What would be the most effective way to stabilize BTC price?

[Sargasm]

So, I've been thinking about this a lot.  It seems like if bitcoins were a more widely utilized medium, the price would stabilize because people would be interested in exchanging from within the currency rather than just using it as a transactional medium.

Just as a thought... if the bitcoin community at large spent a great amount of time on PR and either started offering valuable services at a discounted rate if BTC is used or convinced businesses to offer certain services for BTC, you might see prices regulate and become more stable.

I honestly expect to see BTC price reflect a combination of mining cost and economy size.  IE, if the average person began to transact 1% of their total expenditures in BTC and BTC held a fixed value more widely (as opposed to currently being only as valuable as it's equivalent trade value in USD), you would see the trade value stabilize because price wouldn't strictly be the result of speculation.

Basically if their were a demand for the currency because it had implicit trade value, the value and liquidity would improve.

What this would take:

Many service providers to begin to offer services at a slight discount in BTC OR offer services or web products for a fixed BTC price regardless of trading value.

For so long as the currency serves little purpose besides speculative and transactional ease, it will lack the necessary market depth to regulate price.

Any thoughts? 

Is there a list anywhere of service providers that will trade in BTC?  Something we as a community can help to promote in order to increase the adoption of the currency?

[Revalin]

I agree that increasing services used in BTC is the only real way to stabilize the currency.  I rant about this occasionally, and we're trying to quantify where the real floor (and thus stability) is.

The list you want is over here.

[ElectricMucus]

I don't think it can be stabilized.

If markets would have been remained open the whole time this would be a different story, but it did happen (closed markets) the consequences are here.
So actually there is a way to stabilize prices: A fully decentralized exchange method which can never be shutdown or hacked.

[memvola]

So actually there is a way to stabilize prices: A fully decentralized exchange method which can never be shutdown or hacked.

Assuming you have to exchange Bitcoin with some external thing (by definition), what can be better than #bitcoin-otc? An easy to use client software and a distributed storage for the WoT database? Or do you have something else in mind?

[ElectricMucus]

So actually there is a way to stabilize prices: A fully decentralized exchange method which can never be shutdown or hacked.

Assuming you have to exchange Bitcoin with some external thing (by definition), what can be better than #bitcoin-otc? An easy to use client software and a distributed storage for the WoT database? Or do you have something else in mind?

That could be a nice start.

Things are complicated, I've been dreaming about this a long time, even before bitcoin came along but I never got around to write something down.
Has to do with some rewrite of some archaic data entry software, a decentralized physical network layer and "tiers" of collaborative growth according to the number of people working most successfully in a group.

Some of it could be substituted by existing things like tor, community networks and the now BTC WoT but stitching those together would result in a different concept. But something to enable a working exchange method for bitcoin could be a good start.

I am not yet convinced though that bitcoin would be the ideal candidate to finance the project since the goal would require a substantial part of the economic power behind it and I am doubtful people are willing to give that.

@chodpaba
Don't you think that holds true on the other hand of the spectrum? As soon as the prices are resembling anything long term investors are hoping for some early adopters could see the window of opportunity and do whatever they want with the economy. There are individuals with five to six figures in BTC holdings and if they decide to want to buy up an industry they'd do it.

[dree12]

There is no way in hell the Bitcoin exchange rate will achieve anything resembling stability at low price levels. As long as the market remains small as it is it will be easy for even individual actors to play havoc with the day-to-day rate of exchange. A $50/BTC at 21million Bitcoin is just over a one billion dollar monetary base equivalent... Even that is small, and not immune from manilpulation, but it should probably be considered the lower end of the threshold for the size of Bitcoin MB if exchange rate stability is to be the remotest possibility.

To think that stability will be found at a single digit 'floor' is beyond absurd.

This is completely correct. With a million dollars, even a fool will be able to manipulate the price up 5000%. No person would argue this is stable.

[Revalin]

That's correct - a low market cap can be cheaply manipulated.  However, the high market cap simply means that we have a very large hoarde of speculative investors who're pushing the price around without regard to fundamentals.  A low market cap means that the hoarde has left, and the price is beginning to be controlled by commerce again.  Pushing the price around by large percentages against a heavier fundamental anchor just increases your losses in doing so - I'll remind you that cornering a market is a fool's errand.  That's where the stability comes from.

Real stability will come from increased commerce which will result in a high enough market cap to make the price harder to push - stability from both sides.

[Revalin]

This is completely correct. With a million dollars, even a fool will be able to manipulate the price up 5000%. No person would argue this is stable.

