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Comment by acabal | Hacker News Reader

I added a Bitcoin purchase option to Scribophile to test the waters. But I'm interested in a Bitcoin economy, not a USD cash alternative--the situation where a Bitcoin has its own value, not a value dependent on a different currency. For that reason, I decided to fix the price of an upgrade to 2 BTC, not peg it to the dollar like most other sites do.

Unfortunately it seems like that's just not going to work at this point. I set the price at 2 BTC when the exchange rate was $35--like two weeks ago or so. That meant the BTC membership price was about in line with the USD price. But in a few weeks, the value of a Bitcoin has tripled. Since most people using BTC ultimately want to convert it to dollars, this insane instability makes BTC impossible to use for anyone interested in a pure BTC economy. Too bad.

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One reason debt-backed currencies are relatively stable (vs stocks, commodities, and bitcoin) is that they are pegged to an interest rate, in the case of the dollar the (at least what used to be) the risk-free rate of return. You can even think of them as derivatives of the interest rate, for a loose definition of derivative.

This bounds their volatility in a way that bitcoin can't, and makes me wonder if the lack of a similar stabilizing mechanism isn't a long-term flaw in bitcoin's design.

The only way I can see bitcoin ever reaching a similar level of stability is for its market cap to reach a level such that it stabilizes under sheer weight and momentum rather than any built-in mechanic, which could require exceeding that of all other currencies combined (making speculation and market manipulation difficult or impossible), no small feat.

The lack of a stabilizing mechanism is a feature, not a bug. The risk-free rate of return on dollars only exists because the central authority possesses compulsive force of taxation and/or inflationary power, to pay out the return that it guarantees. Bitcoin is of course designed without any central authorities, inflationary power, or compulsive force.

Flipping around the question, how could a risk-free rate of return exist in Bitcoin at all? Nobody has the power to create more currency or forcibly acquire some in order to satisfy a promised payout.

As ever: Bitcoin is a lovely medium of exchange, a horrible medium of account and hence a purely bubbled store of value.

I believe the proper course of action is to make a calculation, involving: 1. a given velocity of money and thus a derived desirable monetary volume for a given economic condition 2. a projected percentage of that economic activity that makes sense in bitcoin 3. a projected economic condition

Even if there is no value in BTC as a medium of account, the quantity of economic transfer it could plausibly come to represent alone has a certain value.

It has the potential to be just as good a medium of account as any conventional currency. The common measure of value of bitcoin will stabilize when it is a more generally accepted medium of exchange.

How low do you think it will crash when the bubble bursts? Do you think it will recover again, like it did last time, or do you this time it will stay low?

I believe if/when it does crash there will be an immediate resurgence in the price per BTC, driven by the people who wanted to invest but thought the price was too high. This is why i'm not all that scared investing rather large sums of money into the Bitcoin economy.

I'm reminded of this: http://krugman.blogs.nytimes.com/2011/09/07/golden-cyberfett...

You need to adjust the price just like you need to ajust prices for any currency. It's just that the value of 1 bitcoin changes faster than other currencies, as it's now being adopted at a quick rate.

A new domain name has been 10 USD from Namecheap for the last decade. A new domain name in BTC however, has varied between 1 BTC and 0.1 BTC in just the past two months.

BTC as a proxy for USD is still useful IMO, it gives us a way to avoid Paypal and other online processors. But for it to be a USD replacement, it needs to first settle down and stabilize.

> it gives us a way to avoid Paypal and other online processors

How do you buy and cash out your BTC? You still have to make all those real money transactions, just with the exchange rather than directly with the merchant. Seems a bit pointless to me.

Touche.

Although, a BTC exchange + BTC merchant together have to only beat out on Paypal's charges. BTC seems to be stable enough that Paypal's 2.9% charge per transaction makes BTC a useful competitor.

That said, now you have to trust both the BTC exchange and Merchant. But that is a bit easier if you can put up with the downsides to BTC (no chargebacks, etc. etc.)

