Topic: A less volatile cryptocurency, what would it take to regulate its own market? (Read 4093 times)

In the free marketplace, there are different products that cater to different interests and different needs.  On the stock market, there are many different types of investment products, and some of those absolutely depend on being based on a stable currency.  If cryptocurrency is able to broaden its appeal, that I view that as a good thing.

Besides, who am I to say that someone else cannot invest their time and energy into any number of altcoins or other efforts.  Let each of us decide for ourselves.

As the market cap goes up, the impact of a few dollars rushing in or out will decline.

Price cannot achieve its most stable regime until the growth declines dramatically.   Currently the fundamental value is doubling roughly every 100 days.  Humans just can't track that very well.  It results in speculative manic spikes above fair value, which lead to subsequent crashes below fair value when they deflate.  This will continue, but will be moderated by inertia as the market cap grows.  It does not make bitcoin a bad place for long-term savings.  It makes bitcoin a bad place for short-term demand deposits.

It will take time (maybe a decade) and use (adoption).
More volume, more use...less freaking out.

I can only address this with sarcasm, stability comes from the market participants, not the inflation algorithm, since the drug supply has been eliminated by the FBI, many investors have are trading without meds, this alone explains the bipolar behavior.  

My conclusion reading all the posts (some posts have been removed) was:
Volatility is a necessary feature not a problem,
The price is based on supply and demand, (a fundamental law in free markets)
The higher the market participation, the lower the volatility.
Bitcoin supply diminishes at a predictable rate, and is constrained,
The demand fluctuates as Bitcoin is a new innovation and it is hard for the market to evaluate.
The FED creates stability in price at the expense of the Business cycle.
Bitcoin will become somewhat volatile and self correct and stabilise as it goes through business cycle.  

In another thread "Impaler"  shose orthodox views regards economics I don't agree with, I think presented the best option to reduce volatility, to paraphrase with license: "maintaining the blockchain is reworded with a Proof of Storage coin, this coin inflates indefinably, Proof of Storage is redeemed for an option to participate in a round of Proof of Work / mining."  The result is the two types of coins end up hedging each other, and the supply (or distribution) is monitored by the market, self regulated by the price.  

Another solution was to have a coin that has an inflation rate that is vastly different to that of Bitcoin for example coins are generated according to a normal distribution function as opposed to Bitcoin's step function. The result is the supply will not track Bitcoin and the supply and demand models could complement each other. An alternate supply model for an alt coin to hedge Bitcoin volatility  is the coins supply could be regulated by the monitoring of the transaction volume on the blockchain.

Do you recall what mechanism Stablecoin uses to address rapid drops?  Is there a reserve built in?

As far as the price is concerned, Bitcoin's price is far from stable.  Viewed from the worst realistic case, someone who'd bought in at 1200 a few months ago has now lost almost half of their investment.  Most people have savings that cannot be exposed to this kind of risk.  In the marketplace, you offer as many alternatives as you can, and different people pursue different solutions and products.

Bitcoin algorithm seems very stable and reliable to me, the volatility we seek to mitigate is an emotional reaction to how stable Bitcoin is. One minute we beleve it isn't worth anything and dump it and the next day it's revolutionary and we go all in, we could use drug therapy to reduce volatility quite effectively.

It's funny to see the alt. Stablecoin that came from this thread exhibiting more volitility than Bitcoin. 

To stop inflation, just stop--or greatly slow--the printing presses.  When there's a price drop below the lowest 24 hour high, you reduce the block reward as long as necessary until buy orders catch up with sell orders.  In an extreme selloff, the low reward rate would continue for while.  Mining difficulty would not increase again for the time because the ASIC miners would use that downtime to mine altcoins on SHA256.

For an altcoin, you build a small reserve of bitcoins encrypted within your own blockchain.  Allow miners to accept either newly generated coins or receive 90% of that value in bitcoins. 

