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

[Revalin]

The objection that this doesn't reward miners enough is unusual!  This scheme would take most of the value growth and give it to miners instead of currency holders/speculators.  On average it's much more profitable for miners than the current system...  But it would certainly have greater variance.

Encoin's another interesting take on it...  Sort of a different approach at the same idea, just with some different tradeoffs.  It touches a lot more things... I'm interested to see how it pans out.

No, I know my method isn't yet baked to perfection.. If nothing else it will require a lot of tuning to get a set of constants that result in a stable market.  I still think it's an interesting mechanism that altcoiners should consider.  Even if it's never adopted I hope it'll inspire some more innovative ways to stabilize price.

[deepceleron]

Acquire 2,000,000 Bitcoins and $40,000,000. Put in a buy order at $5.00 and a sell order at $5.01. Now the price can't go up unless someone else ponies up $10,000,000 to buy all your Bitcoins (and those of any other sellers too). The price can't drop because you can buy every bitcoin in existence without the price dropping. Buying up ~1/3 of all Bitcoins in existence without making them worth $100 each would be the hard part.

[ElectricMucus]

Acquire 2,000,000 Bitcoins and $40,000,000. Put in a buy order at $5.00 and a sell order at $5.01. Now the price can't go up unless someone else ponies up $10,000,000 to buy all your Bitcoins (and those of any other sellers too). The price can't drop because you can buy every bitcoin in existence without the price dropping. Buying up ~1/3 of all Bitcoins in existence without making them worth $100 each would be the hard part.

And 12 hours later the exchange this is at will be DDOSed to its knees.

[notme]

Acquire 2,000,000 Bitcoins and $40,000,000. Put in a buy order at $5.00 and a sell order at $5.01. Now the price can't go up unless someone else ponies up $10,000,000 to buy all your Bitcoins (and those of any other sellers too). The price can't drop because you can buy every bitcoin in existence without the price dropping. Buying up ~1/3 of all Bitcoins in existence without making them worth $100 each would be the hard part.

And 12 hours later the exchange this is at will be DDOSed to its knees.

Spread it across exchanges, including foreign currencies.  Adjust to exchange rates to maintain liquidity for international transfers.  Increase spread to beat the fees, and nobody will want to mess with you.  You just made bitcoin amazing.  If your askwalls are taking a beating, move the price up a little.  It should last quite a while if it is managed properly, and the stability will bring enough volume you can catch the full spread occasionally.  You might want to spend a small amount of that money developing the software to keep track of and adjust your positions.  Something that flags out of sync exchange rates and bid/ask wall exposure.  You don't want to automate the adjustments (unless maybe if you add some nondeterminism in your decision).  If you always adjust at 10% or something decipherable you will get manipulated.

[Revalin]

This works great as long as you have someone with $40M who's willing to burn a good chunk of it solving this problem.  They will be operating at a loss since this goes against market forces.  I don't have that kind of change in my altruism budget.  Do you? 

[notme]

This works great as long as you have someone with $40M who's willing to burn a good chunk of it solving this problem.  They will be operating at a loss since this goes against market forces.  I don't have that kind of change in my altruism budget.  Do you? 

My altruism budget would have almost no effect on bitcoin.  Ten percent of a small number is a smaller number.  However, if I did, and I had the time to manage it, I think I could manage to bleed very slowly.

[johnyj]

Actually I don't think the price of BTC is an issue

If someone traveling abroad wants to have some local currency to spend, he could easily exchange money to BTC from his home country and exchange BTC to local currency at once, if the whole process do not take more than 1 hour, the price change can be ignored

I can even see BTC as a good utility to wash money, so those exchanges will be the weak point of BTC, a decentralized exchange system is needed

[notme]

Actually I don't think the price of BTC is an issue

If someone traveling abroad wants to have some local currency to spend, he could easily exchange money to BTC from his home country and exchange BTC to local currency at once, if the whole process do not take more than 1 hour, the price change can be ignored

I can even see BTC as a good utility to wash money, so those exchanges will be the weak point of BTC, a decentralized exchange system is needed

The reason for pricewalls (assuming you want to throw the money away to help the cause) is more to provide liquidity.  Right now, you can't move large amounts without affecting price.  Imagine if all the foreign students in the US quit paying western union's high fees and used bitcoin instead.  Of course, that in itself would probably provide enough liquidity, but it's a chicken and egg situation.

[rahl]

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.

Bitcoin will never be able to expand outside black and grey markets as long as there are fiat currencies around because of Gresham's Law.

[ElectricMucus]

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.

Bitcoin will never be able to expand outside black and grey markets as long as there are fiat currencies around because of Gresham's Law.

Ever heard of the System D economy?

All this theory doesn't help as long it doesn't manifest.

[rahl]

Ever heard of the System D economy?

All this theory doesn't help as long it doesn't manifest.

No, but I am assuming it is the counter-economy, and yes this is where we should develop bitcoin but it doesn't take much in terms of marketing efforts which was the proposal. The people engaged in it are looking for solid untraceable irreversibly payment systems already.
What BitCoin would benefit greatly from however is more user-friendliness in terms of wallet protection, SCIs and mass payment processors for dummies...
 
