The next step towards price stability: We back bitcoin

[johnyj]

Central banks intervene on FOREX exchange all the time to stablize the exchange rate of their currency. 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 can manipulate the price and cause large price swing, like we saw last year in china (Chinese have huge fiat money reserve). Because majority of the coins were hoarded, the number of coins circulating on exchanges are small and vulnerable to price manipulation

And, even when each coin worth millions, majority of coins would still be hoarded, thus the outflow of any small amount of those hoarded coins could cause large price swing on exchanges

So, some kind of collective price stabilizing mechanism could be established to reduce volatility. It is a networked society, if everyone is informed and act the same way, it should be as efficient as central bank's action

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

If there are enough amount of bitcoin supporters, and they reach such an agreement with enough fiat money reserve, then they can guarantee the lowest possible exchange rate. For example, bitcoin is guaranteed to be above $400 if their collective fiat money reserve is larger than 5.09 billion (12.7 million coins mined so far)

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

This is very useful: Most of the people wonder who is backing bitcoin, and they are afraid that a currency without any backing will crash to zero one day. Now here is a simple answer: Millions of bitcoiners back bitcoin. Bitcoin is people's money, so people back it, instead of central banks or governments. Once people know that bitcoin is backed by millions of bitcoiners with a large fiat money reserve, their acceptance and confidence about bitcoin will greatly improve

Comparing with this method, the merchants who are accepting bitcoin actually don't back bitcoin, since they usually convert the coin to get fiat money. Only those merchant who exclusively accepting bitcoin and never convert them back to fiat is backing bitcoin with his goods/services. That is a long term goal, but might never be reached

It seems MV=PQ formula can show that bitcoin will increase in value with more economy activity, but that only apply to a money which is the only money in that economy. Until there are many bitcoin-only businesses, the demand to get a bitcoin for transaction is minimum (for fiat money it is maximum), so the increase in bitcoin acceptance from merchants will not cause an increase in demand of bitcoin, thus will not help to stabilize its value

The question is how to reach a consensus among millions of bitcoin supporters to step into exchange and buy coins when it fall below a certain threshhold (average mining cost for example). I guess currently the most motivated people are those mining rig manufacturers and mining farm operators, a higher exchange rate will definitely help their business. For other people there is less motivation. Maybe eventually we will have an industry association to collectively guarantee the lowest exchange rate of bitcoin. Without some kind of coordinated action, each single of them will not dare to provide any backing, unlike a central bank who can take action any time

Anyway, with backing, the final uncertainty on bitcoin is gone. It is ready for some serious business

[chriswilmer]

I think this is a great idea. What we need is some kind of website/organizer to centralize a discussion around what kind of pledges (and at what prices) should people commit to.

Essentially, I think something like this is just a way for free market participants to create a global "bid wall" without actually setting one up on any exchange. Just like a normal bid wall on a regular exchange, it could get pulled in principle, but they usually having a stabilizing effect regardless.

[Melbustus]

...

This is very useful: Most of the people wonder who is backing bitcoin, and they are afraid that a currency without any backing will crash to zero one day. Now here is a simple answer: Millions of bitcoiners back bitcoin.

No. Utility "backs" bitcoin. Things have value because they're useful in some context. Bitcoin is a tool to reduce the friction of exchange. It happens to work very well for that in our modern internet-centric global instant era. We call such a thing money, or currency.

A couple hundred years ago, gold and silver did that very well. They had properties (scarcity, fungibility, recognizability, durability, divisibility, etc) that made them generally work better than anything else for the purposes of reducing the friction of exchange.

What "backed" gold and silver? The only thing that gave them value was their utility. And so it is, should be, and will continue to be, with bitcoin.

I think you're stuck in the last 200yrs of monetary thinking which has largely been an inelegant stop-gap. Sometime during that period, humans started doing commerce over greater distances and started demanding ability to settle accounts/debts more quickly over these distances. Transporting gold/silver all the time for these purposes started to become a pain. So various entities (merchants, governments, companies, banks, etc) issued their own more easily transportable scrip (paper money), and declared it "backed" by gold and silver.

