4 ms·

Can Bitcoin's Price Ever Be Stable?

30 points by rnicholson 12y ago

URSpider94 12y ago
I'm not sure I buy the premise of this article. The supply of Bitcoin in the market is not directly related to the mining rate (the "constant supply" the author refers to) -- instead, it depends on how many people are looking to trade Bitcoin at any given time. Monetary policy is a mechanism to control long-term value of currency, for example to limit inflation or maintain a certain exchange rate with a foreign trade partner. It's not intended to (nor is it able to) damp out short-term fluctuations in foreign exchange markets.
- seliopou 12y ago
  To add, what you're touching on in your response is the "Impossible Trinity" of monetary policy[0][1], which states that any two of the following three options are compatible, but it's impossible to have all three at the same time: a fixed exchange rate, free capital movement, and an independent monetary policy. It seems as though at the start Bitcoin picked one (free capital movement) and only recently has realized that it left something on the table. And a very important something, at that. [0]: http://en.wikipedia.org/wiki/Impossible_trinity http://en.wikipedia.org/wiki/Impossible_trinity [1]: http://www.nytimes.com/2010/07/11/business/economy/11view.html?_r=0 http://www.nytimes.com/2010/07/11/business/economy/11view.ht...
  - deleted 12y ago
    [deleted]
  - lbradstreet 12y ago
    Surely Bitcoin has an independent monetary policy, along with free capital movement. The monetary policy follows the block reward (currently 25 BTC). Of course with this monetary policy and free movement of capital, it is impossible to have a fixed exchange rate, but it does in fact have two out of the three.
hibikir 12y ago
It's pretty difficult to stabilize a cryptocurrency the same way as regular currencies are, if just because there is no good way of cutting the money supply. This makes trying to stabilize the price to some set of goods very difficult, because no matter what you pick, you'll have to cut supply somehow, and that just won't work without something akin to a central bank. The internal measures, unfortunately, are very easy to game. Take, for instance, an option that is now being considered among academics for regular currencies: NGDP targetting. It'd be very easy to check the NGDP of a cryptocurrency: It's really just trade volume. So it'd not be difficult to attach a coin's supply increase to the volume. We could pick a currency's codebase and make a competitor that did such targeting withing the day. The problem is that it would not work. NGDP for a real country is fairly hard to game. It's not as if I can suddenly create real economic activity without major costs to myself, at the very least in taxes and fees. The money is also spread enough that such effort would not really match rewards, even in an NGDP targetting regime. In a cryptocurrency though, it's another matter. Transaction costs are tiny for large transfers, and someone with a large balance would be able to create large volume for pennies. Those that would have an easier time doing this are those with a lot of coin, which are exactly the people that would have a lot more to gain from currency manipulation. I lack any mathematical proof that a stabilization system that is based on what a user cares about, expected value of the coin in a few months/years, is not possible. However I'd be very surprised if there was a solution that worked in the case that a few actors control a significant percentage of the coin's supply, and as it is, this is a characteristic shared by every major cryptocurrencies today. What makes things worse is that many cryptocurrency proponents would consider any of this stabilization mechanisms to be undesirable anyway. So even if we found a way, would the many people that believe that devaluation hurts savers be on board? A currency that did manage do behave a lot more like a traditional currency would probably not be what those people want, regardless of what the state of the art in economics believes. So we are back to Betteridge's law of headlines: Any headline which ends in a question can be answered with the word no.
- seliopou 12y ago
  Nominal GDP, as the name implies, aims to be a measure of production in an economy. This means that shuffling around assets should not count towards nominal GDP. As no real production is happening through the use of Bitcoin (and there isn't really a Bitcoin economy to speak of in the traditional sense)[0], the majority of Bitcoin transactions are speculative, which means people are just shuffling around assets. Transaction volume is therefore not an accurate measure of nominal GDP for Bitcoin. [0]: http://computationallyendowed.com/blog/2013/11/27/bitcoin-deflation.html http://computationallyendowed.com/blog/2013/11/27/bitcoin-de...
pfisch 12y ago
So........how is this not 100% related to trade volume? That is the one and only factor that matters here as far as I am aware.
- URSpider94 12y ago
  My point exactly. One would think that stability would come through one or more groups taking on market-making responsibility and ensuring that there is good liquidity.
kolev 12y ago
Yes, if stabilizes to $0. With speculation being the main driver behind Bitcoin, it's guaranteed that the price will continue to have big fluctuations.
quattrofan 12y ago
Meh, its only maybe an issue if you believe the only use for bitcoin is as a currency, I dont.
- jmnicolas 12y ago
  And what would the other uses be ?
  - cheepin 12y ago
    A lot of people think the blockchain is important independent of the "monetaryness" of the coin it is associated with.
harwoodr 12y ago
I've expressed an opinion about bitcoin (and any other cryptocurrency) that isn't popular, but I haven't heard any compelling arguments against: It isn't a currency, it's a transport mechanism for currency. If you approach it from that perspective, the current value of bitcoin is irrelevant. Sure, if a business wants to be paid in btc, then they'll have to dynamically price based on the current value of btc and then immediately convert to fiat... That also makes it a pretty awesome way to do cross currency conversion without much overhead. Want to pay euros for a product priced in US dollars - (somewhat) easily done with btc... and without (some) of the overhead/fees involved in traditional banking/credit cards. Now, if you're looking at it as an investment - well, enjoy the ride... I could have bought 15 btc in Feb 2013 but instead I bought a bitcoin asic miner - that was promised to be delivered by May... and it showed up in October. If I had bought the btc, it and sold it in Nov/Dec 2013... well, I would have been much happier than I was simply breaking even on the miner. (120x happier, in fact) :)

