Bitcoin technical questions

[Benton D Struckcheon]

Posting this here since I figure someone who knows how this works would be more likely to be here than anywhere else on this site.
So, I'm sitting around watching Bloomberg and they just finished interviewing this guy re the whole Bitcoin mess now ongoing. One good question was how, as a merchant, can you possibly accept payment when the price of a Bitcoin moves around so much? The guy replied there's folks out there hedging it in the same way you'd hedge any fx transaction.
I found this unremarkable, and then realized about five minutes later that you'd need the following to make a hedge work for Bitcoins:

1 - A forward market in Bitcoins.
2 - A money market for Bitcoins with standard interest rates at standard tenors.

So I found the forward market (the overview page shows the latest USD price at 60. That's gotta be hurting someone...). Nothing past 30 days, but maybe there's no need yet.
Can't find anyone who will pay you interest for your Bitcoins though. Does this exist? Is there a Bitcoin equivalent to LIBOR?

[Warpy]

1. If enough people get hurt with today's bubble pop

I have a feeling Bitcoin might find themselves regulated out of business.

I'm always suspicious of any enterprise that expects me to pay real money for fantasy anything, especially fantasy money.

[phantom power]

2. I don't think money markets have emerged yet

I'm just a software guy, but my guess is you'd have to have to achieve a greater penetration before it could support a money market.

Generically speaking, I think that there's nothing existing currencies can do that bitcoins can't do, if people collectively decide to recognize them as legitimate and start using them.

I don't really have any idea whether or not that will happen, but I'm very interested that the experiment has gotten as far as it has. The idea that any significant number of people would attempt to park some of their assets into bitcoins as a reaction to Cyprus still kind of blows my mind.

For the record, I'm personally rooting for the bitcoin experiment to succeed. Also for the record, I've never purchased or used bitcoins for anything.

One of the aspects I'm most interested in is the social process of adopting a currency. Any medium of exchange only works if a sufficient number of people honor it for economic transactions. There's a sort of graph percolation analogy. Bitcoins are currently in the parameter regime where their low penetration is self reinforcing. A lot of people don't trust it and/or aren't interested in it, because not many people use it. But the more people who do use it, the more useful it becomes, thus making it more likely for new people to start using it. Past some threshold, the feedbacks switch from opposing its adoption to favoring it.

The internet works in favor of new currencies to the extent that self-reinforcing groups are now no longer constrained by geography. People interested in bitcoin can find each other and transact with each other via the internet, without having to worry about geographically localized concentrations of adopters.

[quadrature]

10. why does a legit business, need a forward market?

when you can sell (your bitcoin) every day.

just keep your price list
in USD or Euros or Yn.

................
concerning regulation,
to me, BC is legally just barter.

[otherone]

3. kicking for discussion of bitcoins..

I'm fascinated by these things..

[phantom power]

4. background reading:

Wikipedia isn't a bad place to start:
http://en.wikipedia.org/wiki/Bitcoin

The original paper that started it all -- introducing the bitcoin concepts:
http://bitcoin.org/bitcoin.pdf

[Benton D Struckcheon]

5. Yeah but doesn't answer the fx hedge question.

Working on it though. I have an idea how they might do it.

[phantom power]

6. I've been thinking about one possible problem if it worked perfectly well

Assuming a hypothetical world where bitcoins become a widely-accepted currency: They actually have something in common with euros and the EU: imagine you are a country who uses bitcoins as its currency. You have the same potential problem as countries like Greece are currently having -- their economies are bad, but because they don't have autonomous control over their own currency, they can't float the value and help correct.

So, although an open-source decentralized currency has a lot of appealing properties, it can cause certain kinds of economic problems. In a similar vein, I'm ambivalent about the current policy of gradually decreasing inflation and long-term cap. A consistent modest inflation rate has advantages over time.

Of course, that policy could be changed, although it immediately raises the question of currency policy governance.

But then, all currencies ultimately have that same problem -- who sets policy, and why

[Benton D Struckcheon]

7. Well yes I'm actually against bitcoin as an idea.

Currencies need to be closely aligned with the economies they are used in. From that POV, the more local the better, and the euro doesn't pass that test at all. Bitcoin even less. The dollar doesn't either (Texas having the same currency as New York is absurd if you actually sit and think about it for a moment), and it's interesting to note that prior to the Civil War there was no uniform currency in the US, a situation covered in the very informative and entertaining book "A Nation of Counterfeiters", by Stephen Mihm.

[phantom power]

8. It occurred to me last night, there's a solution to that:

Each country can maintain their own bitcoin currency. It's not like you have to have just one. For that matter, there's no real reason that even smaller regions couldn't maintain their own regional currencies.

Obviously, the more you have, the more exchange rates you have to keep track of, but we have computers for that.