ScamLock, similar to multi-sig's 2-of-2 system, would allow scammed buyers to take recently spent coins out of speculation by leaving them locked (unspendable) permanently.  Scammers and disreputable companies would have less incentive to target buyers because a scorned buyer could always destroy their coins within 24 hours.

A mechanism that is designed to take coins out of circulation does not necessarily reduce its total market capitalization.  Just the opposite.  A coin that is much less likely to lose its value suddenly draws in far more investment from those who have more risk averse savings--which, in my mind, is the whole point of having a cryptocoin.

Bringing the above together, here's how you could peg an alt-chain to the USD:

1) Clients have a list of public keys of exchanges that we trust to be honest about the exchange rate. (This is the most centralized part - people could make their decision about who to trust individually, but the network would reach a consensus.)

2) If the exchange rate drops below 1 *Coin = 1 USD, any node can start converting *Coins into future-money-printing vouchers. This works as follows:
- Create a request based on an existing set of outputs (ie some existing *Coins that they own) which the node is volunteering to take out of circulation.
- Contact a minimum number of exchanges and get them to sign it to prove that the rate has really dropped, for which the exchanges would charge a fee.
- Broadcast the signed request to the network.

3) If the exchange rate goes above 1 *Coin = 1 USD, people with money-printing vouchers can start printing money:
- Create a request based on a set of money-printing vouchers that they hold, created in step (2)
- Contact a minimum number of exchanges and get them to sign it to prove that the rate has really risen, for which they would charge a fee.
- Broadcast the signed request to the network.

4) If an exchange misbehaved - people reported that they weren't getting the rates that the exchange reported, or its key was compromised - nodes (especially miners) would remove their keys from their list of trusted exchanges. People would then be unable to use those exchanges to prove that their money-printing and money-destroying operations were legit. You might also build in a delay between creating new money and being able to spend it, to give people time to detect that an exchange was giving out misleading information and revoke their key.

Obviously the need to have these trusted keys for trusted exchanges is hideously nasty compared to the elegance of the original, free-floating Bitcoin, but note that in practice people transacting in Bitcoins are mostly relying on the exchanges' self-reported prices already, because the stuff they're buying is originally priced in USD and they need to convert it.

Thinking about it, I guess if you could somehow solve the problem of the network knowing whether coins are too high or too low, you could incentivize people to destroy coins by giving them an option to create them in the future when the value was too high. So you'd have a protocol-level operation that changed a spendable output into an unspendable licence-to-print-money-when-needed, at a greater value than the value of the coins you'd destroyed. As long as it was likely that you'd need more money in the future to match new demand and make up for coins that were lost and destroyed, people would be incentivized to take coins out of circulation in the expectation of future profits.

I agree that the value-stabilization mechanism needs to be a part of the protocol and be entirely distributed in nature and not rely on any individual or group to function as a unilateral decision maker.  Rather it would be a bit as you describe a counter-cyclical feedback mechanism that expands or contracts money supply as necessary.

In Freicoin we have implemented Demurrage of 5% per anum, with the equivalent amount mined by miners to maintain a stable monetary base after the initial distribution is completed.  If the miners rewards were raised above or below the amount removed by demurrage it would effectively increase or decrease the monetary base.  We believe this demurrage fee to be beneficial entirely for its effects on velocity and interest rates and we don't use it too adjust monetary base, though its the logical mechanism to use when the base needs to shrink.

I do not believe that hash-rate would be an adequate mechanism, while their is strong indication that hashing establishes a floor to BTC valuation it's dose not reflect well the upward speculative swings.  I think the only way to get a handle on the problem is to run a distributed prediction market for the future value of coins inside the block-chain itself.  If the market predicts inflation less coins are made, if it predicts deflation then more are made.  All users would be able to place bets on either side putting their coins on the line and profiting if they are correct, thus by putting 'skin in the game' we can expect the predictions to be accurate.

Unfortunately I have not been able to come up with a reward structure that works, because all bets and rewards need to be in the the coins of the chain and need to be enforced by the block-chain such that the rewards are correct without any outside verification of the purchasing power.  In essence I need a transaction or financial instrument that can be bid upon and then 'won' by a party such that if their inflation/deflation prediction is correct they profit automatically and the person taking the contrary view loses automatically without any central authority deciding arbitrarily.

