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Author Topic: Would it be possible to create a distributed bitcoin price stabilizer?  (Read 1888 times)
Elwar
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May 03, 2014, 07:56:44 AM
 #1

I had this idea a while ago but was not sure if the incentive would be enough or whether people not using the software would have an advantage.


Basically I was thinking of a piece of distributed software with an API to the largest exchange (ie BitStamp).

The goal would be to have a huge buy and sell wall such that the price would not have huge swings during the day but a gradual move up or down. So you might have a $2,000,000 buy wall at $499.50 and a 4,000 bitcoin sell wall at $500.

So essentially, anyone buying or selling would buy or sell within that small window.

Say the sell wall starts going down because of more demand and goes down to 3,500...the price might gradually move up a penny at a time to $500.50...moving up gradually until the equilibrium is once again obtained.

The spread would be just outside of the range of the lowest exchange percentage. The advantage to the users of the software would be high volume at that rate in order to get a constant return with low risk. The advantage to bitcoin users would be a more gradual movement of the bitcoin price while still allowing the market to move the price over time.

The mechanics behind it would be that each user would be given a number to buy and sell at just outside of the fixed spread.

So user A might be given a price to buy at $499.48 and sell price at $500.01
and user B might be given the price to buy at $499.49 and a sell price at $500.02.
The software will only work for you if you set an equal amount at each price. But as people buy or sell, they will hit your prices and you will gradually make money.

The main problem I can see is people putting in their bids right above or below the price spread, though over a large volume such small bids would be minimal.

Is such a thing feasible?


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May 03, 2014, 08:04:50 AM
 #2

If you had people that could invest the 2 million dollars at a time to artificially create the buy wall. But this type of price fixing doesn't seem reasonable, especially with bitcoin being able to freely be tradeable on other exchanges or person to person (which is a good thing). What would happen if the bitcoin price suddenly jumps to $1000 on other exchanges, everyone would remove their $500 buys on your exchange...or if the price dropped to $10/btc, who in their right mind would still keep a buy wall at $500?


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May 03, 2014, 08:12:34 AM
 #3

The price needs to naturally fluctuate such as the price of everything need to fluctuate; price control don't work, there is no substitute to market price and competition

BTW the price volatility has attracted a lot of attention and a lot of persons into buying to profit from it so it may have been a positive for Bitcoin so far

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May 03, 2014, 08:37:05 AM
 #4

This exact basic mechanism is what "market making" means.
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May 03, 2014, 11:56:14 AM
 #5

This is similar to central bank's intervene, it is happening on the FOREX exchange all the time, central banks around the world use this and other method to keep their currency's exchange rate stable

A good example is the exchange rate between Swiss franc and euro, it stayed in a very narrow range during summer 2012 because of this kind of action



Bitcoiners advocate free market, but if one large entity have enough fiat money reserve, he essentially can manipulate the price and cause large price swing, like we saw last year in china (Chinese have a huge fiat money reserve). Because majority of the coins were hoarded, the number of coins circulating on exchanges are much lower and vulnerable to price manipulation

So, some kind of price stabilizing mechanism can be established to reduce volatility. Due to bitcoin's networked nature, it should be as efficient as central bank, because all the bitcoiners will be informed online instantly and take action accordingly

I was thinking about the same thing and have done some practice and research on my trades, some observations:

1. You can limit the downward price movement, but you can never limit the upside movement, because you can have large fiat money reserve but impossible to have large bitcoin reserve, so the large price swing to the upside would still happen

2. If you put all the orders around one price and make one huge wall, and that wall is eaten at once, then you are left with no reserve. So these walls must be flexible and setup at multiple price pivot and be able to adjust itself depends on the current wall's thickness, this is basic market making dynamics

3. The arbitraging from other exchanges will affect the wall, so it is better to setup the wall at several large exchanges so that arbitraging from other small exchanges won't affect too much


If we could get enough amount of bitcoiners reach such an agreement with enough fiat money reserve, then we can defend the lower bound for bitcoin's price. People has always been asking the question about who is backing bitcoin, now we can give them the answer: The bitcoiners back bitcoin. Today we have bitcoin foundation to coordinate the technical aspect of development, we could also have a bitcoiner's association to back bitcoin's value. Bitcoin is advocated to be people's money, so people should back it, not central banks or governments

Currently there are only 12 million or so coins out there, and maximum only 10% of that is in circulation, about 1 million coins. If there is one million bitcoiners back it, each one promise to put in $1000 to the buy wall, then the price will never get below $1000.

Usually the required fiat money reserve is much less, since the price is decided by the daily coin supply, which is around 5000 to 20000 coins, and the daily purchase of 5-20 million USD will keep a price of $1000, requiring only 5-20 USD per day from each bitcoiner, if there are one million of them

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May 04, 2014, 09:39:51 AM
 #6

I doubt whether market will ever allow any controlled stabilization...

