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

[P4man]

The most effective way to stabilize BTC price is speculation.

And here I was, thinking that bitcoin constituted the absolute perfect proof that excessive speculation doesnt stabilize. It provides liquidity yes, and it helps assessing future value provided speculation is not bigger than actual trade. If speculation becomes more important than underlying trade, you dont speculate on future value but you speculate on short term speculation. Thats inherently unstable, as bitcoin so nicely illustrates.

[notme]

The most effective way to stabilize BTC price is speculation.

And here I was, thinking that bitcoin constituted the absolute perfect proof that excessive speculation doesnt stabilize. It provides liquidity yes, and it helps assessing future value provided speculation is not bigger than actual trade. If speculation becomes more important than underlying trade, you dont speculate on future value but you speculate on short term speculation. Thats inherently unstable, as bitcoin so nicely illustrates.

Short term, I agree. Long term, the bad speculators will go bankrupt.

[P4man]

Short term, I agree. Long term, the bad speculators will go bankrupt.

If by bad you mean unlucky; yeah sure.

[hgmichna]

Short term, I agree. Long term, the bad speculators will go bankrupt.

If by bad you mean unlucky; yeah sure.

No. I'm sure by "bad" he means "stupid".

It is actually very simple. The good speculator must buy low and sell high, which stabilizes the price and at the same time earns the speculator a deserved reward.

The bad speculator buys high and sells low, thereby destabilizing the price, and losing his money. He deserves to go bankrupt and to disappear, which he inevitably does.

As to the correct price of bitcoin, that is also very simple. The "true price" of a bitcoin is the dollar (plus other currencies) value needed by people for the purposes of real-world trade and of storage of value, divided by the number of bitcoins.

So far, so simple, but of course the "true price" has to be extrapolated into the future. The "true price" of bitcoins is the value described above, but expected in the foreseeable future, i.e. a number of years hence.

This is where the speculator comes in. He has to do the tricky work of foreseeing the future and direct the price towards his expectation. If his expectation is good, he will be well rewarded. If it is bad, he will go bankrupt too.

Many of the bad speculators are trend followers: "Oh, oh, it's going up! I must buy!" "Oh, oh, it's going down! I must sell!" These people go bankrupt fairly quickly. They do not learn from past mistakes. They keep driving the price up and down in idiotic waves. They feed the micro-stabilizer bots (which do a pretty good job of reducing the micro-volatility, while making good money for their operators). And the bad speculators readily give their money to the good ones, who do their best not to let the price rise too high or sink too low.

So here is my very simple advice. Look at the bitcoin price curve. Calculate a long-term average, at the moment perhaps over the last half year. Do a conservative estimate of a long-term trend, but don't get over-enthusiastic.

That is a ballpark figure for a reasonable bitcoin price. If today's price is much higher, sell your bitcoins. If it is much lower, buy them up again. This is an easy recipe to collect some gain over time, as long as there are so many crazy speculators in the market, eager to hand over their money to you.

Of course the really good speculators do some more homework. They try to obtain as much useful data from other sources and correlate them with the bitcoin price, thus enabling them to arrive at a more precise estimate and stabilizing the price to a finer degree, but that requires some mathematics, clear thinking, good ideas, and quite a bit of hard work. For the time being you can still make money as a speculator with just a decent amount of common sense.

[FredericBastiat]

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.

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...

I have an idea/proposition - although it may be a little late for bitcoin. I think Deepceleron and ElectricMucus are on to a really good idea, or at least generally speaking, on the right path. Given that the network needs to be secured and that means that "transaction handlers" or "miners" need to be incentivized, what if a decentralized digital currency were to arise wherein all of the coins were pre-mined (say 21 trillion) and simultaneously a decentralized exchange was created (initially central as are all start-ups)? Then set the buy order at $1.00 and the a sell order at $1.01. The buy/sell order wall cannot change until all 21 trillion are spent into existence, after which, it begins to float.

All of the coins are pegged at these values until the entire total is bought up. You gain long-term and instant stability, or at least until USD or some other fiat currency-peg inflates beyond the $21 trillion. The money produced from the fixed/pegged value market-makers would be distributed amongst the security providers (miners and transaction-handlers), the exchangers and the currency author. This .01 coin spread is given to the security providers of the network and the exchanges. The author could retain the first 10,000,000 coins as his incentive to start (this is an abitrary value as is the 21 trillion coins).