BitCoin already HAS a Central Bank, but no one seems to want to call it that.  Their is a entity with total control over the money supply and far from rebelling against this overlord the BTC community practically worships it as a demi-god.  It is Satoshi himself or more accurately his protocol rules that he acts through which control the mining rate and caps the supply at 21 million, everyone agrees that the decisions of this entity are ESSENTIAL to maintaining BitCoin, and when it comes to predictability and trust I must admit it beats the conventional bank hands down, you can look at some code and be sure what the protocol will do, heck we can GRAPH it out to 2140.  But the protocol is thus completely blind to the valuation of BTC and makes no attempt to stabilize that value, being blind and non-responsive dose not make an entity powerless or not a Central Bank, it simply replaces human fickleness with the human fallibility of the initial economic design of Satoshi, a design which is clearly failing at the very important job of stability.

Now oddly enough their is another part of the protocol that we can't predict in the future but which we also have a reasonably good faith in, the difficulty adjustment with hash-rate.  We can be confident that it will take roughly 10 minutes to find a block far far into the future without having any idea of what the hash-rate will be, how can that be?  Because this part of the protocol is an ongoing feedback mechanism that continually adjusts.  This principle must be applied to money supply if we want to be remotely confident of future valuation.

Time and participation. There's nothing you can do about the volatility, the BTC market, like all other markets, is driven by the subjective valuations of its participants. There's no way you can manage other peoples valuations.

The way a currency peg works is that the pegged currency is backed by some supply of the currency to which it is being pegged, and for which it can be in principle redeemed. I can not see that model being easily implemented for any cryptocurrency. It would be possible to peg a fiat currency to a cryptocurrency in principle, but I can see few reasons anyone would wish to attempt this.

I think Bitcoin needs to be the crypto gold standard. Ideally it would be used as a safe place to put money, and to make large transactions.

Whereas a second coin, such as Litecoin or what-have you, would be set to a much smaller fiat value. This coin would be used for your everyday online purchases.

I think about it this way: if each *coin was worth, say 10 cents , or even pegged to USD 0.01, then it would be far less volatile in price, making it a much more a usable currency.  Instead of the fiat-worth price of the coin fluctuating a great deal, instead, it should just be traded according to how many *coins  = a bitcoin.

The problem with Bitcoin (or any coin) changing value so fast is a definitely a problem. Not that BTC doesn't have its uses, but when your currency changes +/- 30% value a day on the regular that's an issue. Yet I don't think we could or would want to get rid of speculators; they play an important role.

OK, I get you. But yeah, you've then taken away all the upside, but have no way to intervene on the downside, so inevitably the value of your coins is going to drop, possibly fast.

Maybe there's a middle way where you only take away _some_ of the upside by printing money but not enough to stop it rising too much, but it sounds like it would be hard to figure out what that was in advance, which you'd have to do if you hoped to specify this stuff in an algorithm rather than having somebody driving.

The difficulty change would get cancelled out when the price went back to target levels. So if speculators priced in this fact, there would be no bubble in the first place and the price would remain stable. Ideally the difficulty would correlate with the rate of change of price: the faster the price (or leading indicator) is rising, the easier it is to mine coins. The faster the price (or leading indicator) is falling, the harder it is to mine coins.

Messing with the mining difficulty with the intention of cancelling out what you were doing later wouldn't do much to deter speculation, because speculators would price in the fact that the difficulty change was going to get cancelled out.

I don't think it's worth doing if it can't be done on a P2P basis. I don't think anyone will use it if it has any centralized authority, and besides it creates a weakness that can be shut down or dismantled.

