The next step towards price stability: We back bitcoin

[MrBea]

For any buy commitment to be meaningful in dampening volatility it would have to be near spot.  Any near spot commitment could still create information asymmetry and susceptible to maniplulation namely pump\dump.

What would work in dampening volatility would be ask/bids to be always funded and locked in for a certain amount of time.  This way buy/sell walls would have more meaning and not just be canceled when market moves.

[mysidia]

What would work in dampening volatility would be ask/bids to be always funded and locked in for a certain amount of time.

What are the individual benefits available to a person for making such a pledge?
Which essentially amounts to a market cartel or "trust"   (collusion to not sell a product onto the market below a certain price),  come to think of it.

Volatility and the increased liquidity that results from buyer and seller freedom benefits the exchanges and some traders, financially, however.   Volatility results in bigger spreads and more trades in the short term;   less market freedom implies lower trade volumes,   since buyers simply won't place any orders if they perceive Bitcoin's worth drops below the pledged price  --- it creates a condition where the market gridlocks.

What benefit could be offered in exchange to an individual to compensate them fairly for the disadvantage of choosing to lock-in an ask or a bid,  even after they see the market moving against them?

[elavenil]

It is panic that cause price drop in BTC. Most miners afraid bitcoin value may reduce to zero any-day. So when panic strikes that time they start selling.

[RomertL]

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

Litecoin does not have the same utility as Bitcoin because of the simple reason that you can pay / receive payments from a lot more people with the latter. Ultimately any market price depends of supply and demand, but the day we can send/recive/pay most people/companies with Bitcoin is the day we will have stable (and high) prices. Bitcoin will then have higher utility than Visa, PayPal, Western Union, SWIFT etc.

[mysidia]

Litecoin does not have the same utility as Bitcoin because of the simple reason that you can pay / receive payments from a lot more people with the latter. Ultimately any market price depends of supply and demand, but the day we can send/recive/pay most people/companies with Bitcoin is the day we will have stable (and high) prices. Bitcoin will then have higher utility than Visa, PayPal, Western Union, SWIFT etc.

I don't necessarily expect that fiat currencies will ever become non-volatile with respect to Bitcoin.     In the event that the supply and demand of Bitcoin grows;  the supply and demand of the fiat currencies will shrink over time.

You may see price volatility still,  when you are comparing Bitcoins to fiat at that point,  due to the  instability of the value of the fiat currencies as a whole,  and the relative stability of the value of currencies such as Bitcoin that have a physically fixed or mathematically predictable supply -----  and then, demand only fluctuates with the economy and the health of the network.

Yes.   The bitcoin protocol may need some major changes, however, to ever conduct a tx volume approaching Visa or Paypal's; there are surely problems and pain points involved with scaling that will need to eventually be encountered and then addressed by future work in the development of bitcoin protocols and software.

So a positive but manageable rate of growth is key.

More users and more merchants accepting BTC for goods and services coming on board are a fundamental requirement,  before Bitcoin begins to become more mature and more valuable.

[johnyj]

Ultimately any market price depends of supply and demand, but the day we can send/recive/pay most people/companies with Bitcoin is the day we will have stable (and high) prices. Bitcoin will then have higher utility than Visa, PayPal, Western Union, SWIFT etc.

Suppose that you need bitcoin to do cheap money transfer, but you still need to convert them back to fiat money to spend, this will not help to stabilize the market price since you first buy certain amount and then sell same amount at the other end, creating corresponding sell pressure on exchanges

If bitcoin is the only money in circulation and enterprises use it to pay salary and purchase everything, then the utility of bitcoin will definitely help to stabilize its value. But it is not the case today

[johnyj]

There is another reason for creating such a backing: Central banks/governments around the world will not be happy about this competing currency (It means they will lose the power to tax people by inflation through using fiat money)

The first thing they will try (when they were threatened) is to prevent fiat money flow into bitcoin, like what Chinese central bank did. It already showed its effect

If that does not work, to be more aggresive, they could use their large fiat money reserve to first buy lots of coins slowly, and dump them all on exchanges in a very short time. They can even use lots of fiat money as collateral to borrow coins and short the market. That will crash the market

Because most of the people don't care to maintain the exchange rate for bitcoin, thus under such a scenario, the price could go down to almost zero, thus totally wipe out the bitcoin economy (bitcoin economy is very fragile, because it is mostly dependent on the exchange rate, if exchange rate goes down to $1, then millions of bitcoin holders will lose most of their wealth

Of course, if you have some large enterprise provide bitcoin only sale at a fixed bitcoin price (for example a Tesla costs 100 coins no matter what the exchange rate is), then exchange rate will be pushed back by large amount of car buyers if it drops too low. So another way to stabilize the exchange rate is lots of bitcoin accepting business with fixed bitcoin price. But so far we have not seen any such business

So the most effective way to stabilize the exchange rate is to directly provide buying support on exchanges

[Bit_Happy]

Recently the price is way too stable....yawn.
However, it's hard to be against a solid floor price.

[johnyj]

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.

These are good considerations... I think, eventually you have to trust something, in bitcoin you have to trust the cryptography behind it won't break and the hash power is distributed enough to avoid a 51% attack, so it is not trustless

Fiat money reserve can be distributed, spread among millions of users, so the risk of confiscation is zero. But to guarantee the validity of this reserve is difficult, to make sure this distributed reserve is buying when price dropped to the threshold is even more difficult. I remember that someone has mentioned a P2P artificial intelligence code that will accept bitcoin and automatically clone itself, maybe these kind of code could be setup for each one who are providing the backing for bitcoin, so the code use exchange's API automatically buy coins when the threshold is hit  

But anyway, such a backing, even orally promised, could greatly improve the credibility of bitcoin. This is similar to FDIC promising that account holder will have enough insurance coverage when a bank went down. In fact, if many banks went down, FDIC won't have enough money to cover it. But with this promise, majority of people won't take out their money in the banks when a crisis hit

The money is all about confidence, banks using many tricks to improve people's confidence, so should we. And the strongest confidence will come from a large group of people who are willing to back it with fiat money reserve

Currently we have the largest network back its security, but there are nothing back its value. Unless it becomes the only currency in circulation or a popular investment target, the demand is very uncertain. For normal people, it always feel that the value of bitcoin is floating in the air: can be anything, can be nothing. With a backing, such uncertainty is gone

[RomertL]

Litecoin does not have the same utility as Bitcoin because of the simple reason that you can pay / receive payments from a lot more people with the latter. Ultimately any market price depends of supply and demand, but the day we can send/recive/pay most people/companies with Bitcoin is the day we will have stable (and high) prices. Bitcoin will then have higher utility than Visa, PayPal, Western Union, SWIFT etc.

I don't necessarily expect that fiat currencies will ever become non-volatile with respect to Bitcoin.     In the event that the supply and demand of Bitcoin grows;  the supply and demand of the fiat currencies will shrink over time.

You may see price volatility still,  when you are comparing Bitcoins to fiat at that point,  due to the  instability of the value of the fiat currencies as a whole,  and the relative stability of the value of currencies such as Bitcoin that have a physically fixed or mathematically predictable supply -----  and then, demand only fluctuates with the economy and the health of the network.

Yes.   The bitcoin protocol may need some major changes, however, to ever conduct a tx volume approaching Visa or Paypal's; there are surely problems and pain points involved with scaling that will need to eventually be encountered and then addressed by future work in the development of bitcoin protocols and software.

So a positive but manageable rate of growth is key.

More users and more merchants accepting BTC for goods and services coming on board are a fundamental requirement,  before Bitcoin begins to become more mature and more valuable.

In the long run it's actually not interesting if it's volatile in respect to fiat, what's interesting is stability in respect to the goods I can buy. Maybe in the (distant?) future, the tables will be turned. We will know more or less what we can buy for one Btc, whereas we really don't know what one usd will will buy us. That's when the old farts and laggards finally cave in and give up on fiat. Here's to hoping

[RomertL]

Ultimately any market price depends of supply and demand, but the day we can send/recive/pay most people/companies with Bitcoin is the day we will have stable (and high) prices. Bitcoin will then have higher utility than Visa, PayPal, Western Union, SWIFT etc.

Suppose that you need bitcoin to do cheap money transfer, but you still need to convert them back to fiat money to spend, this will not help to stabilize the market price since you first buy certain amount and then sell same amount at the other end, creating corresponding sell pressure on exchanges

If bitcoin is the only money in circulation and enterprises use it to pay salary and purchase everything, then the utility of bitcoin will definitely help to stabilize its value. But it is not the case today

Obviously the best scenario is when people both get paid and in btc and buy goods with it. But that will probably not be common in at least 5-10 years. Meanwhile it certainly doesn't hurt if people use it to transfer fiat rather than as a currency. Even if converted back to fiat, at any given time bitcoin will be on its way between users, so the netto effect is still increased demand. And maybe more importantly, more people will be introduced to and familiarized with Bitcoin.

[fryarminer]

Do we need a setup like this? The last time that China cried wolf the price dropped a whole $10. Seems pretty stable to me!

[johnyj]

Do we need a setup like this? The last time that China cried wolf the price dropped a whole $10. Seems pretty stable to me!

You don't really need such a setup right away, but you first need to establish such a general consensus or oral commitment that this can be done when a crisis hits, most of the time the market is good enough to maintain a reasonable price

The one who care most about the price floor is the mining equipment maker, since this directly impact their sale and profit. Mining farm owners will also reduce their coin supply on market if the price is too low. If the difficulty keeps rising while the price keeps dropping, soon we might see some reason for them to act together

[MarketNeutral]

OP wants to make Bitcoin not Bitcoin anymore.