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TrailingComet
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May 04, 2014, 11:08:02 AM
 #7

The system eludes coordination to some extent
Hard to do for much the same reason that it is hard to manipulate

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May 04, 2014, 12:01:14 PM
 #8

If the price should go up a lot, the money stabilising the price lower than what it should be will be gone rapidly and the same is true if the price need to go down a lot

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May 04, 2014, 01:06:18 PM
 #9

If the price should go up a lot, the money stabilising the price lower than what it should be will be gone rapidly and the same is true if the price need to go down a lot

The goal is to stabilise, not fix, so if the price moves rapidly the market makers would adjust their bids/asks. The price is still able to move, but spikes are reduced.

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May 04, 2014, 01:21:30 PM
 #10

The system eludes coordination to some extent
Hard to do for much the same reason that it is hard to manipulate

Thinking aloud here, but it reminds me of block adjustments: difficulty remains constant for a set number of blocks, then adjusts. In this case bid price and ask price would both be fixed for a predetermined period, and then adjusts (it might also be desirable to adjust the spread). I'm not sure this would work within the system, but might instead be an external layer that references the Bitcoin protocol (there might even be multiple external systems of market makers, somewhat like the market making system NASDAQ employ where there are multiple, competing market makers).

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Yakamoto
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May 04, 2014, 02:03:06 PM
 #11

Would this not be turning bitcoin into a form of fiat...?














 

 

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boumalo
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May 04, 2014, 02:29:38 PM
 #12

If the price should go up a lot, the money stabilising the price lower than what it should be will be gone rapidly and the same is true if the price need to go down a lot

The goal is to stabilise, not fix, so if the price moves rapidly the market makers would adjust their bids/asks. The price is still able to move, but spikes are reduced.

You can't decide what the price should be, the market will decide it naturally and more efficiently

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May 04, 2014, 02:48:50 PM
 #13

You can't decide what the price should be, the market will decide it naturally and more efficiently

Market making isn't "deciding what the price should be", it's participation in the market. It's purpose is to provide liquidity and reduce volatility. It's no different to a buyer and a seller placing bids and asks, except it's one entity placing the bids and asks, hoping to profit from the spread as a reward for providing liquidity.

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boumalo
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May 04, 2014, 05:03:29 PM
 #14

You can't decide what the price should be, the market will decide it naturally and more efficiently

Market making isn't "deciding what the price should be", it's participation in the market. It's purpose is to provide liquidity and reduce volatility. It's no different to a buyer and a seller placing bids and asks, except it's one entity placing the bids and asks, hoping to profit from the spread as a reward for providing liquidity.

I am not saying there can't be any market maker, I am saying there can't be an efficient way to act as a market maker to stabilize the prices and avoid volatility

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May 04, 2014, 05:05:53 PM
 #15

You can't decide what the price should be, the market will decide it naturally and more efficiently

Market making isn't "deciding what the price should be", it's participation in the market. It's purpose is to provide liquidity and reduce volatility. It's no different to a buyer and a seller placing bids and asks, except it's one entity placing the bids and asks, hoping to profit from the spread as a reward for providing liquidity.

I am not saying there can't be any market maker, I am saying there can't be an efficient way to act as a market maker to stabilize the prices and avoid volatility

Ah, understood. Yes, volatility can't be removed entirely or price wouldn't move (or - more likely - the market maker would go bust).

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May 04, 2014, 10:27:57 PM
 #16

"huge buy and sell wall such that the price would not have huge swings during the day but a gradual move up or down"

Don't we already have this?!?!

I think we do and today the wall is sitting around $440/BTC

 Huh/ Cheesy

If my memory serves me here, I saw the statistic somewhere that ~2000 coins were being mined daily. And the dollars needed daily to soak up these new bitcoins and maintain an unchanged price was ~$2,000,000.

So when we talk about price stability and volatility, aren't those secondary terms? They provide a nice synopsis. But if we want to "fix something", shouldn't we address the cause of the fluctuations rather than try to manipulate the money itself so as to appear to maintain a steady supply/demand balance?  

Finally, I am not concerned today with the number of inked toilet paper notes I can exchange my btc for.
The issue is that fiat inked toilet paper is more widely regarded as money than bitcoin is.
When this changes, there will be no need for exchanges, buy walls, or the dollar price of bitcoin.

just burn barrels for all the inked notes.


And until that time when bitcoin is universally accepted as money, volatility of price paradoxically contributes to the stability of the bitcoin price.
Love it.



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May 05, 2014, 08:31:11 PM
 #17

"huge buy and sell wall such that the price would not have huge swings during the day but a gradual move up or down"

Don't we already have this?!?!

I think we do and today the wall is sitting around $440/BTC

 Huh/ Cheesy

If my memory serves me here, I saw the statistic somewhere that ~2000 coins were being mined daily. And the dollars needed daily to soak up these new bitcoins and maintain an unchanged price was ~$2,000,000.

So when we talk about price stability and volatility, aren't those secondary terms? They provide a nice synopsis. But if we want to "fix something", shouldn't we address the cause of the fluctuations rather than try to manipulate the money itself so as to appear to maintain a steady supply/demand balance?  