With a million dollars I can manipulate the price up 5000% today.  I wouldn't be able to hold it there very long since I'd be bleeding money fast, but I'd probably get a couple hours before someone with a large enough wallet came along to sell through me.

Price manipulation potential is not a simple ratio of your cash on hand to the market cap.

[ElectricMucus]

@chodpaba
Don't you think that holds true on the other hand of the spectrum? As soon as the prices are resembling anything long term investors are hoping for some early adopters could see the window of opportunity and do whatever they want with the economy. There are individuals with five to six figures in BTC holdings and if they decide to want to buy up an industry they'd do it.

It does not hold true at the low end of the spectrum because anyone can come in at any time with a modest investment and start playing pump and dump all over again. Hell, even if the holders of large amounts of BTC are really smart and effective traders it is still within the realm that a single MM could come in with an investment equal to 100% of the market and just muscle it away from them.

Why would one be interested in that if one could own, for example the whole market for supplying 3D-Printing raw materials, or Massive Parallel Processing Arrays, or any of the hypothetical emerging Industries.
I suspect that we have at least a dozen individuals who are planning to do exactly that, because we would have seen a much, much further drop after 30 otherwise, but we haven't. (In that scenario the price right now would be stabler and a little higher)

They won't sell out at 100, 200, 300, 500, or 1000. They want a monopoly, god help us if it ever comes to that...

[Revalin]

It remains an attractive target for every jackoff who thinks they can do it. The disruption is all the same.

Let me qualify my argument a bit:

A low price doesn't provide stability, and indeed reduces it - I agree with you there.  However, a low price indicates that the destabilizing jackoffs have left the market.  For that, I believe we will therefore see stability correlated with a lower price.

Of course, even greater stability results from a high price driven by commerce.

The same goes for routine transactions that are simply largeish. Someone pays for a fancy car just because they can, and has to convert through the exchange to do it can set up price swings that last for days in a smaller market, whereas a larger market could restabilize in hours or minutes...

Absolutely.  This is preventing me from doing my business in BTC today.  I'll try to switch to BTC as soon as the market depth supports it, but we're a long way from there.

Keeping Bitcoin at $2 makes it a toy.

Artificially inflating the price to $30 makes it a joke.  I don't want to stay at $2 forever.  I just want it to grow with real commerce instead of crazy speculation.

[ElectricMucus]

You are both implying that a) a situation where a monopoly in an industry acquired by one individual with over 0.5% of all currency hoarded is not possible and b) someone with such a motive must be someone who bought them originally at an exchange or is planning to.

I've read somewhere that 97% of all bitcoins were never sold and that the richest hoarders are in fact early miners. (According to Blockchain statistics)
Even if somebody wouldn't be likely to have acquired them with the goal to do so but could in fact see this as an opportunity to attempt it.

[ElectricMucus]

Makes sense, but what has this to do with my fear of someone with a five to six figure wallet attempting to buy up a chunk of the industry at later levels? (be it one to three magnitudes higher)

Also what you'd have to consider is that if the total percentage in circulation where higher the required price for each bitcoin to archive the same amount of stability is lower.

IF we were to have a somewhat stable price at USD 50 and 3% it should be as stable with USD 3 and 50%.
That being the assumption nearly everybody sell half of their coins over the next period. (Which, I take it is unlikely to happen)

But that said: I don't get the feeling people even want a stable price right now, traders are scalping the shit out bitcoin and don't want to give it up.

[Meni Rosenfeld]

Just as a thought... if the bitcoin community at large spent a great amount of time on PR and either started offering valuable services at a discounted rate if BTC is used or convinced businesses to offer certain services for BTC, you might see prices regulate and become more stable.

That's what we're doing already. You're welcome to join.

[BTCHosting]

Just as a thought... if the bitcoin community at large spent a great amount of time on PR and either started offering valuable services at a discounted rate if BTC is used or convinced businesses to offer certain services for BTC, you might see prices regulate and become more stable.

That's what we're doing already. You're welcome to join.

+1

[P4man]

im not even convinced a substantial increasing in BTC trade will bring stability. It will bring higher exchange rates, but growing exchange rates will also lure in hordes of new speculators and speculations. As long as the majority of trade is speculative, prices will jojo. It doesnt matter how big the underlying market is, speculators will always be bigger. Look at oil, food, etc.

The only way I see to stabilize the exchange rate is what most people here so despise: regulation (possibly even taxation on transactions, like  a tobin tax) and something akin to a central bank.

Since none of that is likely to happen any time soon, or ever, as a merchant your best bet is hoping for some useable hedging tools, but I wouldnt hold my breath.

