

What would the unit of exchange be for these "Index Prices"? Interesting idea, trying to imagine the logistics.


So, if we can fix the problem with people doing the buying and selling backing out of commitments, then we could look at volatility of the payment method.

Reasons for transaction failure matter. I was quoting a transaction that was cancelled in part because of a fear that the unit of exchange for the transaction, one that he would be holding at the end, would be worth less than it was at moment of sale.

I'm not pointing to all failed transactions in general as a failure of bitcoin; only that this particular transaction (and many others, from anecdotes and the existence of web software to instantly update BTC prices to USD), bitcoin's volatility is an extremely important barrier to move it into the world of "currency". Now, it's a fancy commodity easily moved about the net semi-anonymously. Not much more.

I am not following the volatility argument: if my transaction is settled (confirmed) after one hour, as a buyer, I can buy back the same amount of coins I just sent for payment for the same amount in dollars.
The seller also can sell the coins to get the same amount of dollars, presumably on the same forex.

If volatility is extreme enough that it requires transfer into, a goods/service exchange, and then transfer out of BTC for every transaction ASAP, doesn't that speak volumes about how useless (and costly, remember fees) it is as a "currency"? How could this be less complicated and less expensive than using paypal, not to mention faster?

One of the hallmarks of the adoption of a useful currency is that people don't worry about its value at $5, $10, $100 investments (USD used for comparison). You ever left $100 in an interest-free bank account, and worried terribly about inflation/deflation? No, because it's immediate use as exchange isn't particularly vulnerable to crazy, nation-wide price changes across the board (i.e. serious currency value changes). Not true with BTC so far.

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October 03, 2011, 01:02:59 PM
 #19

With the technology we have today, it's conceivable that this could be made so easy for merchants that we see a permanent switch from setting prices in dollars to setting them based on such indexes.
What would the unit of exchange be for these "Index Prices"? Interesting idea, trying to imagine the logistics.
The unit of exchange could be anything you want, paypal dollars, physical dollars, gold, or bitcoins...that's the point.  The price in any one of these units of exchange would be determined based on market exchange rates.  The index itself would be set based of the price of goods in one of these units of exchange.

The important point I was making is that the very notion of a stable currency is flawed.  And, central bank market actions to keep a currency stable are exactly the activies that enable the banking industry to extract wealth without providing anything of any real use to the market (ie front-running the FED based on insider information).

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BitMagic
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October 03, 2011, 11:31:10 PM
 #20

The unit of exchange could be anything you want, paypal dollars, physical dollars, gold, or bitcoins...that's the point.  The price in any one of these units of exchange would be determined based on market exchange rates.  The index itself would be set based of the price of goods in one of these units of exchange.

The important point I was making is that the very notion of a stable currency is flawed.  And, central bank market actions to keep a currency stable are exactly the activies that enable the banking industry to extract wealth without providing anything of any real use to the market (ie front-running the FED based on insider information).

Wait, so what you're talking about is exactly what I'm seeing on sites like the Silk Road, with one more hurdle: summarize prices as an "index", with exchange rates into each currency posted instead of just USD. So basically, a price in each currency based on current exchange rates between them...how is that any different than what we have now? I mean, it still requires you to pay with the currency you hold. If you hold one that fluctuates wildly with respect to others, you'd dump it in exchange for something less volatile.

I'm not sure what you think is in the realm of reality about the existence of volatility; What, exactly is flawed about the fact that relative to what you can get, goods-wise, BTC is more volatile than USD?

I'm talking about the natural tendency for mediums of exchange to disappear as such because they are more volatile, relatively, to others. It doesn't matter a whit whether it's backed by Mariah Carey's ruined tits, my pubes, or artificial diamonds. The more volatile "currency" dies in favor of the less.

It just so happens that Fed-backed USD has a centralized control on it's volatility, whereas gold does not. This has potential problems, but is far beyond the scope of this discussion. Fact is, BTC sucks because of it's volatility relative to USD, whatever the reasnos, and people are choosing not to transact with it for this reason, among others.

Do you disagree with this?

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