That would also keep things in a position where people have plenty of options available if some regional entity is doing a bad job managing their currency. One of the appealing properties of a bitcoin-based currency is that it has a lot more inherent transparency. It's designed to make it impossible (or at least harder) to make management decisions behind closed doors *cough*FederalReserve*cough*

"management" in this case also pertains to how well people are managing their server security, not just actual monetary policy.

[Benton D Struckcheon]

9. Hmm. That's almost brilliant. n/t

[phantom power]

14. Curious, did you do any further thinking about this?

[Benton D Struckcheon]

15. No, haven't been able to figure this out,

sorry about that. I don't know how holding funds in escrow would allow you to hedge against a dive in bitcoins. No one seems to use the spot/forward relationship for hedging, which makes sense since without a money market that pays interest it's not going to be useful. If I ever find a definitive source on how bit coin transactions are hedged, I'll definitely post it.

[eridani]

11. Bitcoin Tells Us Something Important About the Nature of Money

http://readersupportednews.org/opinion2/279-82/16925-bitcoin-tells-us-something-important-about-the-nature-of-money

Which brings us to bitcoin. It is a digital currency, which a certain variety of techno-utopian futurist crowd views as a form of money unencumbered by the shackles of privacy-reducing international anti-money laundering laws and inflation-tolerant central banks. Its value has been extraordinarily volatile over the last several weeks, rising from $20 a couple of months back, to over $250, to around $60 on Friday, with a couple of trading halts in between.

Bitcoin really is a tiny market in the scheme of things, and its recent gyrations mean that the dollar, euro and yen have nothing to fear from the competition. If a currency can lose 75 percent of its buying power in two days, it may not be the best store of value. But it also an important window into the strange and uncomfortable mystery of "What is money," which is a harder question to answer than one might think.

We can all agree that the dollar bills in my wallet are money, as are the quarters and dimes in the jar on my dresser. So are the funds deposited in my checking account. The investment I have in a money market mutual fund probably counts, too; after all, I can write a check from that account and use it to buy things. Gold isn't money, but can be readily traded for money, so it can be a reasonable substitute if you're into that sort of thing. My refrigerator is definitely not money; even though it has value, it would be a lot harder than gold to convert it into money if I fell on hard times.

The common thread here is that money has almost nothing to do with physical form. It also doesn't have much to do with who creates it: The dollar bills were issued by the Federal Reserve, the checking account created by my neighborhood bank, the money market fund was created by a mutual fund manager, the gold was mined out of the ground, and the refrigerator was made by General Electric.

Rather, what makes money money is what you can do with it. If you can purchase the goods and services that you want and need with it, it is money; if you can't, it isn't. Money is memory, said Narayana Kocherlakota in an important 1996 paper (he is now president of the Minneapolis Fed). It is the way we as a society record how much capacity to buy stuff each of us possess. In other words, The Onion was right. Money really is just a symbolic, mutually shared illusion.

[eridani]

12. Krugman: The Antisocial Network

http://www.nytimes.com/2013/04/15/opinion/krugman-the-antisocial-network.html?hp&_r=1&

What is bitcoin? It’s sometimes described as a way to make transactions online — but that in itself would be nothing new in a world of online credit-card and PayPal transactions. In fact, the Commerce Department estimates that by 2010 about 16 percent of total sales in America already took the form of e-commerce.

So how is bitcoin different? Unlike credit card transactions, which leave a digital trail, bitcoin transactions are designed to be anonymous and untraceable. When you transfer bitcoins to someone else, it’s as if you handed over a paper bag filled with $100 bills in a dark alley. And sure enough, as best as anyone can tell the main use of bitcoin so far, other than as a target for speculation, has been for online versions of those dark-alley exchanges, with bitcoins traded for narcotics and other illegal items.

But bitcoin evangelists insist that it’s about much more than greasing the path for illicit transactions. The biggest declared investors in bitcoins are the Winklevoss brothers, wealthy twins who successfully sued for a share of Facebook and were made famous by the movie “The Social Network” — and they make claims for the digital product similar to those made by goldbugs for their favorite metal. “We have elected,” declared Tyler Winklevoss recently, “to put our money and faith in a mathematical framework that is free of politics and human error.”

The similarity to goldbug rhetoric isn’t a coincidence, since goldbugs and bitcoin enthusiasts — bitbugs? — tend to share both libertarian politics and the belief that governments are vastly abusing their power to print money. At the same time, it’s very peculiar, since bitcoins are in a sense the ultimate fiat currency, with a value conjured out of thin air. Gold’s value comes in part because it has nonmonetary uses, such as filling teeth and making jewelry; paper currencies have value because they’re backed by the power of the state, which defines them as legal tender and accepts them as payment for taxes. