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It has very limited use as a serious transaction system while there is so much volatility. Prices are therefore pegged to local currencies, and if you want to k

by polshaw 12y ago

It has very limited use as a serious transaction system while there is so much volatility. Prices are therefore pegged to local currencies, and if you want to keep that then it's no longer low cost because conversion to/from local currency costs just as much. The speculation and (eventually) deflationary nature of BTC significantly hinders the chances of it ever stabilising, and therefore a true 'bitcoin economy' emerging (ie. where people do not need to peg to or convert to local currencies). Then there is the fact that it is not a limited good-- someone could quite easily come along with a BetterCoin making BTC almost useless-- there are various things that could be improved, eg privacy, or the slow confirmation times. E: also, there will be an 'oversupply'-- Whoever buys these bitcoins won't be buying other BTC because of it -- it's irrational to think that the auction is creating a significant new demand that wouldn't have existed otherwise! Selling over weeks/months would still affect the price, although more in the normal supply/demand manner than causing a crash/panic. But that could be happening before any of these BTC are sold anyway!

ryan_j_naughton 12y ago
All very good points. The volatility is the greatest hindrance to it being a viable transaction system. I'm hopeful that well functioning derivatives (futures, options, etc) will help to stabilize the price (as is the purpose of a futures market); however, that would rely on the traders having effective forecasts on supply and demand which I view as unlikely. Related to that, I thought of an idea a while ago for a non-profit to create a new cryptocurrency that is by design pegged to the USD. Whenever anyone wants a unit of this currency, they can buy one from the non-profit for $1 and the non-profit will mint a new coin. Similarly, if you want to sell the currency, the non-profit will always buy it for $1. The non-profit must keep the appropriate reserves (ideally, they would keep 100% of the US dollars bought or have always sufficient credit lines). With this design, the proposed cryptocurrency will always maintain a $1 peg, removing the insane amounts of volatility. I know that is will be hated by all those in the btc community as it brings in a centralized monetary authority who controls minting coins; however, there is a huge value to an extremely low cost transaction system that is decentralized and pseudo-anonymous (which this would still be). The central authority would not be capable of destroying coins or changing blockchain history, only minting new coins (and as per their charter, only when they are provided $1USD for the coin). People would not have any obligation to use this monetary authority to exchange coins, and surely other exchanges which were more user friendly would appear. Simply, by an entity existing which will always buy at a given price or sell at a given price, it will cause the intended effect without having to have any central role in the decentralized transaction system.
- dllthomas 12y ago
  I had some ideas for mechanisms to peg without centralization. I stalled out at the question of what to peg to...
  - logicallee 12y ago
    a basket of currencies (real-world ones backed by governments, e.g. http://en.wikipedia.org/wiki/Currency_basket http://en.wikipedia.org/wiki/Currency_basket , where the US dollar, pound sterling, etc, etc, all have a weighted percentage.) but what on earth did you have in mind for a mechanism to do a peg without centralization?
    - dllthomas 12y ago
      I don't have room in this margin (actually, mental-bandwidth constrained right now) but the gist is 1) mechanisms to expand and contract the supply of money in circulation, in response to 2) mechanisms to determine whether money is over- or undervalued. A number of methods for the former should spring to mind. For the latter, my thought is that you add a type of mined block that contains proof of an outstanding bid and offer in each of the products you're pegging against, verified by some exchange/clearinghouse[1]. Such blocks would be accorded "difficulty" according to the tightness of the spread in each of the products and the size of the orders, as well as the subjective trustworthiness of the backing institution (including a penalty for being too common in the chain relative to others). Of course, if it's known that the currency will correct itself in the long term, market makers would be expected to keep it stable in the short term. Countless other details, but that's the gist... [1] Unfortunately, this is not completely trust-free, but a level of decentralization is maintained by encouraging multiple such institutions, and of course people can broadly recognize and react when one becomes untrustworthy, and it should be fairly observable when they do.
      - logicallee 12y ago
        thanks. This is interesting - you should write it up as a formal algorithm and publish it, so that it could get some eyeballs.
mrb 12y ago
The arguments you make (speculation + deflation) have been discussed many times. The answer is always the same. Bitcoin proponents argue that they are not a problem because: 1. As the use of Bitcoin increases over time, as the exchange markets become bigger and deeper, as economic activity is surpassing speculative activity, etc, the effect of speculation are becoming smaller and smaller. There is evidence that this happening right now: graphs showing the volatility level of Bitcoin (at a coarse level: 6 months) is decreasing... I can't find a link at this moment unfortunately. 2. Although deflation is, as of today, "generally" believed to be detrimental, it is disputed. For example the very famous 1939 paper "A Program for Monetary Reform" argues (amongst many things) that deflation is healthy and normal[1]. One thing is certain: our understanding of financial systems is imperfect, and just because more economists think, today, that deflation is generally negative, does not mean it is true. Bitcoin is an experiment that will perhaps disprove it. [1] "Some authorities regard prices falling, to some extent at least, with technological improvements, as a proper result of a successful monetary policy" http://en.wikipedia.org/wiki/A_Program_for_Monetary_Reform http://en.wikipedia.org/wiki/A_Program_for_Monetary_Reform
- polshaw 12y ago
  Bitcoin proponents tend to have a vested interest and can be.. less than objective. @1: A trade alone does not help BTC stabilise. We ARE seeing an increase in BTC trade, but all of this is pegged to local currency, and usually traded out for that immediately. As it is held for a very short period, there is no real effect on price, and is essentially the same as cashing out.[1] What might help BTC stabilise would be if there were a true, significant BTC economy, that is, items priced in BTC, rather than pegged to local currency. When I wake up tomorrow I can reasonably expect my loaf of bread is going to cost the same as it did when I went to bed. But that can't happen (yet) with BTC, because pegging goods to BTC carries far too much risk due to the volatility. Frankly, I can't see an attractive way to get to a situation where there is a substantial, viable BTC-first economy-- displacing local currencies as the first-choice isn't going to be easy. The only thing affecting the price of BTC is people buying and continuing to hold BTC (ie, in the absence of a real BTC economy-- speculators). Further, I’m sure you can paint BTC stability as improving/worsening based simply on altering the time frame involved. The fact is the volatility is way too high (for consistent pricing), and we certainly don't have enough evidence to predict the future. You might have thought it was stabilising in October of last year before all hell broke loose. @2: Not really a coherent argument there. An upward price trend (existing for whatever reason) encourages hoarding, which reduces liquidity. This creates a feedback loop, resulting in bubbles and crashes. Deflationary + speculation inherently leads to this, and we've seen it over and over already with BTC. Again, there is a chicken/egg problem because only speculators are interested in it, making it volatile, making it no good for non-speculators, which keeps it volatile! I think the best we could hope for is a little worse than gold (as it continues to be mined), which AFAIK still carries a significant amount of instability. All this is not to say that bitcoin can't, or won't, be a long term success. It may well be; it has first-mover advantage, there is significant vested interest in it succeeding from those who have bought in, and it has a vast computing army. But it could be displaced. Or marginalised by an unlimited number of clones. 1. Ironically it is in a way simply passing half the transaction cost onto the customer.
zik 12y ago
Not really. I bought my lunch in bitcoin today. Bitcoin transactions are usually priced in dollars so the volatility is immaterial to its use in transactions.
- mpyne 12y ago
  > Bitcoin transactions are usually priced in dollars so the volatility is immaterial to its use in transactions. That then leaves the question of why not simply use the non-volatile currency directly. Bitcoin would still have the advantage of being able to transfer money more easily than a wire transfer, but that wouldn't matter for the use case of paying for lunch.