Personally I think it would be enough to just prevent the price from rising too quickly. Some way to preempt speculative bubbles by decreasing mining difficulty at the right time, then gradually increase the difficulty back to where it was, such that the net effect is that supply increases in sync with its increase in market capitalization, aka demand. But you're right, that doesn't solve the problem of decreases in demand. I don't think people would be willing to bear any demurrage or fees, but perhaps mining difficulty could be increased to very high or infinity in the event of inflation? This would temporarily cap the supply, which would raise the value, but it would be a lot slower than the other direction. Still, if it could be done I think it would work pretty well.

The problem is, how does one measure a currency's value (or change in value) without comparing it to anything else? Are there any measurable, intrinsic monetary indicators that correlate with a currency's value?

Right, that's half the problem. If you could figure out a reliable way to capture the value of your coins you could hook up the money supply (in Bitcoin's case the block reward) to it, but that seems to be impossible (?) without some trusted authority somewhere.

The other half of the problem is that you probably need a way to actually take coins out of circulation if the value of your coins drops. This is particularly true if you've just taken away the upside to holding your coins by making a protocol that prints money to stop it appreciating.

And once we've done those two things, we seem to have reinvented the Central Bank. Which is why the best we could do as far as I can see is to still have multiple Central Banks, and the ability for the community to make a decentralized consensus decision to blacklist any that might misbehave.

Also I think I agree somewhat with the idea that the inability to speculate on Bitcoin's future price makes its price discovery less efficient than it should be. Right now if all people think the BTC price will be $200 tomorrow, it will be about $200 today. But the opposite is not as true... if all people thought BTC would be $1 tomorrow, it will take time to fall because people can't short BTC or buy BTC options. At least not easily.


A larger market cap will help the problem but not fix it. In my opinion, the high deflation of Bitcoin is part of the cause of its speculative bubbles... If people thought it would retain its approximate value over the long term, or gain value slightly, they wouldn't speculate on it and hoard it to make more dollars. They would use it like money directly. Think about how much more useful a very liquid instrument that gets at or above US security rates would be. It would be amazing.


I have an idea to tie the price to the generation difficulty... but I can't figure out how to measure BTC value in a decentralized way that could be captured in an algorithm. The closest I can think of is bitcoin days, but I suspect that's a lagging indicator of price, and what we'd really need is a leading indicator.

In a free market where the practical value as a medium of exchange is set by the protocol and the supply is fixed the only variable is demand, so the price is a reflection of demand.

You can stay with the central bank model if you want to sacrifice savings for price stability.

The fixed supply may be making things worse, but I don't think it's the only problem. If it was you could solve it with an alt chain designed to keep on issuing money forever, but you can't. The core of it is that the value of all the Bitcoins in the world is just incredibly uncertain, depending on the extent of adoption and all kinds of other assumptions. So even if Bitcoin had a formula where the block reward gradually increased, there would still be a huge variation in plausible valuations of any single Bitcoin. And combined with speculative greed / fear, that's going to mean bubbles and crashes.

In theory there may be a possible world where the extent of Bitcoin use has leveled out and become predictable, and we all have contracts and salary expectations denominated in Bitcoins, so it behaves more like a regular currency even without a central bank, but it's hard to see how we get from here to there, and there's a lot of instability in between.

In practice if you want price stability you need information about prices (whether denominated in another currency or in terms of stuff we buy) to somehow feed back into the money supply, so that if prices drop you get more money put into circulation and if they rise you get money taken out. That in turn requires some information about the real world - you can't just capture it in advance in an algorithm. And once you need information about the real world, you get into issues of how to trust whoever is providing that information and prevent them from gaming it.

As any new currency becomes more utilized would it not increase in value? How do you suggest dealing with this issue?

According to this : http://www.quora.com/Economics/Why-are-bitcoins-more-unstable-than-fiat-currencies-like-the-USD
Bitcoins are volatile in part because they have no real futures market, so people can't easily short BTC.

According to me, it's because Bitcoins have been designed to increase greatly in value over time, which encourages hoarding. I can't believe people actually think that massive sustained deflation a good thing for a currency. Nobody can put prices in or truly conduct commerce in BTC. Merchants that use BTC now don't actually use it as a currency... they conduct the transaction in BTC and then immediately exchange it for USD. They shouldn't have to do that, but they do, and they will continue to have to do that for the forseeable future.

