Prices Cannot Stabilize

[BTConomist]

To create and maintain deflation in the Bitcoin economy, we have to wait for the inflation to end first. 

There's no need in waiting... If you have 1,000,000BTC to spare, I'll give you the answer now.

I have 1,000,000 units to spare, but they aren't BTC.

If I can sell them for 1,000,000BTC, then you've got yourself a deal.

[cbeast]

To create and maintain deflation in the Bitcoin economy, we have to wait for the inflation to end first. 

There's no need in waiting... If you have 1,000,000BTC to spare, I'll give you the answer now.

I have 1,000,000 units to spare, but they aren't BTC.

I have one unit that I would not spare, even for 1,000,000 BTC.   

[Rassah]

A proposal to consider...

I don't know if it's funny, or annoying, the way people keep forgetting that when you exchange currency, such as Bitcoin into USD, or USD into whatever currency is being proposed here, the currency being exchanged doesn't just disappear. When you quickly exchange out of BTC into USD to avoid currency fluctuations, someone else is buying and holding that BTC, exposing themselves to the fluctuation risk. Likewise, with your proposed idea, when you buy this Bitcoin 2.0 with USD, someone else ends up with your USD. So, basically what you are proposing is gifting a few lucky exchange operators with $21,000,000, totally free of charge, and then making the rest of us give them our hard earned USD for the privilege of using their special freely obtained $21,000,000 worth of BTC.

Even you yourself later point out that "without somebody to take the other side of the trade, your BTC isn't worth anything," so why even propose something like this?

[notme]

No thanks

[FredericBastiat]

I don't know if it's funny, or annoying, the way people keep forgetting that when you exchange currency, such as Bitcoin into USD, or USD into whatever currency is being proposed here, the currency being exchanged doesn't just disappear. When you quickly exchange out of BTC into USD to avoid currency fluctuations, someone else is buying and holding that BTC, exposing themselves to the fluctuation risk. Likewise, with your proposed idea, when you buy this Bitcoin 2.0 with USD, someone else ends up with your USD. So, basically what you are proposing is gifting a few lucky exchange operators with $21,000,000, totally free of charge, and then making the rest of us give them our hard earned USD for the privilege of using their special freely obtained $21,000,000 worth of BTC.

Even you yourself later point out that "without somebody to take the other side of the trade, your BTC isn't worth anything," so why even propose something like this?

Firstly, it's 21 trillion coin, not 21 million (this market is too small if you're going to peg). Secondly it's pegged to the dollar, on purpose, to avoid volatility. The idea is that if it's pegged, it doesn't fluctuate. All of the exchangers agree to the peg (thru smart property cryptographic mathematical arrangements). The currency doesn't initially float. The net effect is to move as many dollars into many vaults (permanently parked in hundreds of locales) and circulating as bitcoin as much as possible. The exchangers would be the "vaults" for this. No money disappears anywhere. There is just a transference and preference to bitcoin trading or money away from USD or other fiat.

Initially, people will probably use the coin as a transition between fiat and BTC but without the currency price exposure. Once they realize it's easier to trade in bitcoin, more fiat resides in the vaults (it doesn't move much except to grease the proverbial wheel when necessary). The money velocity demand decreases for USD and increases for bitcoin until eventually all transactions are in BTC or other digital coin. Once you exceed the 21 trillion dollar mark (or some other largish dollar amount) you then go to the float scenario. Hopefully by then, volatility will be less of a factor.

Nobody gifts anybody. The miners who authenticate and secure the network get paid a fee to do so. The exchangers are nothing more than a connection to the fiat market. I'm piggybacking, nothing more.

[notme]

You're still asking for 21 trillion to process some transactions.

[FredericBastiat]

Besides, bitcoin was just made out of the thinness of air why should I give/gift my hard earned $$$ to someone for the privilege of moving/creating/transacting bitcoin (it's the identical argument as yours Rassah). The incentive is just relocated. The idea is to get people to use bitcoin sans the boostrapping volatility issue. Maybe a picture will help. The following is money flow/velocity.

$$$$$$$$$ --> BTC  or  BTC <--> BTC,
not BTC <--> $.