Doing this was just a way to hack gold and silver to make them far more conveniently transportable (ie, adding the "backed" paper-money layer to the gold/silver infrastructure). The problem, of course, is the entities guaranteeing the backing. Eventually they always screw it up, and fail to honor their commitments.

Now, finally, after 200yrs of bad money and hackish systems/conventions, we have created something which actually functions ideally as money, natively, in our present economic environment. Bitcoin *is* the scarce asset that's *also* easily and instantly portable over any distance. It does not need "backing". Bitcoin *is* the backing.

[chriswilmer]

...

This is very useful: Most of the people wonder who is backing bitcoin, and they are afraid that a currency without any backing will crash to zero one day. Now here is a simple answer: Millions of bitcoiners back bitcoin.

No. Utility "backs" bitcoin. Things have value because they're useful in some context. Bitcoin is a tool to reduce the friction of exchange. It happens to work very well for that in our modern internet-centric global instant era. We call such a thing money, or currency.

A couple hundred years ago, gold and silver did that very well. They had properties (scarcity, fungibility, recognizability, durability, divisibility, etc) that made them generally work better than anything else for the purposes of reducing the friction of exchange.

What "backed" gold and silver? The only thing that gave them value was their utility. And so it is, should be, and will continue to be, with bitcoin.

I think you're stuck in the last 200yrs of monetary thinking which has largely been an inelegant stop-gap. Sometime during that period, humans started doing commerce over greater distances and started demanding ability to settle accounts/debts more quickly over these distances. Transporting gold/silver all the time for these purposes started to become a pain. So various entities (merchants, governments, companies, banks, etc) issued their own more easily transportable scrip (paper money), and declared it "backed" by gold and silver.

Doing this was just a way to hack gold and silver to make them far more conveniently transportable (ie, adding the "backed" paper-money layer to the gold/silver infrastructure). The problem, of course, is the entities guaranteeing the backing. Eventually they always screw it up, and fail to honor their commitments.

Now, finally, after 200yrs of bad money and hackish systems/conventions, we have created something which actually functions ideally as money, natively, in our present economic environment. Bitcoin *is* the scarce asset that's *also* easily and instantly portable over any distance. It does not need "backing". Bitcoin *is* the backing.

I think we're all in agreement here about Bitcoin not needing to be backed by anything. I don't think that was OP's point. He was writing about something less fundamental, which is simply a collective / organized agreement among many participants to stabilize the price of Bitcoin (with a floor, but not a ceiling). Informally, you can refer to this kind of behavior as "backing Bitcoin" but it's really not using the word "backing" in the same category as in the many debates others have about backing fiat/bitcoin/whatever with gold/stocks/whatever.

[MrBea]

It sounds like you are talking about an orderbook with a commitment to buy at a certain price.  How about an oderbook with timelocked buy and sell offers?  Maybe this is what youre talking about

[johnyj]

No. Utility "backs" bitcoin. Things have value because they're useful in some context. Bitcoin is a tool to reduce the friction of exchange. It happens to work very well for that in our modern internet-centric global instant era. We call such a thing money, or currency.

A couple hundred years ago, gold and silver did that very well. They had properties (scarcity, fungibility, recognizability, durability, divisibility, etc) that made them generally work better than anything else for the purposes of reducing the friction of exchange.

What "backed" gold and silver? The only thing that gave them value was their utility. And so it is, should be, and will continue to be, with bitcoin.

Value is not coming from utility, but decided by supply/demand. Utility is only one of the prerequisites for demand, but if the supply is endless, then it will not have value. Email can have great utility but it has almost no value, since it can be duplicated endlessly. Litecoin's utility is as good as bitcoin, but it does not hold 1/20 of bitcoin's value

The value of gold and silver is also backed by supply/demand. If you mass dump all the gold reserves from central banks, the price will crash hard. Today, everything's value is more or less decided by its value on exchanges

[Bit_Happy]

This is a win/win, great idea johnyj.
The price will probably rarely hit the floor since so many people will put orders starting "a little" above.

[jonald_fyookball]

Miners should agree not to sell below certain price. Kind of like Map pricing for retailers. 