It's not just about fees, Paypal has banned half the world from using their services (India, China) and dictates what you're allowed to sell, arbitrarily seizes money for months on end, and can be easily frauded with no protection for merchants.

You also don't have to trust any exchange, you can walk to your local coffee shop and trade for cash off the books with anybody from localbitcoins.com

In a common scenario where the customer pays 1% to Coinbase and the merchant pays 2.6% to BitPay, Bitcoin comes out worse than Paypal or credit cards.

In a common scenario where Paypal freezes your account for dubious reasons and then refuses to answer your telephone calls or emails, Bitcoin comes out ahead.

In another common scenario where a Senator named Lieberman makes a press release accusing Wikileaks of criminal activity, and other payment processors simply refuse to conduct transactions for you, Bitcoin also comes out ahead.

Bitcoin is now regulated in the US, so it's only a matter of time until Coinbase, CoinLab, and BitPay get Lieberman'ed.

In the common scenario where my supplier screws me over on Ebay, I can put a "cancel order" on my credit card. I have no such recourse to do that with Bitcoins.

Bitcoins offer no consumer protection right now. Once exchanged, the other party holds the money.

OTOH, if you're the supplier, there is no risk for you to go ahead and send the stuff if you were paid in bitcoin.

Precisely. No risk at all. You don't even have to send your stuff to your client, because you've already been paid.

Bitcoins right now puts the consumer / supplier relationship upside down. The supplier is already right... not the customer. I wonder if any customers will prefer to paying BTC over Paypal, especially after they've been defrauded a few times.

Nobody said it was perfect. It's a shame that a decent escrow service doesn't exist.

Don't worry, from what I've heard Coinbase are quite capable of freezing accounts for dubious reasons, along with causing purchases to fail by delaying outgoing payments for days and other similar fun activities.

You can also earn bitcoins, which will become more prevalentover time.

"A new domain name has been 10 USD from Namecheap for the last decade. A new domain name in BTC however, has varied between 1 BTC and 0.1 BTC in just the past two months."

I agree that the value of bitcoins changes faster than other currencies. However, the fact remains that the prices for all currencies change. Domain names are the exception, but inflation adjusts prices upwards of almost all commodities.

"BTC as a proxy for USD is still useful IMO, it gives us a way to avoid Paypal and other online processors. But for it to be a USD replacement, it needs to first settle down and stabilize."

I disagree with your definition of "proxy". Bitcoin fits the definition of currency, not "proxy-currency" in my opinion. It's true that the currency will benefit when it's value will stabilize, as the currency is currently being adopted.

USD changes at a rate of 3% per year, according to the CPI.

Bitcoin is currently changing at a rate of 50% per month.

Volatility is a bad thing for currency. Bitcoin has too much of it right now.

And sorry, as long as BTC keeps changing by 50%+ per month, it will only be a proxy currency. If BTC is to become a true currency, it will need to settle down to ~3% / year volatility, like the other major currencies of the world.

Yeah, this. Right now, BTC is more of a speculative investment than it is a currency. You just can't have insane volatility or even too much uni-directional movement in your medium of exchange.

For a merchant to offer something at a particular BTC price, that merchant would have to update its prices at least daily, if not more so. This to avoid losing money or overcharging himself out of the market, depending on the direction of the currency. It's just not practical at this point.

And, it's a catch-22: As long as it's a speculative investment, it's likely to remain volatile. And, as long as it remains volatile, it's likely to remain a speculative investment vs. a "true" currency.

Thats a bit of a logical fallacy. Just because modern currencies tend to not exhibit volatility, doesn't mean its a bad trait for a currency. In the past, ideas like "menu costs" might make it less favorable because of sticky prices not aligning with a free floating currency, but that isn't as much of an issue anymore. The real issue would be if the underlying fundamentals, IE the supply and demand of the currency, didn't align, making the volatility due to human expectations and not genuine factors.

While I think that a good deal of the BTC volatility is due to human expectations, it just bothers me when people try and use older macro ideas when explaining Bitcoin.