The latter creates an environment of volatility the former not so much.

One way to do this is to peg the currency until such time as so many dollars are vault-parked and an equivalent number of bitcoins are in circulation so that when you unpeg because you ran out of digital coins to spend into circulation, the volatility is a non issue. You want dollars/fiat to flow into bitcoin first thru exchanges into the BTC economy not in and out and in and out of it (rinse repeat) because of speculation, volatility and manipulation.

Why is this so hard to envision?

[FredericBastiat]

You're still asking for 21 trillion to process some transactions.

So what are you saying? Is 21 trillion too big (dollar equivalence)? Make it $210 billion in transactions then. At least make it as big or bigger than the wealthiest individual or potential colluding groups could create to push the market around. The NYSE handles transactions in the trillions of dollars or at least hundreds of billions of dollars on a daily basis. Do you have a problem with them too?

I know I'm concerned, but I'm trying to do something about that by creating a cooperative but mitigated restrained federated exchange trust server network. Spread the trust around. Use math to solve the problem. Let the market want to move fiat to bitcoin. The way to do that IMO is to create an initial par-value trading environment, then unpeg later when it matters less.

It isn't any different in the way bitcoin is handled now. My approach is just slightly different. Having a digital currency is a neat idea. Price volatility isn't necessarily a good feature or side effect to have when bootstrapping a currency into existence.

I'm not raining on your bitcoin parade, just offering suggestions that could further the cause.

[jothan]

Artificial scarcity, a very special character of BTC, in a world that almost everything can be mass produced without limit

What world you live in is what I'm starting to wonder.

Emphasis mine. With a large value of "almost".

Automation in manufacturing is at an all time high, but this has been the case for the last 100 years too. We are slowly but surely moving in a post-scarcity society.

[FredericBastiat]

The idea is to function initially like a bailment service. Each DigiCoin token in circulation represents $1 fiat of world currency. It's a lot like E-gold, PayPal, Dwolla, or Amazon Payments (they're all digital fiat equivalent exchange systems with a 1:1 conversion. E-gold was the exception since it tied to itself to a commodity) except decentralized and open source. Once the digital tokens are purchased, those tokens can trade between users independent of the exchanges (exactly like bitcoin does now). The exchanges only exist primarily for bailment and reserve/vaulting of fiat, thus transacting to and from "digicoin-token" (bitcoin) and "fiat-token" (dollars) at a 1:1 par-value conversion.

Everyone can see the digital token/currency blockchain and verify it against the sum total of all of the dollars in reserve at each of the exchanges (due to their open source nature they must publish in a similar fashion to the blockchain, but just the fiat dollar totals to maintain privacy and quasi-anonymity). It's a completely auditable digital paper-trail both for the user-to-user, user-to-exchange, and exchange-to-exchange transaction interface.

Everybody must authenticate everybody else's transactions (or some high percentage, say 60%). Everyone can also see the main account that holds the reserve digital coin tokens and can verify that they aren't being spent unless there is an equivalent fiat dollar in reserve at the exchange.

The idea is to grow the reserve of dollars in the vault and use the digital tokens as the transaction medium (money material as it were). And then once the tokens are bought up (this happens when the reserve of dollars exceeds the pre-mined coin token total), their real value will be known and the coins then go to a float scenario (a deflationary event which you want to arrive at sooner than later).

Hopefully by making the exchange software open-source like the bitcoin network, more exchange services will emerge to share the load. At the moment we have a very centralized fiat-to-bitcoin system. You have to trust somebody somewhere eventually. Better to have a complete system end-to-end so that integration can happen smoothly, than bootstrap completely independent of the rest of the world. You want a tandem bitcoin exchange with a fiat exchange platform joined together, but partially semi-dependent on each other for security purposes.