by polshaw 12y ago

ryan_j_naughton 12y ago

All very good points. The volatility is the greatest hindrance to it being a viable transaction system. I'm hopeful that well functioning derivatives (futures, options, etc) will help to stabilize the price (as is the purpose of a futures market); however, that would rely on the traders having effective forecasts on supply and demand which I view as unlikely. Related to that, I thought of an idea a while ago for a non-profit to create a new cryptocurrency that is by design pegged to the USD. Whenever anyone wants a unit of this currency, they can buy one from the non-profit for $1 and the non-profit will mint a new coin. Similarly, if you want to sell the currency, the non-profit will always buy it for $1. The non-profit must keep the appropriate reserves (ideally, they would keep 100% of the US dollars bought or have always sufficient credit lines). With this design, the proposed cryptocurrency will always maintain a $1 peg, removing the insane amounts of volatility. I know that is will be hated by all those in the btc community as it brings in a centralized monetary authority who controls minting coins; however, there is a huge value to an extremely low cost transaction system that is decentralized and pseudo-anonymous (which this would still be). The central authority would not be capable of destroying coins or changing blockchain history, only minting new coins (and as per their charter, only when they are provided $1USD for the coin). People would not have any obligation to use this monetary authority to exchange coins, and surely other exchanges which were more user friendly would appear. Simply, by an entity existing which will always buy at a given price or sell at a given price, it will cause the intended effect without having to have any central role in the decentralized transaction system.