Have you even read the parent post? https://news.ycombinator.com/item?id=5473508

Scribophile cannot sell services based on BTC at the moment, because the BTC market keeps swinging by 50% or more each month. It is impossible to peg the price of anything to BTC right now.

Have you read my post? I even mentioned "menu costs" in my response.

The issue is not that the currency has volatility, but that they refuse to peg the value. Scribophile is facing menu costs, but the menu costs are of their own creation. Simply allowing their prices to fluctuate with value would solve the problem. My point was that technology can make volatility a much smaller issue than it was in the past, hence why using old currency paradigms hinders thoughtful examination of the costs and benefits of a currency like bitcoin.

How would you suggest Scribophile allow their prices to fluctuate with a bitcoin's value? How should they measure the value of a bitcoin?

Setting a target price in USD is the obvious answer, but then bitcoin becomes merely a way of exchanging dollars, not a currency in its own right.

Uh, do you realize big companies already put big hedges for the value of existing currencies to minimize the swings in value? That will not be possible with bitcoins with the current volatility since it will be way too expensive. That is bad for business and therefore also bad for the economy and the currency.

That alone doesn't prevent something from being a currency, it simply changes who prefers to use the currency, altering its supply and demand. Currencies have many characteristics and a "store of value" is just one. A volatile currency, may make a poor store of value and thus less favorable to companies that hold large cash accounts (the ones who have to do the hedging you mention), but this volatility may also make it desirable to other economic actors. By accurately reflecting the supply and demand (IE not having an artificially manipulated price as many global currencies do) bitcoin makes a much stronger medium of exchange than many other currencies in the world. The growing interest out of Cyprus is a great indication of this.

My main point was just that for a traditional controlled currency, volatility would be bad, but for bitcoins, which rely on supply and demand to set the price (this includes speculative demand), volatility is not necessarily a bad thing.

"settle down and stabilize."

Depends how you look at it. From BTC point of view it is the USD that's highly unstable and dropping in value... It's all relative.

Except we can look at the price of computers, milk, eggs, oil, etc. etc.

ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

Across all of our goods, the total change (ie: CPI) between January 2013 and Febuary 2013 changed from 230.280USD to 232.166USD. A difference of 0.8%

In the same period, BTC changed from 13.51 to 20.41, a difference of 51.1%

It's common to value a currency against a basket of other currencies; you would still see BTC's volatility be huge.

Because of currency manipulation, some would rather think of bitcoin's value with respect to a basket of commodities instead of currencies.

Give it time. I happen to think that bitcoin is still stabilizing. Whether it will stabilize at an even higher price than it is now, or "crash" and stabilize at a much lower price, I think it will eventually stabilize.

"I happen to think that bitcoin is still stabilizing."

Considering that this is the largest spike in the history of Bitcoin, I would like to know what makes you think that.

"I think it will eventually stabilize."

So do I, but that is because I think it will eventually fail (and stabilize at $0/BTC).

"Still stabilizing" means "has not yet stabilized". As in, it's trying to find a stability point.

Since Bitcoin's monetary supply is totally disconnected from economic activity, I wonder how it can ever stabilize (except perhaps by accident).

Right now a landgrab is going on. People want to hold some btc. At some point in the future, when everyone knows about btc and purchased as much as they want/can, the price will be more stable and grows only as much as new wealth is created by the global economy and new people are born.

> Right now a landgrab is going on. People want to hold some btc.

How's that different from tulips?

> the price will be more stable and grows only as much as new wealth is created by the global economy and new people are born.

Err...how so? Fiat money can do that, but how does bitcoin correlate to much of anything?

> How's that different from tulips?

The key difference is that the tulip burst happened in the past, so you can be quite certain that it was a speculative bubble.

Isn't the point of bitcoin that its monetary supply is disconnected from economic activity? I thought the "mining" is supposed to be analogous to actual gold mining, so that increases in supply happen very slowly, get more difficult over time, and eventually cease completely. Obviously, many (perhaps most) people think that centralized government currencies (where the government can essentially increase the money supply at a whim) is the best system, but the point of bitcoin is to challenge that system.