[chriswilmer]

I think that even if there was a large commitment to buy Bitcoin at $10, it would have a significant psychological effect. For many people it seems like Bitcoin "could go to zero" but if you had a credible pledge to buy a large amount of bitcoins below $10, then it would be some reassurance (this is also similar to how central banks work when they are a "lender of last resort," ... by promising to mitigate a catastrophe, you can actually prevent the catastrophe from occurring in the first place).

[jonald_fyookball]

I think that even if there was a large commitment to buy Bitcoin at $10, it would have a significant psychological effect. For many people it seems like Bitcoin "could go to zero" but if you had a credible pledge to buy a large amount of bitcoins below $10, then it would be some reassurance (this is also similar to how central banks work when they are a "lender of last resort," ... by promising to mitigate a catastrophe, you can actually prevent the catastrophe from occurring in the first place).

10? Are you mad.  Should be $500

[vipgelsi]

Miners should agree not to sell below certain price. Kind of like Map pricing for retailers. 

Sounds good on paper.

[chriswilmer]

I think that even if there was a large commitment to buy Bitcoin at $10, it would have a significant psychological effect. For many people it seems like Bitcoin "could go to zero" but if you had a credible pledge to buy a large amount of bitcoins below $10, then it would be some reassurance (this is also similar to how central banks work when they are a "lender of last resort," ... by promising to mitigate a catastrophe, you can actually prevent the catastrophe from occurring in the first place).

10? Are you mad.  Should be $500

The higher the price, the less credible the pledge. There's a trade-off.

For example, I can potentially publicize that I will buy all bitcoins sold below $0.001 USD. I could safely stake my reputation on that pledge and many people would believe me... even if it wasn't a really noteworthy pledge. If I tried to say the same thing for $100, without cooperating with a large (and wealthy) community, nobody would take it seriously (unless I was a well known billionaire like Richard Branson).

[DeathAndTaxes]

I think that even if there was a large commitment to buy Bitcoin at $10, it would have a significant psychological effect. For many people it seems like Bitcoin "could go to zero" but if you had a credible pledge to buy a large amount of bitcoins below $10, then it would be some reassurance (this is also similar to how central banks work when they are a "lender of last resort," ... by promising to mitigate a catastrophe, you can actually prevent the catastrophe from occurring in the first place).

Pledges are based on trust.  So you believe making a trustless system now dependent on trust and a centralized trust at that is a good thing.  Lets imagine hypothetically this reserve was managed by say MtGox who defrauded the depositors and used the funds to cover losses in other areas.  How much of a psychological effect do you think the headline "bitcoin reserve losses $5B, bitcoins now worthless" would be?

Another scenario would be one or more governments seizing this reserve.  That is ultimately what ended eGold. The US government physically seized the gold bullion backing the currency.   As such the eGold "tokens" were utterly worthless.   

Bitcoin for the first time removes that counterparty reserve risk and the solution to some is to voluntarily reintroduce it.  No I think I will keep my wealth (fiat and bitcoins) under my own control.

[chriswilmer]

I think that even if there was a large commitment to buy Bitcoin at $10, it would have a significant psychological effect. For many people it seems like Bitcoin "could go to zero" but if you had a credible pledge to buy a large amount of bitcoins below $10, then it would be some reassurance (this is also similar to how central banks work when they are a "lender of last resort," ... by promising to mitigate a catastrophe, you can actually prevent the catastrophe from occurring in the first place).

Pledges are based on trust.  So you believe making a trustless system now dependent on trust and a centralized trust at that is a good thing.  Lets imagine hypothetically this reserve was managed by say MtGox who defrauded the depositors and used the funds to cover losses in other areas.  How much of a psychological effect do you think the headline "bitcoin reserve losses $5B, bitcoins now worthless" would be?

Another scenario would be one or more governments seizing this reserve.  That is ultimately what ended eGold. The US government physically seized the gold bullion backing the currency.   As such the eGold "tokens" were utterly worthless.   

Bitcoin for the first time removes that counterparty reserve risk and the solution to some is to voluntarily reintroduce it.  No I think I will keep my wealth (fiat and bitcoins) under my own control.