In my opinion, there will be another cryptocurrency that is designed to be more stable over the long term than Bitcoin. A Bitcoin killer. I do not think any of the existing alternative coins fulfill this goal, but I at least hope that it will happen someday. Something that takes what Bitcoin got right, and fixes several of the things it got wrong. This currency would be designed to be very nonvolatile in value, or to perhaps deflate at a slow and predictable rate over time.

One thing you could do if you wanted a payment system with a lot of the properties that Bitcoin has - fast, cheap, censorship-resistant - but wanted to peg it to a regular currency or asset (say USD) without a single central authority would be have Central Banks like a traditional currency, but allow lots of them.

A bunch of different people would set up organizations in different countries - probably charities although in theory they could be private businesses - with charters instructing them to buy up coins whenever the price dropped below 1 USD == 1 Coin, and issue coins whenever it went above. Central banks would issue coins by signing data with their private keys, and we'd have a list of acceptable public keys in our clients. If a central bank started misbehaving, we'd blacklist them by removing their key from our client, so they would no longer be able to create new money. If people disagreed about which central banks were trustworthy we'd get a blockchain fork, as we do when there's a change in the Bitcoin protocol, and the losing side would end up having to get with the program.

I've thought of this stabilization problem extensively, and while I do not have a full solution I'm fairly confident in a few things.

First, none of the currently utilized first-order metrics from the block-chain such as hash-rates or transaction rates would be viable as an input to any kind of stabilization methodology, they are both too indirect, too volatile and too easily manipulated for financial gain.

Likewise no pegging to a real world physical commodity is possible because pegs require RESERVES, a central party to manage the reserve and trust in said central party, which entirely defeats the purpose of crypto-currency entirely.  Many painfully stupid proposals have been made along these lines that seem to thing a peg can just be stuck on a token and everyone would just "follow it".

The only way to make a peg is to make it INTERNAL, flat fees are probably the simplest internal peg.  If it cost X coins to send a transaction then it would set a cap on valuation because the cost of using the coin for its intended purpose would rise and this would drive out users and kill any upward price pressure.  But transaction fees are terribad from an economic stand-point (it causes a dead-weight-loss).  Were already seeing people complain about the minimum transaction is getting noticeable to people.  A better solution would be a flat per-time period fees, every wallet would need to pay this fee in order to be able to send coins.  This would give a cap but be far more fair and result in vastly less economic loss.

The value of the currency would never go below the value of the solution to one of those random problems. Say I have an NP-complete problem to solve. I can solve it myself, or I can pay you to solve it for me. Or, I can (as is guaranteed by the definition of NP-completeness) translate it into an instance of the NP-complete problem that this cryptocurrency is based on, and post a special transaction that awards coins to the first person to provide a solution to this NP-complete problem. (Here's a possible weakness: when you go to announce your solution, what stops another node stealing it? In Bitcoin I think this is handled by having the address that generated/fee coins go to as part of the data being hashed, but it seems like it would be difficult to make the solution to e.g. the Traveling Salesman Problem depend sufficiently on these parameters and also be useful as a solution to the original problem. But assume we can solve this, for the sake of the economic argument.) Then, the value of your currency would never go below the value of having one of this class of NP-complete problems solved for you, because you could always bid above the auto-generated problems and have all rational miners work on your problem.

The Internet was not intended to be a currency; the comparison is specious. A currency has needs the Internet does not.

Think of it as stable somewhere between $2 and $10, as a currency. Bitcoins greatest strength is a finite quantity and a distributed p2p world network.

The Bitcoin economy is transforming Bitcoin (by demand) into a store of wealth.

Volatility is a a result of uneven distribution (Bitcoins biggest weakness) on the up side volatility is a sign of good health and should be expected until we have around 2/3s of all total adopters uses Bitcoin.