Some people think the point of Bitcoin is decentralized detection of double spending and consider the deflationary goldbug mentality a flaw. One could imagine a decentralized inflationary cryptocurrency that uses a closed-loop algorithm to adjust the monetary supply (perhaps in response to difficulty, since the system already measures that). Of course, a stable exchange rate doesn't make speculators rich.

What do you expect? It will not stabilize any time soon but the fact that this is happening means there's a new player joining the game and one that needs to be taken pretty damn seriously.

Out of curiosity, did you see any uptake on that option? A lot of places seem to be adding the BTC option lately, but I haven't managed to find any good sources on how much use there is once the option is provided.

For general (ie not Scribophile info)...

http://www.reddit.com/r/Bitcoin/comments/19t3uq/hey_rbitcoin... is the best that I could find (admin from Reddit talking about Reddit Gold revenue).

It's interesting that the accounting costs more than they bring in (though this is something that could obviously change with increased stability in the BTC/USD rate / increased volume / better processes). Somewhat concerning, considering that they host what seems to be one of the most active/vocal bitcoin communities out there.

Also, http://www.reddit.com/r/Bitcoin/comments/1auzjg/factorio_dev..., though this one may just be a case of not properly targeting for users.

Nobody has bit, and for a few reasons I think:

1. The site audience tends to be a little older and not very tech-savvy, so Bitcoin isn't something that many are interested in comprehending.

2. Since the price was fixed at 2BTC a few weeks ago when 1BTC~=35USD, and now 1BTC~=100USD, people will see this is a raw deal. (The USD price for a membership is $65.)

It's #2 that's the hard part. I'm not interested in accepting BTC just so I can convert it to USD, but since everyone's so focused on the BTC->USD exchange rate as the measure of value for BTC, and since the rate is so insanely volatile, it's impossible for a merchant to fix a "fair" price without auto-adjusting the BTC price to the USD exchange rate.

Auto-adjusting to the rate doesn't require you to cash out to USD, though. You can easily both adjust and hold on to the resulting bitcoin.

wouldn't it be possible to link the BTC price to the going rate at MtGox, so that it always translates to around $35?

Correct, and there are merchant services set up to do exactly this.

I'm curious if you have any experience working with them, and which you'd recommend?

Yeah but that's what I don't want to do--because that makes Bitcoin just a USD proxy, not a currency and economy of its own. I'm interested in BTC as its own economy, but unfortunately the price instability and tendency of most users to exchange for USD in the end makes it impossible to explore that.

Logically speaking it doesn't make bitcoin a USD proxy, a non-currency or "not-a-economy" as you claimed. Fixing the bitcoin price to another currency is a good solution when the value of 1 bitcoin is changing rapidly, as it would take a lot of work to adjust it daily. Besides, you can fix the price to the average of multiple major currencies (like average of euro, American dollar and the British pound).

Every form of currency suffers this problem in the beginning.

There are really only two ways around it: easy convertibility into another currency that people already understand, or direct use-value of the currency commodity itself.

It's a question of social inertia. It's too early to expect people to think in BTC.

A currency can have an economy fully its own and still have prices pegged to another currency. There is a lot of historic precedent for that. You act like its an abhorant practice. Prices will stabalize as the BTC price approaches something more workable on a global scale, like $21,000,000/BTC

Sorry man, IMO it will be years before BTC can function in the way that you want it to. First you need widespread adoption.

How about an automatically-adjusted price scheme where the price varies according to the demand? You might even automatically optimize profits this way.

That is an extremely cool idea. Why worry about setting the exchange rate yourself when you can let the market do it for you!

Not only that is a cool idea, but that is what some Bitcoin shopping carts (eg. see bitcoinstore.com) and payment processors (eg. Bitpay) already do!

The USD used to be on the Gold Standard -- that is, it used to be a proxy for Gold.

Using BTC as a "proxy" currency isn't unhealthy per se -- it's merely a transitionary step until people have adopted BTC more widely.

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