Still a lot of people will prefer to just use cash or there own accounting systems/local currencies in face-to-face free business but I still see a lot more potential in BitCoin then e-Gold ever had for instance.

[P4man]

Bitcoin will never be able to expand outside black and grey markets as long as there are fiat currencies around because of Gresham's Law.

Maybe you should reread that law.

[rahl]

Maybe you should reread that law.

"When a government compulsorily overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation."

People want to get rid of there inflationary overvaluated fiat first so it will drive out any market priced non-inflationary currency like BitCoin from circulation in white markets ... it is pretty straight forward. The second part of the law with an undervalued money can't happen anymore, paper money will always be overvaluated because of legal decree (either by price fixing or just by being forced into circulation thru being legal tender and the only currency the government and legal financial institutions will accept) as long as it is circulated at any value above that of toilet paper...

[P4man]

There is no compulsory exchange rate for bitcoin. Its value floats, as does that fiat currency. Gresham's law applies to gold or silver coins with a face value that doesnt match its intrinsic value, or it applies to currencies with artificially fixed exchange rates that dont match market supply/demand. It doesnt apply to bitcoin or dollars/euro's.

[FreeTrade]

"When a government compulsorily overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation."

I think Gresham's law applies to monies that have predominantly the same properties - like silver coins and gold coins and so compete on an equal footing. However Bitcoin and government money have different properties (for example in how they can be transferred), so they compete on more criteria than expectation of future value alone. The degree to which Gresham's Law holds depends on the similarity of the properties of the two currencies.

tc,du; I might want to keep my Bitcoin, but it might be the only option for payment if I wish to buy a hand-made porcelain bowl from Sudan over the internet.

[rahl]

There is no compulsory exchange rate for bitcoin. Its value floats, as does that fiat currency. Gresham's law applies to gold or silver coins with a face value that doesnt match its intrinsic value, or it applies to currencies with artificially fixed exchange rates that dont match market supply/demand. It doesnt apply to bitcoin or dollars/euro's.

Floating fiat currency are not subject to free market pricing since they are still forced into circulation they are artificially overvalued and will drive out any "correctly" priced alternative.

This is not what law says specifically but it is an indirect application of the law.

[S3052]

All what it takes to drive btc prices up is a few investors buying btc with 200-300 k$ funds each.

[runeks]

It's simple: the higher the price, the more stable the price. The higher the price, the more money it will take to move the price. Buying for $100,000 Bitcoins right now (at ~$3/BTC (or $0.00000003 per base unit) would cause a massive increase in the price. The price would go up to about $3.8, which is a 15% increase. This is because at $3/BTC the market capitalization (total value) of Bitcoins is about $25M. 100k out of $25M is a lot!

If Bitcoins were worth, for example, $300,000/BTC ($0.003 per base unit) right now, the market capitalization would be ~$2.4 trillion. Someone buying BTCs for $100,000 would be a drop in the ocean in a market this big. This is why gold is so relatively stable in price. In the single year that has passed since mid-December 2010 and now, gold is up by 20%. By comparison, Bitcoin is up 1300% in one year.

[RaggedMonk]

It's simple: the higher the price, the more stable the price. The higher the price, the more money it will take to move the price. Buying for $100,000 Bitcoins right now (at ~$3/BTC (or $0.00000003 per base unit) would cause a massive increase in the price. The price would go up to about $3.8, which is a 15% increase. This is because at $3/BTC the market capitalization (total value) of Bitcoins is about $25M. 100k out of $25M is a lot!

If Bitcoins were worth, for example, $300,000/BTC ($0.003 per base unit) right now, the market capitalization would be ~$2.4 trillion. Someone buying BTCs for $100,000 would be a drop in the ocean in a market this big. This is why gold is so relatively stable in price. In the single year that has passed since mid-December 2010 and now, gold is up by 20%. By comparison, Bitcoin is up 1300% in one year.

But the higher the price, the less bitocins one has to sell to crash the market. So the volatility is still a problem.

High price: someone with lots of BTC can move the market easily
Low price: someone with lots of USD can move the market easily

It is the depth of market that really counts.  The more people willing to buy/sell at a certain price, the harder it is for manipulators to push the price around.  If you want to stabilize the price without trading at a guaranteed loss, set buy orders 10% below market, and sell orders 10% above market.  This makes it harder for the price to move.

[hgmichna]

The most effective way to stabilize BTC price is speculation. A speculator, if he wants to be successful, has to buy low and sell high, which means exactly that he stabilizes the price. And he makes money on the side as well.

Another interesting aspect is that poor speculators, who destabilize the price, quickly go bankrupt and remove themselves from the market, so it is the good speculators who stay and stabilize.

We are already observing that. The first speculative price bubble, the one that took the price over $30, is past us and has removed a lot of bad, destabilizing speculators from the bitcoin market. The better ones who remain will make sure that it does not happen again.

Of course there are new speculators pushing in. Those may perhaps cause a second speculative bubble, but if that happens, I will laugh all the way to the bank.

The nice thing is that ultimately bitcoin stabilizes itself that way. The remaining price movements will only reflect changes in actual and expected bitcoin use and will thus be justified.