Nobody, including the author/originator of the currency, gains a significant "first mover" advantage. The "manipulator" is a known quantity and the market isn't abritrarily swung in any direction by a few people with large resources. Once the 21 trillion coins are spent into the economy it would be hoped no one individual or group of colluding individuals can manipulate the market. The market is stable and money which already exists, grows the market externally. It would also seem that you waste fewer resources (GPU's, FPGA'S and their attendant electricity and hardware costs and externalities.)

[FredericBastiat]

...which involves a massive amount of trust placed on the market maker. That might work for you, but I'll have to pass. The only trust I need to have in Bitcoin is that other people value Bitcoin, which I'm quite comfortable with.

So you would have a less secure network? Resources are not "wasted" on the Bitcoin network.

It is possible to use cryptography to create a federated network of "trusted" market makers or exchangers to peg the price to a known fiat currency. It would work similarly to the way the bitcoin network already functions. If you think about it, you have to trust the top 4-5 exchangers to handle your BTC/fiat exchange anyway. How is this that any different than what I've proposed?

Were the bitcoin economy to even remotely resemble the amount of market capitalization of even a small country, the first group of "miners" could be a serious "force" to be dealt with. To be clear, I have nothing against the "first adopter" advantage, but somebody who has a few $100 billion equivalent USD in BTC purchasing power to throw around makes me a bit nervous as a merchant, speculator, or just your regular "anybody" for that matter.

I withdraw the "wasted" comment since it isn't really what I intended to express. I understand that a certain amount of resources will always be required to secure the network (the more computation effort, the stronger the network). I was just suggesting that resource allocation could be spread out and smoothed, hence less asset risk exposure if the price were pegged over a longer term. You would more easily be able to allocate your resources and anticipate the market if it was a steady growth to a $21 trillion market, instead of a fluctuating market which has seen as little as $30,000,000 USD and as high as $100,000,000 USD in the last 6 months (and almost zero if you look at the pre-2010 era). A lot of miners and merchants tend to get burned in those kinds of markets.

[FredericBastiat]

You are simply complaining about early adopters and free market, even if you say you aren't. You answer is to regulate the early adopter and regulate the market. Give it a shot, I won't choose it over a free market.

Prices fluctuate according to supply and demand. Bitcoin is new, so the supply and demand fluctuates a lot! Big deal. There are ways for miners and merchants to deal with it if all they are concerned about is fiat currency.

To be crystal clear again, I have no bias towards early adopters or free markets. I personally believe you can do anything you like as long as those who you deal with, agree to the terms (uncoerced). Some ideas work well, some work really well. Nothing is perfect. Nearly everything can be improved upon. My whole point was that you want to placate your merchants (who you want and even perhaps need), not chase them off by hourly and dayly yo-yo price gyrations. Was bitcoin designed or intended for speculators and manipulators only?

The way bitcoin operates is a form of participatory "regulation". To wit, everybody decides to regulate the production of bitcoin thru their participation in a crypto-mathematical "creation" process. So what? Nothing wrong with that. I don't care one way or the other, any more than I do any of the other alt-currencies that come along.

I was merely suggesting that by initially pegging your newbie currency to a quasi-stable fiat currency you can gain quicker adoption rates with less price fluctuation and market manipulation. Again speculators are great to have, just maybe not when you're just out the starting gate. My idea is as equally a free market as the bitcoin market is, and you can't say otherwise. I prefer decentralizaion and federated trust servers to central point-of-failure designs too. Am I explaining myself clear enough for you yet?

By the way, I own several hundred bitcoin and run a 3 Ghash/s miner, so I do have skin in the game.

[FredericBastiat]

If you distribute all the coins to one, or several exchanges, and then set the price because you have possession of every coin in existence, you are regulating several factors. The market is still "free" inasmuch as I don't need to enter it if I so choose, but it's hardly as "free" as Bitcoin.

You complain about market manipulators, and offer the fix of having one massive market manipulator.

You want to introduce these changes because you are dissatisfied with the volatility of Bitcoin and how it affects merchants. Perhaps this is unavoidable when introducing a voluntary new currency.

But there is no point in discussing it. I say you create your invention and release it to the public. If it is as you say, it will be the dominant crypto-currency in no time.

Bitcoin is only as "free" in so far as it can be traded for something else without external interference. My "bitcoin2.0" proposal is even more free than you think. If you purchase digital coin, your coin (BTCx) can be spent to anyone, anywhere, and at any time sans exchange interference. The only difference is if you cash it in for fiat with any of the "federated trust" coop exchangers it will remain at a constant pegged $1 (at least until all are spent into the economy). After which it would float, and hopefully with less volatility.