The quicker you can obtain a critical mass of token transactions equivalent to billions of vaulted/parked reserve fiat dollars, the more stability you can create, the faster the adoption rate. Imagine if the bitcoin economy was a 50 billion dollar fiat equivalence and the volatility was similar to the USD/EURO currency pairs? Just about everybody would convert. At the moment though were just a toy to be played with. Too easy to manipulate, in my opinion.

[bitfreak!]

We have two main factors to consider when it comes to the price of BTC:

1) Change in the number of people buying/mining bitcoins (demand)
2) Change in the total number of bitcoins in circulation (supply)

An increase in demand results in an increase in price (assuming the supply is unchanged).
An increase in supply results in a decrease in price (assuming the demand is unchanged).

We know this much:

* The supply will continue to increase until 2140 and remain constant after that (apart from lost coins)

We can make this prediction:

* The demand will continue to increase for a long time but will eventually reach a relatively stable state

As the demand and supply increase, they help balance each other out. When I first started getting into Bitcoin I noticed that the price was steadily increasing, it went all the way up to $30 until it came crashing back down with all the hacking drama. This indicated to me that the increase in demand was slowly outpacing the increase in supply. Fear and speculation was what brought it back down. A lot of people probably cashed out and the demand went down.

Now I predict, the price will continue to slowly rise again (like it has been recently doing) as more people get back their faith in Bitcoin, and also as more newcomers start investing in bitcoins. It's clear to see that the price wont go down until the demand actually stops increasing or decreases, or the increase in supply outpaces the increase in demand. Wild speculation is the only other thing that will cause the price to come back down. And there is a lot of speculation when it comes to Bitcoin.

I think Bitcoin is designed so that even if prices are very volatile in the beginning, there's still incentive to use Bitcoin because people know the price is set to go up (long term), and it's worth while to get in as early as possible before things start to smooth out (when all the coins are mined and Bitcoin finds a solid audience). Bitcoin is still a rather new currency, but a large percentage of the bitcoins are already in circulation (over 8 million), which means demand is likely to outpace supply for a while.

I think that by the time all the coins have been mined, the price will be extremely stable because not only will the amount of coins in circulation be static, but the demand is also likely to be very stable by that point in time because it'll have a stable user base and if Bitcoin lasts that long the trust issues and rampant speculation will be virtually non-existent. A stable supply and a stable demand certainly seems to mean a stable coin in my mind. It's like Bitcoin is designed to be the currency of the future imo.

[Grinder]

Firstly, it's 21 trillion coin, not 21 million (this market is too small if you're going to peg). Secondly it's pegged to the dollar, on purpose, to avoid volatility. The idea is that if it's pegged, it doesn't fluctuate. All of the exchangers agree to the peg (thru smart property cryptographic mathematical arrangements). The currency doesn't initially float.

This is just not possible. It is so far from remotely possible that if you don't see it yourself there's probably no point in trying to explain why.

[FredericBastiat]

Firstly, it's 21 trillion coin, not 21 million (this market is too small if you're going to peg). Secondly it's pegged to the dollar, on purpose, to avoid volatility. The idea is that if it's pegged, it doesn't fluctuate. All of the exchangers agree to the peg (thru smart property cryptographic mathematical arrangements). The currency doesn't initially float.

This is just not possible. It is so far from remotely possible that if you don't see it yourself there's probably no point in trying to explain why.

The 21 trillion coin amount is just arbitrarily large (it might as well be 210 billion coins). It's merely acting like a large supply/demand shock absorber when the bailment service is abandoned for a foreign currency system.

I bet you didn't think to invent bitcoin either, and had somebody mentioned it to you 5 years ago, you probably would have said it was impossible. Just because you say it's impossible doesn't make it so. No point in explaining it to someone who has already dismissed any and all plausibility.

