Currently the price has fallen more than 60% from the top (to around 12,5) and what I think happened with the bitcoin is that too many people were speculating too much in it. But when the value reached heights far above what it would have without speculators (meaning with only merchants use), a small sell off prompted other investors who had probably made money, to cash out. Thus a small dip would turn into a violent tumble. The bottom of the plunge is where most speculators have sold off the bitcoin and even some businesses who are not totally dependent on the bitcoin might have dropped using it. This is what characterizes a bubble.
What I suggest is to change the rules a bit. So instead of just having the miners create 50BTC ever 10 minutes, we set the creation rate based on the velocity of the money.
This year we are set to have around a 50% inflation rate of the money supply (HUGE). This is may be ok, when the value is shooting up, but it is hard to justify when the market is plunging (inflation) . Rright now, someone is generating 50 bitcoins every 10 minutes, then probably selling them at mtgox driving down the price when everyone is loosing money, why do we want this to happen? This is only ok, when the price is NOT falling.
To explain how the velocity of money is related to the price at mtgox, lets say the price in dollars per bitcoin fell from 15 to 10. Now people have to spend more bitcoins to pay people and buy their goods. Maybe the price of a cake before was 2BTC (30$ before) but a cake now is 3BTC (30$ now), thus more money is transferred when people buy stuff or transact. The total sum of transactions is called the velocity and with a small change, it could be calculated.
When the bitcoin prices rise on mtgox (deflation), the opposite will happen, now people have to spend less bitcoin to buy the same stuff and this can also be seen on the velocity in the same way. So instead of the system just spitting out 50BTC every 10 minutes, the amount could be depend on the velocity of transactions.
(The amount of bitcoin days destroyed should also count so that no one could manipulate the velocity too much by transacting quickly to himself, I will can write a lot about that if people like the general idea.)
In order to be able to correctly establish the velocity we would need an additional small change though. Today all the bitcoin in a block that was not meant for transfer will be transferred back to a new address of the sender, which means we cant really calculate the real velocity. Because people can use block explorer, this doesn't really add any stealth though, is there some purpose for this that I am missing?
So lets say we could perfectly control the inflation/deflation rate, what rate should we aim for? 2% inflation like most developed countries? No. I think 1-3% deflation would be better for the bitcoin. In our economy, we don't really care if people hold our money, as long as there isn't any speculation bubble (everyone buying just because they want to sell off and profit shorty after, driving the price to unsustainable heights). I would rather buy German government bonds for a 2% or 3% return so there is no reason for me to speculate in bitcoin at that level.
But on the other hand I would be comfortable storing my long term savings in bitcoins, with this healthy return rate. Also merchants would be comfortable knowing that they got a healthy and steady interest on the bitcoins they hold in mid transactions. Lastly 1-3% deflation sets a safety margin, because we can easily slow down the appreciation of the bitcoin (deflation) by creating more money, but it is much harder to control the depreciation of the bitcoins (inflation) by taking out money from the system. This means that we can easily control deflation bubbles, but the inflation spiral into hyper inflation is much more dangerous and harder to control, so better be on the safe side and have a bit of deflation instead of a bit of inflation.
Sometimes we will inevitably have a little bit of inflation though and when the amount of bitcoin that gets generated per 10 minutes approaches 0 I suggest that we destroy some percentage of the transaction fees (proportional to the level of inflation of course) when people transact, which would also increase transaction costs further, thereby encouraging less transactions. Still not as effective and easy as controlling deflation, where we can just increase the amount created every 10 minutes.
But I think we would have to always give those computing a minimum wage to keep the system running though (With the current system the miners will get zero per block created). Under the new rules, they would sometimes earn almost nothing and other times earn a lot of money, in effect they would "take" the volatility from the bitcoin price, only they cannot really loose money (though electricity costs money, so maybe a little bit).
Under something approaching hyper inflation over a longer period (will hopefully never happen) to save the future of the bitcoin, an emergency fee of transactions (in percentage, calculated by severity) could be imposed and destroyed, which would stop the hyper inflation very quickly and effectively.
But think about what this would create, a currency that was very stable and normally with a healthy return. In the financial crisis in 2060 big banks and financial firms would store their money sagely in bitcoins, because it would be as stable as gold, but yield a fine interest none the less. We can calculate and control the money supply more efficiently than can any central bank. When the euro and the dollar is falling, some people might even prefer to be paid in bitcoin.
Why only have the advantages of anonymity and decentralization, when we can add stability to the list, without any disadvantages as far as I can see?
Please add your opinion