dllthomas 12y ago
I had some ideas for mechanisms to peg without centralization. I stalled out at the question of what to peg to...
- logicallee 12y ago
  a basket of currencies (real-world ones backed by governments, e.g. http://en.wikipedia.org/wiki/Currency_basket http://en.wikipedia.org/wiki/Currency_basket , where the US dollar, pound sterling, etc, etc, all have a weighted percentage.) but what on earth did you have in mind for a mechanism to do a peg without centralization?
  - dllthomas 12y ago
    I don't have room in this margin (actually, mental-bandwidth constrained right now) but the gist is 1) mechanisms to expand and contract the supply of money in circulation, in response to 2) mechanisms to determine whether money is over- or undervalued. A number of methods for the former should spring to mind. For the latter, my thought is that you add a type of mined block that contains proof of an outstanding bid and offer in each of the products you're pegging against, verified by some exchange/clearinghouse[1]. Such blocks would be accorded "difficulty" according to the tightness of the spread in each of the products and the size of the orders, as well as the subjective trustworthiness of the backing institution (including a penalty for being too common in the chain relative to others). Of course, if it's known that the currency will correct itself in the long term, market makers would be expected to keep it stable in the short term. Countless other details, but that's the gist... [1] Unfortunately, this is not completely trust-free, but a level of decentralization is maintained by encouraging multiple such institutions, and of course people can broadly recognize and react when one becomes untrustworthy, and it should be fairly observable when they do.
    - logicallee 12y ago
      thanks. This is interesting - you should write it up as a formal algorithm and publish it, so that it could get some eyeballs.

mrb 12y ago

The arguments you make (speculation + deflation) have been discussed many times. The answer is always the same. Bitcoin proponents argue that they are not a problem because: 1. As the use of Bitcoin increases over time, as the exchange markets become bigger and deeper, as economic activity is surpassing speculative activity, etc, the effect of speculation are becoming smaller and smaller. There is evidence that this happening right now: graphs showing the volatility level of Bitcoin (at a coarse level: 6 months) is decreasing... I can't find a link at this moment unfortunately. 2. Although deflation is, as of today, "generally" believed to be detrimental, it is disputed. For example the very famous 1939 paper "A Program for Monetary Reform" argues (amongst many things) that deflation is healthy and normal[1]. One thing is certain: our understanding of financial systems is imperfect, and just because more economists think, today, that deflation is generally negative, does not mean it is true. Bitcoin is an experiment that will perhaps disprove it. [1] "Some authorities regard prices falling, to some extent at least, with technological improvements, as a proper result of a successful monetary policy" http://en.wikipedia.org/wiki/A_Program_for_Monetary_Reform http://en.wikipedia.org/wiki/A_Program_for_Monetary_Reform

polshaw 12y ago
Bitcoin proponents tend to have a vested interest and can be.. less than objective. @1: A trade alone does not help BTC stabilise. We ARE seeing an increase in BTC trade, but all of this is pegged to local currency, and usually traded out for that immediately. As it is held for a very short period, there is no real effect on price, and is essentially the same as cashing out.[1] What might help BTC stabilise would be if there were a true, significant BTC economy, that is, items priced in BTC, rather than pegged to local currency. When I wake up tomorrow I can reasonably expect my loaf of bread is going to cost the same as it did when I went to bed. But that can't happen (yet) with BTC, because pegging goods to BTC carries far too much risk due to the volatility. Frankly, I can't see an attractive way to get to a situation where there is a substantial, viable BTC-first economy-- displacing local currencies as the first-choice isn't going to be easy. The only thing affecting the price of BTC is people buying and continuing to hold BTC (ie, in the absence of a real BTC economy-- speculators). Further, I’m sure you can paint BTC stability as improving/worsening based simply on altering the time frame involved. The fact is the volatility is way too high (for consistent pricing), and we certainly don't have enough evidence to predict the future. You might have thought it was stabilising in October of last year before all hell broke loose. @2: Not really a coherent argument there. An upward price trend (existing for whatever reason) encourages hoarding, which reduces liquidity. This creates a feedback loop, resulting in bubbles and crashes. Deflationary + speculation inherently leads to this, and we've seen it over and over already with BTC. Again, there is a chicken/egg problem because only speculators are interested in it, making it volatile, making it no good for non-speculators, which keeps it volatile! I think the best we could hope for is a little worse than gold (as it continues to be mined), which AFAIK still carries a significant amount of instability. All this is not to say that bitcoin can't, or won't, be a long term success. It may well be; it has first-mover advantage, there is significant vested interest in it succeeding from those who have bought in, and it has a vast computing army. But it could be displaced. Or marginalised by an unlimited number of clones. 1. Ironically it is in a way simply passing half the transaction cost onto the customer.

zik 12y ago

Not really. I bought my lunch in bitcoin today. Bitcoin transactions are usually priced in dollars so the volatility is immaterial to its use in transactions.

mpyne 12y ago
> Bitcoin transactions are usually priced in dollars so the volatility is immaterial to its use in transactions. That then leaves the question of why not simply use the non-volatile currency directly. Bitcoin would still have the advantage of being able to transfer money more easily than a wire transfer, but that wouldn't matter for the use case of paying for lunch.