[ElectricMucus]

The only way I see to stabilize the exchange rate is what most people here so despise: regulation (possibly even taxation on transactions, like  a tobin tax) and something akin to a central bank.

lol
Desperate times require desperate measures or what 

I agree with the rest of your post but, as for regulation goes nope you are thinking in the wrong direction.
The reason for the huge price swings is the relative size of the speculative market.

Most people here are way to "bullish" to admit that but there are 2 ways which can stabilize the price or be it more like a product of both.

First there is the part of the world economy bitcoin represents the larger the more stable will the price be which will tend to make prices go higher.
The second part is the part of the bitcoins in active circulation, the greater the percentage the more stable will the price be. More people would have to sell out (currently only 3%) and it would make prices tend to get lower.

We are heading in the opposite direction though on both accounts, reason being that both bulls and bears are waiting for the other group to move first and while this happens bitcoin becomes more and more a forex gambling tool.

[P4man]

lol
I agree with the rest of your post but, as for regulation goes nope you are thinking in the wrong direction.
The reason for the huge price swings is the relative size of the speculative market

Regulation could limit speculation by imposing position limits.

[ElectricMucus]

lol
I agree with the rest of your post but, as for regulation goes nope you are thinking in the wrong direction.
The reason for the huge price swings is the relative size of the speculative market

Regulation could limit speculation by imposing position limits.

And who decides and enforces these limits?
Doesn't make any sense for me. I'll assume you mean the exchanges should impose them.

Why would they be interested in that?

[P4man]

This is nothing new really; regulation on commodity exchange has pretty much always existed; well, up until it was deregulated (mostly under clinton). and now baby steps are being taken to again impose some limits:
http://www.cftc.gov/IndustryOversight/MarketSurveillance/SpeculativeLimits/index.htm
(thought the exemptions that lobbyists managed to get in will likely make it very ineffective).

If it can be done for oil and food, I dont see why theoretically it couldnt be done for bitcoins.

[Revalin]

If that were the ONLY economic activity driving exchange volume then even small daily fluctuations could lead to continual liquidity crises.  ( ... ) Now, if you want Bitcoin to have the horsepower to participate in real, grown up commerce and have a somewhat stable exchange rate, you have to also accept that the amount of exchange activity must dwarf the amount of daily spending to smooth out liquidity levels.  ( ... ) Any way you slice it currency speculation has to be a big part of the picture ( ... )

I agree with all of this except the word "speculation".  We need market makers, not speculators.  Market makers and arbitrageurs create market depth and liquidity, but neither perform speculation, and they make money whether the market goes up or down.

Indeed, speculation does not create market depth - speculators buy up (or sell) inventory and then hold that position until they capitalize or capitulate.  They do not put it back on the market as they are speculating that it will be more valuable in the future.  They perform an important aspect of price discovery (pricing in the future), but right now it's dominated by people who don't seem to be well informed.

The market also has to have a certain critical mass to be able to handle even 80% of the transactions people will want to do on a regular basis... This doesn't happen at $2... It doesn't even happen at $10.

There are plenty of coins in circulation to handle all current business at $1/BTC.  With only 2% of coins on the market (and matching fiat) you'll have over USD$1M of depth.  That's enough to absorb a few days worth of all personal transactions that are occurring without moving the price.  It's not enough to buy a house or do commercial business, but we're not there yet.

The current depth is 0.05%.  That is directly from excess speculation.

Raising the price does not create more fiat depth, and reduces BTC depth.  Right now there are only USD$100k of bids on MtGox.  If you raise the price to $50, there will still only be $100k of bids... Just at a higher price, and for fewer coins.

At some point a higher price is justified to allow more depth and value store, but for current use, we're still order of magnitude past where it needs to be.

If it can be done for oil and food, I dont see why theoretically it couldnt be done for bitcoins.

It's a lot easier to regulate centralized markets like commodities exchanges.  Bitcoin's decentralized and pseudonymous nature makes regulation much less effective.  Just like the internet, they can regulate all they want, and it will react in similar ways: moving prohibited actions to another jurisdiction; increased use of anonymity; widespread disregard for the law.

Take a look at copyrights.  There is widespread cross-jurisdictional agreement on the terms of what's covered.  There are fairly strong laws to enforce it, and occasionally they bust a few people.  So what do the pirates do?  Build decentralized networks and move all their coordination to more friendly jurisdictions.

That's not to say the regulation will have no effect.  Without regulation copyrights wouldn't exist at all, and content sharing would be much more widespread.  It will just be much harder to do than the SEC's usual fare.