I agree that the volatility is not a good thing, but I also believe that the price will stabilize over time, especially as Bitcoin is used more for transactions instead of mostly trading.

Volatility is sympathetic of uneven distribution, this resent crash has only redistributed coins into financially strong hands.
Once the strong hands have all the coins redistribution happens as a reword for contributing work. The balance is a fight between labour and capital, labour wins by saving.

I think a simple solution would be to embed some purchasing power index (Big Mac-index for example) into each block. Every client can verify on public sources (Wikipedia, etc.) that the number is correct, or alternatively it can even be hardcoded in the client, since most users upgrade at least once a year and the index will not change that fast.

Now this index can be used to control some of the coin's parameters (difficulty, block-reward, etc.). That way the value of the coin could be stabilized to grow exactly along with the global purchasing power.

The problem with a super-stable coin is that its not interesting for speculants, because they cannot make any profit on it because its non-volatile, and will not rise much in value in the future.

This sounds great, but it will mean the coin will have very few early-adopters, because there is no way to get rich quick, and nobody will be interested in jumping onboard.

Wow one heck of a volatile day wish I had more assets that spread!

Understandably you can always mine and the costs associated will validate against deflationary spirals, but in a fixed currency like bitcoin this is only a temporary measure.


How exactly does mining random problems provide an instant price floor? Please explain. I think with deflationary currencies price floors are not so much an issue.

Back to the original topic of a stable cryptocurrency.

I think it would help to tie the value of the currency to something, and that something might as well be hashrate. The cost of doing hashing or other sorts of computation doesn't fluctuate nearly as wildly. Especially if we're talking about hashing problems for which ASICS already exist.

So we could basically have Bitcoin with the difficulty and block reward fixed forever. If it's too hard to get coins by any other means, you start hashing. Instant price ceiling.

Alternatively, we could try and phrase the whole proof of work part of the system in terms of some NP-complete problem, to attempt to pin the value of a unit of the currency to, e.g. solving a 3-sat problem of a certain size. People could phrase useful work in terms of these problems, and offer a reward of coins that would clear only when someone found a valid solution to the problem, which would then be recorded in the blockchain for them to pick up. Miners would work on these problems, or some sort of network-generated problems that paid a lower rate if there was no real work available. Instant price floor.

Care would need to be taken to prevent people from computing answers and then problems to fit them and trying to use that to reap rewards from the network.

Everything is an experiment, noone knows what their doing really.

No such thing as an economic experiment

Sounds like a hypothesis in need of an experiment.

Thats not really a fair comparison, if the internet only ever became 100 nodes then it would still be the internet, you wouldnt have sudden outages or massive latency like what we're experiencing with bitcoin's sudden crashes and massive deflation. It might be slower but it would be just as stable and predictable as it was in the early 90's. The fact we're realizing here is that when the price does stabilize, even if everyone trades all their fiat for btc, there will still be massive instability as everyone clamors to guess what the true price of an infinitely divisible non-physical non-backed currency is (hint: there isnt one).

"ideal" is different to different people

This.  Exactly.

For those who can't handle this concept here is a simple solution:
1) take the amount of bitcoin you are comforable seeing be worth nothing (yes absolutely nothing) someday
2) put the bitcoins from #1 on a paper wallet, multiple backups, safe storage, etc.
3) sell all the rest of your bitcoins
4) wait 10-20 years.

Tada the growth rate will be much more "managable" and with massively deeper markets the intraday volatility will be much lower.  Either that or Bitcoin will be worthless.  Still the problem is solved either way.


Those worrying about the rapid growth and volatility likely would be trying to plan the growth of the internet circa 1972.  "see we just connected the first two nodes.  We anticipate 100 new nodes to connect to this "internet" in the first year ......

WTF MAN?  100 nodes per year?  That is like 5000% growth rate.  BUBBLE, TULIPS, PARABOLA.   You internet idiots don't know anything about stability.  I going to do make my planned internet.  10% growth per year and minimal volatility.  By the year 2202 finally all 7 billion people on the planet will be connected to the planned-internet (although only 4000 in the first 30 years).  It will be a perfect no volatility line from 2 nodes up to the entire planet.