Small countries do this sometimes (peg to the dollar) because their own fiat has little to no acceptance, value or trust. I would think we would want to integrate into the current economy initially and then cut ties when the level of participation increases to the point where the exchange volatility is less of an issue. People still think in dollars, they rarely think in bitcoin. It's a paradigm shift for many. Let's ease them into it.

And no, it is not true that I want just one market maker (you call them manipulators, but whatever). I want as many market makers as are willing to participate insomuch as they all agree to be bound to the $1 pegged value and that they all spend an exacting portion of the spread/fee to the miners/brokers/authenticators to secure the network. Once all of the pre-mined coins are spent into the economy does it float against all the other monies out there. This can be done with smart contracts. See the following link for details.

https://en.bitcoin.it/wiki/Contracts

[FredericBastiat]

I said one, or several, in my post. No reason to stress "one". I called them manipulators only to follow your lead. Call it what you want, pegging the exchange rate is manipulation, even if it is benevolent.

Of course pegging the bitcoin to fiat is manipulation. I never said it wasn't. And despite that obvious fact, mining an exact amount of bitcoin per hour is also manipulation, but then again, who cares? And I do believe it could be considered more benevolent or neutral if a pegged price is the specific expectation of the exchangers until all coin are distributed, at least for initial exchange stability.

Either way, if you upset your clientele, they'll bail. It would be akin to paypal arbitrarily quadrupling their fees. It's probable you'll have detractors. It might even sound their death knell. We can only hope. However, if you use "smart property" where the trust has to be shared (the pegged price agreement), it's not likely any one or all the exchanges will collude to screw everybody else. The same could be said for the bitcoin network. No one group is typically large enough to affect the rest, and they aren't incentivized in that way in the first place. Better have something, than risk everything for nothing.

First of all, I don't think your idea will fly, simply because there is too much trust that the exchanges will do what they say. "Expenses and a fluctuating dollar has forced us to change our rate, don't worry, we did an internal vote and decided it was best for the future of the currency." And if you think people complain about early adopters now, wait until a single entity starts with every coin in existence.

Did you you read the smart property or digital contract proposal? It's shared federated trust servers. The Open Transaction project by Traveler could work in a similar fashion. The single entity with all the initial coin will be mitigated by the aformentioned arrangement (he would seek federated partnerships to protect against centralization whilst simultaneously gaining limited liability from aggresive government control).

The idea is to quickly disseminate and put into the hands of as many exchangers the entirety of the coinage, and then force them to authenticate each other when they spend (via fiat) the coin into the economy (or they can't spend it at all). It certainly simplifies things when you have one price. No need to second guess, speculate, have charts, do averages, hedge, or leverage. In addition options and futures contracts come much later if even needed.

Finally, if you manage to go so far as to get this system up and running, I suspect when the day comes that you finally have to float against the other currencies of the world, you will experience extreme volatility, and it will affect everyone involved in a much larger way because the previous regulation dulled their senses into thinking stability was part of the design.

Really? How's that possible? You'll have $21 trillion worth of coin floating around. Nobody's going to push that around very easily. Contrast that with now and somebody with 100K BTC. It's easy to manipulate that market. Are you counting on somebody cornering 1 trillion or two to create similar volatility. Sure...

I admire your goals, I just don't agree with how you are trying to achieve them. I will be surprised if you manage to pull if off in the way you suggest. And I'll be happy to admit I was wrong.

Unfortunately, I'm going to have to brush up on my math skills or hire somebody to hammer out the details. Just trying to improve the opportunities and wrest the power away from the state. No small task I would assume. Discussion always gets me thinking.

[FredericBastiat]

This is an old argument.

Pegging ultimately creates an unsustainable market imbalance. Sooner or later the peg slips or breaks and everything that relied upon it is thrown into chaos. It is probably the most destructive thing you can do. What you really want is adequate exchange volume to sustain a strong correlation between the pair that is being traded. $/BTC is currently just a long way away from that is all.

Enlighten me. Why is pegging bad? I'm familiar with fiat currency issues, but that's not exactly what were talking about here (fiat to fiat pegging is what you're referring to). How is the imbalance created? Who is creating this imbalance? How is bitcoin different than that? Why is it the most destructive thing you can do?

I'm not seeing it. Almost all of us have converted between bitcoin and fiat, so it seems were all causing some kind of indirect harm. Should we not convert to fiat at all?

Give references please. I can be persuaded.

[FredericBastiat]

Because the economy will grow and contract and normally the exchange rate would ebb and flow accordingly, but your leash will prevent that and tension will build. You won't need someone to corner the market, you've already cornered it. And when you release the leash, the market will probably attempt to correct, and it will probably over correct, and so on.