Finally, I am not concerned today with the number of inked toilet paper notes I can exchange my btc for.
The issue is that fiat inked toilet paper is more widely regarded as money than bitcoin is.
When this changes, there will be no need for exchanges, buy walls, or the dollar price of bitcoin.

just burn barrels for all the inked notes.


And until that time when bitcoin is universally accepted as money, volatility of price paradoxically contributes to the stability of the bitcoin price.
Love it.




It is closer to 3600 btc/day  (25 btc/block * 6 blocks/hrs * 24 hrs/day), although it has been higher with the rapidly increasing hash rates.  At current prices, that is about $1.5-$1.6 million per day to keep price stable ($440/BTC * 3600 BTC/day).  In about 26-27 months the block subsidy will halve again.

I do agree - acceptance and usage are the keys to increased prices in fiat.  Stability is less important as long as usage is increasing, although eventually it will stabilize.

Elwar
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May 06, 2014, 06:55:33 AM
 #18

Currently there are only 12 million or so coins out there, and maximum only 10% of that is in circulation, about 1 million coins. If there is one million bitcoiners back it, each one promise to put in $1000 to the buy wall, then the price will never get below $1000.

Usually the required fiat money reserve is much less, since the price is decided by the daily coin supply, which is around 5000 to 20000 coins, and the daily purchase of 5-20 million USD will keep a price of $1000, requiring only 5-20 USD per day from each bitcoiner, if there are one million of them

One idea I had was a group of people that wished to stabilize the price to get together and like your idea of promising to put in $1000 to the buy wall, each person would get a price and amount such as $1000.0408 and when that price is sold they get another number (automatically created via software). Each person can verify that they are still part of the group as all of the bids and asks are shown on the exchange.

The reason for having a large wall on the largest exchange would mean that the arbitragers are working for you instead of the need to put it on each exchange.

But outside of some desire or loyalty to keep the price stable, if there is a financial incentive then many people will sign up and it will organically balance out.


As for the idea that this is price fixing or market manipulation...it would still allow for the gradual movement of the price. If great news occurs and there is upward pressure then the price will gradually rise. Same for falling gradually. What it would help with is someone going to buy groceries with bitcoin when the price is at $450 then you get home and the price is $500.

The stability will come with a larger user base and more liquidity, but this could stabilize it in the mean time.

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boumalo
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May 06, 2014, 11:37:23 AM
 #19

Currently there are only 12 million or so coins out there, and maximum only 10% of that is in circulation, about 1 million coins. If there is one million bitcoiners back it, each one promise to put in $1000 to the buy wall, then the price will never get below $1000.

Usually the required fiat money reserve is much less, since the price is decided by the daily coin supply, which is around 5000 to 20000 coins, and the daily purchase of 5-20 million USD will keep a price of $1000, requiring only 5-20 USD per day from each bitcoiner, if there are one million of them

One idea I had was a group of people that wished to stabilize the price to get together and like your idea of promising to put in $1000 to the buy wall, each person would get a price and amount such as $1000.0408 and when that price is sold they get another number (automatically created via software). Each person can verify that they are still part of the group as all of the bids and asks are shown on the exchange.

The reason for having a large wall on the largest exchange would mean that the arbitragers are working for you instead of the need to put it on each exchange.

But outside of some desire or loyalty to keep the price stable, if there is a financial incentive then many people will sign up and it will organically balance out.


As for the idea that this is price fixing or market manipulation...it would still allow for the gradual movement of the price. If great news occurs and there is upward pressure then the price will gradually rise. Same for falling gradually. What it would help with is someone going to buy groceries with bitcoin when the price is at $450 then you get home and the price is $500.

The stability will come with a larger user base and more liquidity, but this could stabilize it in the mean time.

Why would 1000$ be a good price? If it needs to be higher the selling wall will end up disappearing and the price will go up again; the process will just have take the coins out of the members who participated

There is no substitute to the market and competition

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May 06, 2014, 02:39:02 PM
 #20

Elwar,
The efficient mechanism for stabilizing the price of BTC is called "The Free Market". My understanding of those words is that every individual human makes up their own mind as to what price to buy or sell bitcoins at. So currently we have individuals at Bitpay who are constantly putting selling pressure on the dollar price of btc. Many miners sell their btc also putting downward pressure on the price.

Cartels make agreements about a price floor and then agree to hold that price. When I read your post it read to me that you are calling for a cartel.

OPEC is a cartel that readily comes to mind. The members agree not to sell oil (bitcoin) below a certain price. Oil priced below the Cartels asking price is bought up and re-sold at the agreed upon price.


I'd rather see all individuals make up their own minds and let the BTC price go where it may from this.
I see nothing wrong with a small group of people getting together to buy up all the cheap bitcoins to create a floor so to speak. As long as the "cartel" doesn't have a government sanctioned monopoly, there really is little difference between a "cartel" and a few individuals in the free market who get together and hatch a plan for themselves.


The only way to deal with an unfree world is to become so absolutely free that your very existence is an act of rebellion. – Albert Camus
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