See the Smart Property concept explained here:

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

and the Open Transaction server methodology here:

https://bitcointalk.org/index.php?topic=53329.0
and here
https://bitcointalk.org/index.php?topic=44692.0

[Rassah]

The reason people are saying it's not possible is not because of the 21million/billion/trillion figure, but because what you are proposing is exactly the same as gold-backed fiat. Except instead of backing fiat with gold, you are proposing backing fiat with another fiat. And instead of already owning the gold and issuing fiat notes against it, you want other people to give you their "gold" in exchange for as yet not established fiat. And to answer your earlier question, I can trust an open source, mathematically established system, and can more or less trust some guy who has a small amount of tokens from that system and who is willing to trade them for a bit of my money, but who otherwise has no control over what the system does. It's a bit harder to trust someone who has most, if not all, of the tokens in this system, and who has the power and incentive to manipulate the system to their advantage. With bitcoin I am trusting a distributed mathematical system no one can control. With your system, regardless of how much financial data is available, you are still exactly as trustworthy as a central fiat issuing entity, and there is still nothing to stop you from clearing out that vault and running away to another country.

Btw, question. Let's say this works, $21m worth gets issued to the public (sold for USD), and then the peg gets released. What happens to the $21m still sitting in the vaults? Is it profit for currency issuers that they are finally free to do with as they wish?

[FredericBastiat]

The reason people are saying it's not possible is not because of the 21million/billion/trillion figure, but because what you are proposing is exactly the same as gold-backed fiat. Except instead of backing fiat with gold, you are proposing backing fiat with another fiat. And instead of already owning the gold and issuing fiat notes against it, you want other people to give you their "gold" in exchange for as yet not established fiat. And to answer your earlier question, I can trust an open source, mathematically established system, and can more or less trust some guy who has a small amount of tokens from that system and who is willing to trade them for a bit of my money, but who otherwise has no control over what the system does. It's a bit harder to trust someone who has most, if not all, of the tokens in this system, and who has the power and incentive to manipulate the system to their advantage. With bitcoin I am trusting a distributed mathematical system no one can control. With your system, regardless of how much financial data is available, you are still exactly as trustworthy as a central fiat issuing entity, and there is still nothing to stop you from clearing out that vault and running away to another country.

Btw, question. Let's say this works, $21m worth gets issued to the public (sold for USD), and then the peg gets released. What happens to the $21m still sitting in the vaults? Is it profit for currency issuers that they are finally free to do with as they wish?

There is little to no incentive to manipulate the system, as doing so would be immediately verified and determined by the auditing system (blockchain of BCT being out of whack with the vaulted $FIAT reserves). It would be like saying Mt. Gox would just up and close shop and take all your fiat and bitcoin tomorrow. Not that they couldn't, but why? Why kill the golden goose (fee structure)? They would have the worst reputation on the planet and could potentially kill the bitcoin network overnight. 90% of the current miners would bail. That just doesn't compute.

We are already in this situation with the top 4 $FIAT/BTC exchanges, otherwise you would just trade your bitcoins with another bitcoin address and never mess with the exchanges in the first place. If you want fiat we already have a very centralized "fiat-backed" system. The majority of players in the market are probably storing both their fiat and their bitcoin with Mt. Gox (80% volume leader).

The $21B fiat just sits in the vault. It goes nowhere until someone converts BCT for fiat. If everybody bails, then the BTC/FIAT pair value will change, exactly as it does now. Think of it like shares in a company on the stock market. If you have more sellers than buyers the stock drops, conversely for more buyers than sellers it goes up.

[Rassah]

There is little to no incentive to manipulate the system, as doing so would be immediately verified and determined by the auditing system (blockchain of BCT being out of whack with the vaulted $FIAT reserves). It would be like saying Mt. Gox would just up and close shop and take all your fiat and bitcoin tomorrow. Not that they couldn't, but why? Why kill the golden goose (fee structure)? They would have the worst reputation on the planet and could potentially kill the bitcoin network overnight. 90% of the current miners would bail. That just doesn't compute.

Most (vast majority) of the people don't keep their money in MtGox. If MtGox were to run off with the funds, at most they would have a few $100k to play with. They have more of an incentive to hold as little as possible (reduces their liability), and to keep making money off trades, though even that isn't guaranteed to be a viable long term income.
In your system, who is checking the physical fiat reserves? Why should we trust that they are honest and not working with vault holders to skim off the top? And why would they care about reputation of they have the option to run of with ALL the Fiat, as opposed to just a fraction of it?