Which likely would have worked out better:
a) the chaotic explosive growth internet based on the free market.
b) the centrally planned internet based on a stability plan to minimize volatility and manage growth.

 

Obviously. But one of the questions was what would be ideal; I am not claiming that real-world currencies are ideal (though some are better approximations than others,)

Exactly.

Well, no, not true. There is a supply and a demand for a currency just like anything else. Currency is just like any other security, and changes in price mean changes in the optimal amount of investment in it at that time.

The ideal graph for a currency would be a flat line, achieved ASAP after genesis. Assume this is measured against some good benchmark (I won't get into arguing about what that might be--that is beside the point.)The exact value  of one unit is irrelevant, as long as it is stable. A flat line would be boring, but boring is what you want for a currency.

information, adoption and the feelings of the market constantly changing?


There's nothing inherent to any asset that makes it volatile. It's just the whims of the market participants

This old system is fucked, and unstable bitcoin is very stable 25 every 10 minutes.

Brilliant chart. There is indeed simply no way to reach mainstream adoption without crazy growth, and crazy growth absolutely means volatility. There is no point lamenting this.

Likewise, whatever Bitcoin supposedly loses as a currency during rapid price rises (if you even buy this questionable notion*), it must by the same token gain as a store of value. Bitcoin's function as a store of value is probably far more interesting to high net worth individuals, by the way. Especially when that store of value is invisible, can't be confiscated, operates globally without need to be transported or transferred, can be made untraceable, and has no counterparty or legal risk.

Since Bitcoin's growth to mainstream adoption must be jagged, the store of value functionality and the currency functionality may have to take turns on the way up, to some degree.

Not to mention that BitPay and options markets mitigate any risk here for merchants, at least, and in theory for buyers as well.


*Sure, if the price has been stable for a long time then starts growing rapidly, many people will hold off purchases temporarily, until they've made so much more money that they are motivated to spend.

Note the chart says "value" on the y axis and you can choose your own units. Does not have to be USD. Use 40s of malt liquor or pizza rolls.

Don't compare bitcoin with a fiat currency.
Compare with gold then you will understand better how it works. Gold can be used for exchange but also to store value because the supply is limited and with the time will be more expensive to mine it.
Bitcoin is even more limited then gold so it is more suited to store value.
Of course there is another factor that bitcoin still didn't filled all the market gap where it is needed.
Once it will fill this market gap it will grow much slower.

I see it this way: bitcoin is stable, what's really unstable is the old system.

The fact that it's decentralized and has no backing authority is very likely why the price of BTC will never be stable. Nearly every real currency has backing, whether it is silver/gold or governmental authority. Of course, nobody wants authority in Cryptoland so your choices are non-existant for a stable currency.


Even if it gets a use it is still going to be volatile, and it's price is still relative to the Dollar.

@nobby, 200$ is enough to feed an impoverished family for a year. Hardly "Two bucks" 

I have yet to see one person making this complaint fill this out:

One way to create a less volatile currency would be to float the block reward according to hash rate. So as the value goes up it becomes more profitable to mine, more coins get produced and inflation should stabilize the rise. But you would need to determine a target hash rate for the network, and I don't think there is any other way to do this apart from pluck an arbitrary number out of the air and have it rise over time in accordance with Moore's Law.

Bitcoin is still in the early-day process of being bootstrapped into the Internet and mainstream economies. If this phase transitions successfully, bitcoin will be more stable, probably at an exchange rate 100x or more higher than today's. $200 is very small change indeed: call it "two bucks".

What is it that causes exchange rates to be volatile?

bitcoin will be perfectly stable when there will be no other currencies.

Right now we are seeing a huge price jump and naturally people think that this means bitcoin is doing better than ever, but bitcoin first and foremost is a currency and a currency's greatest strength is its stability, which means at this moment bitcoin is doing worse than ever before. How could a cryptocurrency control volatility?