There's no discussion about changing Bitcoin in anyway in this thread. I think OP's idea about people voluntarily pledging (which obviously is based on trust) to buy at a certain price has nothing to do with the way you use Bitcoin. You wouldn't even notice if it happened (unless you wanted to). Am I missing something about your complaint?

[DeathAndTaxes]

The OP used the word RESERVE.  I didn't say anything about changing Bitcoin I said "what would be perception if this backing reserve was stolen, seized, and embezzled"?  If the reserves boosts faith and stability then the loss of it would undermine the currency. 

Now if there isn't even a reserve just a pledge well that is even more worthless.  The CHF wasn't held steady by some unbacked pledge.  It was held steady by the government having massive funds on hand (both EUR and CHF) and a willingness to aggressive trade against any movement to hold it steady.   A pledge without any enforcement is worth about as much as an anonymous petition.  I guarantee you the first time the exchange rate falls through the pledge rate that will become obvious.

[DannyHamilton]

I think that even if there was a large commitment to buy Bitcoin at $10, it would have a significant psychological effect.

I'll pledge to buy 1,000 BTC at $1 if the exchange rate falls that far.
I'll pledge to buy another 10,000 BTC at $0.10.
If it drops all the way to $0.01, I'll pledge to buy an additional 100,000 BTC.

Since:
21,000,000 BTC divided by 111,000 BTC per person = 189 people

We can guarantee that the exchange rate will never drop below $0.01 per BTC if we can find another 188 people to make the same pledge.

[chriswilmer]

I think that even if there was a large commitment to buy Bitcoin at $10, it would have a significant psychological effect.

I'll pledge to buy 1,000 BTC at $1 if the exchange rate that far.
I'll pledge to buy another 10,000 BTC at $0.10.
If it drops all the way to $0.01, I'll pledge to buy an additional 100,000 BTC.

Since:
21,000,000 BTC divided by 111,000 BTC per person = 189 people

We can guarantee that the exchange rate will never drop below $0.01 per BTC if we can find another 188 people to make the same pledge.

Right, exactly. Although, I think a system like this requires more than just 188 random people... each person would need to be perceived as trustworthy (a perhaps impossible task). In all seriousness though, if a group of ~50-100 high net worth individuals did a pledge like this you could probably get a reasonable floor in the double digit range.

@Death and Taxes: What the OP is suggesting is a purely voluntary effort. It's not any more centralized than Bitstamp or Coinbase or Mt.Gox are centralized. It's yet another centralized service/concept that exists in the Bitcoin ecosystem. Probably multiple such "reserves" could exist with different agendas that don't cooperate at all.

[DeathAndTaxes]

So a reserve without a reserve and a pledge without enforcement?   That will bring stability?  If anything it confuses the ideal that bitcoin is backed by utility, it is utility not an easily broken pledge which creates value.

I promise (not really) to buy 21 million BTC @ $100 ea.

[chriswilmer]

So a reserve without a reserve and a pledge without enforcement?   That will bring stability?  If anything it confuses the ideal that bitcoin is backed by utility, it is utility not an easily broken pledge which creates value.

I promise (not really) to buy 21 million BTC @ $100 ea.

As you pointed out, anonymous pledges wouldn't work.

If Warren Buffet publicly pledged to buy any amount of BTC @ $100, I would believe him. Ditto with Richard Branson, Bill Gates, etc.

[chriswilmer]

So a reserve without a reserve and a pledge without enforcement?   That will bring stability?  If anything it confuses the ideal that bitcoin is backed by utility, it is utility not an easily broken pledge which creates value.

I promise (not really) to buy 21 million BTC @ $100 ea.

Also... I kind of feel like our conversation is going something like this:

[OP and chriswilmer]: "Hey, let's make an applie pie!"

[DeathAndTaxes]: "Applie pies aren't necessary. Apples are nutritious on their own. Baking apple pies will just confuse people and goes against the principle that apples can be eaten on their own."

I completely agree that any reserve/pledge system is not necessary for Bitcoin to work. However, I don't see how a group acting voluntarily to buy/sell at certain prices in anyway detracts from your ability to use Bitcoin as you like.