Topic: A Stable Bitcoin Exchange Service - page 2. (Read 3452 times)

But we would only have the exchanges word that they weren't issuing more credit notes it would be impossible to check, and as the value of the note plus the bitcoin would (if everything worked) never change relative to the dollar (providing the change in bitcoin price wasn't greater than the value of the note) you might just as well hold usd which is far more liquid and by definition is less risky.

The fact that the bitcoin price might overrun the note could also be a problem because as the volatility rose the risk associated with this special currency would rise making it beneficial to the purchaser of the currency to ask for more to cancel the risk premium involved. This would mean the value of the currency could fluctuate especially if rumours came out about the exchange itself.

With pure bitcoins the risks are real but visible and observable, with this the risk is still there but harder to quantify and measure as it lies within the exchange and the volatility in the bitcoin itself.

Because how else is the receiver of the coin going to exchange it back for the promised amount? And how can he be sure that the promise is good, unless it is locked-in by the exchange?

We need stability, and trustworthy 3rd parties. This is a simple fact. Economics does not work if you don't trust the people you do business with. We need to focus on ways of establishing and quantifying this trust.

Ok, well the difference as I see it is that there is no central authority that issues anything. YOU make a promise to pay X amount of fiat for X amount of bitcoin, you transfer that promise to someone else along with the bitcoin, and they can exchange the bitcoin for the value of fiat you have promised.

You are the one backing the coin with your own money. You are not relying on a suitably liquid market to sell the coin back into, nor is there a central authority that promises to guarantee against volatility. There is no volatility. There is just the fiat you have promised to pay to your merchant.

Ok, so from what I can understand, you want to create options and the means to easily (automatically) transfer the contracts. I will not comment on the sustainability of such a system, which I doubt for the moment, but I think it can be made to work.

My question is this: why would anyone want to transfer the put contract, too? Why would someone voluntarily give up his protection? Because, in the end, that's what an option is...

I see this scenario to be common: user Joe exchanges 300 USD for 100 BTC+ the put contract for 100 USD @ 3 USD. He buys stuff, maybe he also gets some coins by selling. He will keep the contract until he will want to exchange his coins to USD. If the exchange rate is higher than the contract, he will sell at spot price and be happy. If the exchange is lower than the contract, he will exchange 100 BTC at 3 and the rest at spot. If he doesn't have 100 BTC, he will buy at spot and use his option for some quick profit.

Linden dollars are exchangeable for US dollars or other currencies based on market-determined rates at currency exchanges. I know nothing about linden dollars other than that. Where is the similarity?

Commerce cannot be carried out with smoke and mirrors. It needs to have a stable means of exchanging value. The decentralized nature of bitcoin has many advantages, but providing a stable means of exchange is not one of them. Bitcoin is failing miserably on this front.

Again, I am not an economist, but I do feel that there is a great need for something along these lines. I am not saying that I have come up with the right solution, but some kind of solution is required if we want bitcoin to be successful.

Think of it as a transferrable promise to exchange 1 bitcoin for X amount of fiat then.
No new currencies need to be involved.

Essentially you are correct, but this would all happen automatically under the hood of the merchant API. The end user need not understand that they are buying a promissory note, or transferring it along with their bitcoin via the API. All they need to have is an account with the exchange and some fiat funds.

I get that there is counterparty risk involved, but by making the system transparent and posting realtime statistics, trust could be slowly established. There could not be more guarantee-credits available than there is fiat funds to back them up. Merchants would cash them in immediately. They do not need to exist for very long. As long as both the reserve total and total guarantee credits issued is published in realtime, this will help negate the risk.

You could do the exact same thing, but get rid of the $5 bitcoin. Just sell $100 credit notes which is pretty much what you would be doing.

Again, not quite. There would be no differentiation between individual coins. The important factor is the guarantee-credit. It is transferrable, and is backed not by a central exchange, nor the total market capitalization of the bitcoin system as a whole, but by the fiat currency YOU have paid. You are guaranteeing the bitcoin with your OWN money.

So they buy a bitcoin with a note of credit, really what they are buying is a new currency (your note of credit) with a small token bitcoin tagged on. This kinda removes the whole point of bitcoin being decentralised why not use usd as the holder of your notes cant tell if you are buying off the market and issuing more credit notes for profit.

The new exchange would add massive counterparty risk in my opinion which is the major incentive for using bitcoin.

How are you going to get 1btc for $5 with a guarantee of $100? The only way you will get the guarantee is if you buy the bitcoin from the exchange and pay $100 for it.

You can only sell back however many coins you have already purchased. You can't buy coins from the open market and sell them for $100, as you will not have the required guarantee-credits to do so.

Not quite. It would sell 1btc at a price well above the rate, I don't know exactly what price, but one that would take a significant amount of new money in the floating exchanges to get to. Lets just use $100 as an example, it really doesn't matter.

For your $100, you get 1 btc PLUS a transferrable guarantee-credit that will ensure you can trade the coin back in the future for the price you originally paid.

You can then send the coin, plus the guarantee-credit to a merchant, and they can trade it back using the transferred guarantee-credit for $100. This would all take place seamlessly via a merchant API that businesses could implement on their site.

We should get it to google android market, if many of the smart phone application can only be bought with BTC, then it will have some real economy back it  

How? If the exchange sells 1 btc and 1 guarantee-credit for $100, where is the incentive to sell it for $2 on the open market? The only way you will get your fiat back is to sell it back to the exchange for $100.