We are already in this situation with the top 4 $FIAT/BTC exchanges, otherwise you would just trade your bitcoins with another bitcoin address and never mess with the exchanges in the first place. If you want fiat we already have a very centralized "fiat-backed" system. The majority of players in the market are probably storing both their fiat and their bitcoin with Mt. Gox (80% volume leader).

As I said, I seriously doubt a lot of people are holding their money in MtGox. Especially after all the losses and scandals last summer. High volume just means two people exchanged money using their system, and likely withdrew it as soon as possible. It doesn't mean MtGox sold BTC themselves and are keeping the money, as would be in your scenario. The point is not how much, or who, but how much control is there by free individuals, and how much of our well being depends on having to trust someone else.

The $21B fiat just sits in the vault. It goes nowhere until someone converts BCT for fiat. If everybody bails, then the BTC/FIAT pair value will change, exactly as it does now. Think of it like shares in a company on the stock market. If you have more sellers than buyers the stock drops, conversely for more buyers than sellers it goes up.

Ah, I think I see where you're going with this. You want to essentially create shares of stock equivalent to $21m or whatever, and sell it on the market with the promise to keep the share exchanging system secure, and the price pegged to $1 per share. But, again, corporations issue and sell shares. For the promise of giving profits and being secure, they ask that you give them lots of your own money, which they then use for whatever they want with the condition that the buyers of that stock will like what is they do. Again, how is your proposal different from also asking for money from people that you'll be free to do with as you please? If it's not, I guess your main issue would be trying to sell your idea so people can give you their money.

[FredericBastiat]

Most (vast majority) of the people don't keep their money in MtGox. If MtGox were to run off with the funds, at most they would have a few $100k to play with. They have more of an incentive to hold as little as possible (reduces their liability), and to keep making money off trades, though even that isn't guaranteed to be a viable long term income.
In your system, who is checking the physical fiat reserves? Why should we trust that they are honest and not working with vault holders to skim off the top? And why would they care about reputation of they have the option to run of with ALL the Fiat, as opposed to just a fraction of it?

As I said, I seriously doubt a lot of people are holding their money in MtGox. Especially after all the losses and scandals last summer. High volume just means two people exchanged money using their system, and likely withdrew it as soon as possible. It doesn't mean MtGox sold BTC themselves and are keeping the money, as would be in your scenario. The point is not how much, or who, but how much control is there by free individuals, and how much of our well being depends on having to trust someone else.

You're just doing bailment by maintaining 1 BTC for every 1 FIAT dollar until you run out of BTC coin (21 billion BTC in my particular case). To spend the coin into the BTC economy requires the joint signatures (cryptographically signed) by multiple trusted servers (M of N server verifications, where M = N/2+1). Otherwise, the transaction fails and the fiat is either returned or never accepted. There is no individual central authority for this. A BTC block chain and equivalent exchange auditing system exists to verify this for continual public review. It would use something like the Open Transactions software developed by FellowTraveler, or the Stratum Network Protocol. It's a distributed trust network.

[brunoshady]

bitcoin is growing, and it is growing fast, by 70% increase in the last 30 days or so

[MPOE-PR]

Bitcoin is still a very inflationary currency, if you think about it. 50 BTC added every 4-500 seconds comes out, over 8 million total supply, well above even US inflation which is easily the most inflationary economy of the developed world atm.

This will change after the 2nd or maybe 3rd halving, when the built in inflation drops under 1%.

[Cosbycoin]

The supply of coins grows at the same rate regardless of demand. Stability requires a flexible supply increase to correspond with demand increase. This limitation will be an impediment to the growth of Bitcoin commerce.

In 9 months that rate will drop by 50%....despite demand. I think there wasn't supposed to be a correlation between the two given that Satoshi made the model of coin distribution from day 1.