I'm not going to waste any more time discussing it, because I don't see it as feasible. Chodpaba said it better than I could have and I'll leave it at that. Chodpaba didn't say anything in particular, and he provided no references, so I'm not convinced (i.e. I don't like gravity, but that doesn't make it inherently bad)

You probably didn't see Bitcoin coming either (or for that matter PayPal), and yet here it is. Be open minded. There's nothing wrong with an idea, especially one that incorporates slow transitioning, integration and familiarity.

Who has cornered the market? In fact, if you look at bitcoin, the early adopters have cornered the bitcoin market but I say who cares? I know I don't. That isn't my concern. I'm merely trying to smooth the volatility out and convince more businesses to use bitcoin and simultaneously avoid volatility issues. It isn't like they'll be blindsided when the unpeg happens. Everybody will decide to price bitcoin however they want at that point. Some will stay, some will go. Will we all be sheep and follow the first guy over the cliff? Whatever.

Why would they all run for the exits when the exchanges "unleash" the market and let if float? I guess I don't see the panicky-crazed, yell fire in a theater, deer-in-the-headlights issue here.

It's not like the world came to an end in 1971 when Nixon unpegged the dollar from the gold standard. I'm not suggesting we're doing the same here by the way. He blatantly stole the gold and that is a completely separate discussion better suited for the "politics and society" forum.

[FredericBastiat]

In order to keep a peg the loosing side of the trade that makes that happen must have resources equivalent to the size of the market. It is mathematically infeasible. To maintain stability in the exchange rate both sides of the exchange have to remain liquid. If the rate stays too much above, or to much below this equilibrium for too long one side or the other will go illiquid. A static rate virtually guarantees that this illiquid condition will occur.

Except that all that bitcoins are are representative tokens or certificates for redemption (fiat in this case). If I mint 21 trillion coins, I'm already fully liquid. I'm merely exchanging one token (fiat) for another token (bitcoinX) until I run out. By pegging you guarantee a par-value price match until you run out of bittokens, at which point you float.

The exchanges hold your fiat dollars in reserve whilst you use your bitcoin in trade and when they want to exchange them for fiat again you give their fiat money back to them. There's nothing mathematically impossible about it at all. It's a lot like GoldMoney. It's no different - it's effectively bailment until you run out of tokens.

Not to mention, the fees and/or bid/ask spread fund the security of the network. The source of that incentive comes from direct exchange (USD<->BTC or BTC<->BTC) not mining, exactly as it would were the bitcoin network no longer mining coins. This is an eventuality anyway, why not deal with it now instead of later? Even Gavin Andreeson is concerned about it.

At that point (floating unpegged) everybody has a small percentage of the total bittokens in circulation which individually or even collusively are difficult to move the market in any one direction. I must not have explained this very well. I've written a point by point description of this here and in one other thread.

[FredericBastiat]

Good luck with that.

Thanks for the vote of confidence  

To recap, I'm effectuating bailment with a fixed quantity of digital tokens, afterwhich the entirety of the tokens price-float against the worlds currencies. It's merely transititional with most of the components functionally similar to bitcoin. It's still deflationary and decentralized, but also connected to the rest of the world.

The money material is merely transferring wealth to a different token type (BTCx in this case) as opposed to fiat tokens. It would be kind of like a hybrid paypal/bitcoin or paxum/bitcoin or dwolla/bitcoin situation but decentralized and open source.

I would like to think we could just dispense with the fiat conversion altogether because that market has taken a bit of a beating lately and could use a face lift, but it seems we have a bit of an attachment to fiat currencies we're unwilling to give up readily.

With both a open source digital currency and a open source trust-exchange environment I bet you could do wonders. Open Transactions comes to mind.

[MPOE-PR]

The workings of MPOE stocks/bonds/options will probably go a long way towards stabilising the BTC price in USD.

[memvola]

The workings of MPOE stocks/bonds/options will probably go a long way towards stabilising the BTC price in USD.

Don't know about MPOE (just discovered) but an options market would definitely have a stabilizing effect.

[hashman]

The workings of MPOE stocks/bonds/options will probably go a long way towards stabilising the BTC price in USD.

+1 

Alsoa lot of people running pairs trading algorithms will help. 

[MPOE-PR]

Of course since the btc supply is inelastic there will still remain a potential for large variations due to mainstream/usd interest. Until at least 1/10th of people know about bitcoin you never know how fast the number of people that do know grows. Once it becomes a household name real stabilisation can begin.