The only people who are going to be hurt by this are those buying it on floating exchanges. Example, I buy 1 btc for $100 (plus a guarantee credit for $100). I take that bitcoin and sell it on an exchange for $2. Then I wait for the price to fall, buy another for < $2 and sell it back to the exchange for $100 again. What has happened? I have siphoned off a little from the market capitalization of bitcoin at the floating exchange. This transaction does not hurt the not-for-profit exchange I am suggesting. Equally, if the price rises, I have to pay more than $2 for my new bitcoin, and I have actually made a loss then.

The exchange would not lose money. It receives $100, gives out a bitcoin and a guarantee credit, it then receives a bitcoin and a guarantee credit back and gives out $100. There are no losses. There is no opportunity for arbitrage...

It could just be set very clearly above the market price, lets say around $10, or even $100. It doesn't matter how much the price is, as long as it facilities trade, and the receiver knows he/she will be able to sell it back for a given price that does not fluctuate in the schizophrenic way the floating exchange rate does. The market price is totally and completely irrelevant for the purpose of this service.

Just like a floating rate, the static price of the coin is an agreed upon delusion between the buyer and seller. You pay $10 for a coin, send that coin to a merchant along with a guarantee that they can trade it back for $10. It doesn't matter how many coins we are talking about, or the price of each one, as long as the transaction can be completed without a loss of the agreed upon purchasing power of the bitcoin.

I don't get it. If you have to keep readjusting your price to float it above the market price, then how will it keep a stable price? What is the necessary margin you will need to cover the market fluctuation? You will have to keep adjusting to stay above that margin.

Why do they both have to be better off after a trade? As long as neither is worse off, bitcoin can be used properly in a real economy. The scenario you are suggesting is fictitious. This is NOT what we have now. Do you think people WANT to sell at $2 because they are better off? Of course not, they have no choice in the matter if they want to remain solvent.

There just is not enough liquidity in the exchanges to maintain stability for it to be feasible as a legitimate means of exchange. The way to get around this is to provide liquidity yourself with your own fiat for every transaction you carry out.

Yes, of course a commodity market is not about guaranteeing risk-free investment. But bitcoin is a currency, not a commodity. It has no inherent value other than it's purchasing power. It's function is to facilitate economic transactions, which themselves may be profitable. It is not supposed to be a tool to reward speculators for hoarding. It is NOT an investment vehicle, and I wish people would get that out of their heads.

These misconceptions are dragging the whole community down, and you have been round the block long enough to know better.

The rational thing about a free-floating market is that the buyer and seller transact at a price that leaves them both better off.

If I judge the value of a bitcoin to me to be $10, and someone else decides that the value of a bitcoin to them is $8, then they can sell to me at $9 and we're both happy.

A market isn't about guaranteeing anyone a risk-free investment, or anything like that.

This is not about controlling the market, it is about ensuring price stability for consumers and businesses who wish to use bitcoin as a means of exchange. They cannot do that reliably with bitcoin at present, because of the inherent instability of the exchange market.

You say that controlling a market means it is not rational, but what is rational about a free-floating market? What is rational about people buying bitcoin at $30, then watching their investment slowly decline all the way down to $2 without selling it? This is not a rational act. Both of these systems are as irrational as one other, but the latter is much more prone to excessive levels of panic, mania and delusion. With a pseudo-static bitcoin exchange, at least excessive irrationality can not affect the price and you get the added benefit of being able to actually use your coins without risk, because they are backed up by your money via guarantee-credits, so merchants can be sure that their bitcoin can be exchanged back for the same amount of fiat currency.

Think of it as a market that is deluded (i.e. not rational) but in favor of consumers and businesses, rather than speculators.

I understand that this can be done by using an options market (does one actually exist?) but what I want is to create an exchange that takes care of all of this for you and simultaneously facilitates smooth economic activity by providing a merchant API and without the requirement of having a degree in economics just to ensure that you don't lose any of your money after you buy bitcoins to make a purchase. Call it an options market if you want, as I already confessed, I'm not an economist.

I'm not saying all the exchanges should do this, but for businesses who want to accept bitcoin as a means of payment, they could use this exchange to ensure price stability until the transaction is complete. The price paid for a bitcoin doesn't matter so much if this is all you want to achieve. People are still free to trade as much as they want on the irrational floating markets, and the static price of, say $3, would not affect this floating price as you cannot sell into it without having bought at that price first.

It is simply a way of facilitating economic activity without having to rely on a widely volatile and thinly traded exchange markets such as MtGox and others to get your fiat out once the transaction has been completed. If these markets were bigger and had more people and money involved in the collective buy/sell decision making, this would not be necessary. But at the moment, it is necessary, because we cannot offer bitcoin as a realistic commerce solution without the price being stable at least over the medium term.

Why should we let exchanges determine the fiat value of a bitcoin when it is not at all necessary, accurate or for that matter... wise, to do so?

Not necessarily. As I said, if the exchange price rises above the static price it would be reviewed upwards and held at a level constantly above the best exchange rate available anywhere else. This would only apply to subsequent transactions. If someone manages to sell all their bitcoins for more on another exchange, when the price inevitably collapses again, they still have a $3 guaranteed price to which they can sell into by buying coins from cheaper exchanges, thus replenishing the coin reserve.

The key point is that this would be a not-for-profit exchange that will self-regulate and ensure price stability for economic activity. The fees charged would be just enough insurance to cover any monetary losses and expenses. If we could work the system out properly, I think that it could be stable over the long term.

And anyway, there are plenty of people out there with thousands and thousands of coins, early adopters who believe in the currency more than they care about short term fiat profit. We just need some philanthropist to allow their coins to be used for the good of the community. After all, they may become worthless without these controls.

A market this irrational needs to be controlled in my opinion. It is the only way to facilitate good honest economic activity.
In the end, that is what will determine the fate of bitcoin.