30 points by rnicholson 12y ago

I'm not sure I buy the premise of this article. The supply of Bitcoin in the market is not directly related to the mining rate (the "constant supply" the author refers to) -- instead, it depends on how many people are looking to trade Bitcoin at any given time. Monetary policy is a mechanism to control long-term value of currency, for example to limit inflation or maintain a certain exchange rate with a foreign trade partner. It's not intended to (nor is it able to) damp out short-term fluctuations in foreign exchange markets.

seliopou 12y ago
To add, what you're touching on in your response is the "Impossible Trinity" of monetary policy[0][1], which states that any two of the following three options are compatible, but it's impossible to have all three at the same time: a fixed exchange rate, free capital movement, and an independent monetary policy. It seems as though at the start Bitcoin picked one (free capital movement) and only recently has realized that it left something on the table. And a very important something, at that. [0]: http://en.wikipedia.org/wiki/Impossible_trinity http://en.wikipedia.org/wiki/Impossible_trinity [1]: http://www.nytimes.com/2010/07/11/business/economy/11view.html?_r=0 http://www.nytimes.com/2010/07/11/business/economy/11view.ht...
- deleted 12y ago
  [deleted]
- lbradstreet 12y ago
  Surely Bitcoin has an independent monetary policy, along with free capital movement. The monetary policy follows the block reward (currently 25 BTC). Of course with this monetary policy and free movement of capital, it is impossible to have a fixed exchange rate, but it does in fact have two out of the three.

hibikir 12y ago

It's pretty difficult to stabilize a cryptocurrency the same way as regular currencies are, if just because there is no good way of cutting the money supply. This makes trying to stabilize the price to some set of goods very difficult, because no matter what you pick, you'll have to cut supply somehow, and that just won't work without something akin to a central bank. The internal measures, unfortunately, are very easy to game. Take, for instance, an option that is now being considered among academics for regular currencies: NGDP targetting. It'd be very easy to check the NGDP of a cryptocurrency: It's really just trade volume. So it'd not be difficult to attach a coin's supply increase to the volume. We could pick a currency's codebase and make a competitor that did such targeting withing the day. The problem is that it would not work. NGDP for a real country is fairly hard to game. It's not as if I can suddenly create real economic activity without major costs to myself, at the very least in taxes and fees. The money is also spread enough that such effort would not really match rewards, even in an NGDP targetting regime. In a cryptocurrency though, it's another matter. Transaction costs are tiny for large transfers, and someone with a large balance would be able to create large volume for pennies. Those that would have an easier time doing this are those with a lot of coin, which are exactly the people that would have a lot more to gain from currency manipulation. I lack any mathematical proof that a stabilization system that is based on what a user cares about, expected value of the coin in a few months/years, is not possible. However I'd be very surprised if there was a solution that worked in the case that a few actors control a significant percentage of the coin's supply, and as it is, this is a characteristic shared by every major cryptocurrencies today. What makes things worse is that many cryptocurrency proponents would consider any of this stabilization mechanisms to be undesirable anyway. So even if we found a way, would the many people that believe that devaluation hurts savers be on board? A currency that did manage do behave a lot more like a traditional currency would probably not be what those people want, regardless of what the state of the art in economics believes. So we are back to Betteridge's law of headlines: Any headline which ends in a question can be answered with the word no.

seliopou 12y ago
Nominal GDP, as the name implies, aims to be a measure of production in an economy. This means that shuffling around assets should not count towards nominal GDP. As no real production is happening through the use of Bitcoin (and there isn't really a Bitcoin economy to speak of in the traditional sense)[0], the majority of Bitcoin transactions are speculative, which means people are just shuffling around assets. Transaction volume is therefore not an accurate measure of nominal GDP for Bitcoin. [0]: http://computationallyendowed.com/blog/2013/11/27/bitcoin-deflation.html http://computationallyendowed.com/blog/2013/11/27/bitcoin-de...

pfisch 12y ago

So........how is this not 100% related to trade volume? That is the one and only factor that matters here as far as I am aware.

URSpider94 12y ago
My point exactly. One would think that stability would come through one or more groups taking on market-making responsibility and ensuring that there is good liquidity.

kolev 12y ago

Yes, if stabilizes to $0. With speculation being the main driver behind Bitcoin, it's guaranteed that the price will continue to have big fluctuations.

quattrofan 12y ago

Meh, its only maybe an issue if you believe the only use for bitcoin is as a currency, I dont.

jmnicolas 12y ago
And what would the other uses be ?
- cheepin 12y ago
  A lot of people think the blockchain is important independent of the "monetaryness" of the coin it is associated with.

harwoodr 12y ago

I've expressed an opinion about bitcoin (and any other cryptocurrency) that isn't popular, but I haven't heard any compelling arguments against: It isn't a currency, it's a transport mechanism for currency. If you approach it from that perspective, the current value of bitcoin is irrelevant. Sure, if a business wants to be paid in btc, then they'll have to dynamically price based on the current value of btc and then immediately convert to fiat... That also makes it a pretty awesome way to do cross currency conversion without much overhead. Want to pay euros for a product priced in US dollars - (somewhat) easily done with btc... and without (some) of the overhead/fees involved in traditional banking/credit cards. Now, if you're looking at it as an investment - well, enjoy the ride... I could have bought 15 btc in Feb 2013 but instead I bought a bitcoin asic miner - that was promised to be delivered by May... and it showed up in October. If I had bought the btc, it and sold it in Nov/Dec 2013... well, I would have been much happier than I was simply breaking even on the miner. (120x happier, in fact) :)