I defer to DeathAndTaxes' aforesaid summary of the issues.

[chriswilmer]

OP wants to make Bitcoin not Bitcoin anymore.

I defer to DeathAndTaxes' aforesaid summary of the issues.

What is it with comments like these? There is nothing in OP's idea about changing Bitcoin... NOTHING!

It's just another centralized service that exists within the Bitcoin ecosystem, like a Bitcoin exchange or Coinbase. Does the existence of Bitstamp make "Bitcoin not Bitcoin anymore" ?

[MarketNeutral]

OP wants to make Bitcoin not Bitcoin anymore.

I defer to DeathAndTaxes' aforesaid summary of the issues.

What is it with comments like these? There is nothing in OP's idea about changing Bitcoin... NOTHING!

It's just another centralized service that exists within the Bitcoin ecosystem, like a Bitcoin exchange or Coinbase. Does the existence of Bitstamp make "Bitcoin not Bitcoin anymore" ?

ok. I see your point. I was referring to the spirit of bitcoin. I understand the OP had no intention to change the Bitcoin protocol. I also understand that layers of services may be added atop Bitcoin. That's fine.

I wonder though, what's the point of the OP's suggestion, when we already have such currencies that are 'backed' as he wants them to be? In other words, why not just use government fiat currency? Why bother with bitcoin at all?

Also, the OP greatly over-simplifies the forex markets and how currencies trade against each other. It's not nearly as simple as he suggests.

My gripe is with people who think the legitimacy of bitcoin, and services thereof, ought to be based upon centralization.

It's a philosophical stance, i.e., one that prefers trusting an open-source protocol to trusting a closed-source human brain. Ultimately, there has to be trust with money at some point in commerce and finance, including bitcoin, but eliminating the human aspect as much as possible is a worthwhile endeavor.

[johnyj]

OP wants to make Bitcoin not Bitcoin anymore.

I defer to DeathAndTaxes' aforesaid summary of the issues.

In an ideal situation when every market participants are rational and independent, a distributed backing is not necessary. But in reality, most of the market participants are speculators who are lacking of confidence and emotional, so the market manipulator will easily slaughter them and make the bitcoin market a speculation heaven with great volatility

[MarketNeutral]

OP wants to make Bitcoin not Bitcoin anymore.

I defer to DeathAndTaxes' aforesaid summary of the issues.

In an ideal situation when every market participants are rational and independent, a distributed backing is not necessary. But in reality, most of the market participants are speculators who are lacking of confidence and emotional, so the market manipulator will easily slaughter them and make the bitcoin market a speculation heaven with great volatility

Exactly!  

[johnyj]

It is also worth noting: Fiat money usually have a large economy (lots of goods/services with fixed fiat money price) backing it, so any change in exchange rate of a currency will be stabilized by the corresponding export/import in international trading

For example, if JPY exchange rate drops, then there will be more export for their cars to US, then more US dollars will purchse their JPY to purchase their cars, this will in turn increase the JPY exchange rate, to counter the original effect

But for bitcoin economy, there is no goods/services with fixed bitcoin price label. If exchange rate for bitcoin drops, the price in bitcoin for goods/services at those bitcoin-accepting business also changes, you need more bitcoin to buy the same goods, so there is no corresponding counter effect to bring up the bitcoin exchange rate

So bitcoin's price is very dependent on exchanges. It requires extremely care in this area

[luv2drnkbr]

Congratulations, you've realized that all backing is fake and relying on some "trusted" entity's promise.  "Price stability" is simply large actors attempting to manipulate the market forces in such a manner as to reduce variance, by altering their promises in order to change the psychology of smaller market actors.

But to me, that just means "I may break my promise at any time."  Thanks but I'll take the free market every day of the week.  If you want price stability, I'll happily sign a contract with you to purchase some amount of bitcoins for $50 in a year.  As long as I am reliable, you have a guaranteed floor of $50 on your bitcoin.

There, now you get it...  Futures markets are how the free market does price stability.  And at least with futures market you've signed a contract that's better than "I reserve the right to change my mind" from some large untouchable mafioso.  You actually have legal (or if not that, moral, and importantly, pragmatic) ability to either get what is owed to your or punish the person when he renegs on his contractual promise.

Again, that's far better than the empty promises I hear for nation-state level price stability.  Price stability via inflation and promises is like a gambling game with no variance where the game is the government just takes 7 cents on the dollar.  Bitcoin is like flipping a coin but getting paid 60-40 in your favor.

I'll take the variance, especially when the government's promissory inflation only increases the value of the bitcoin.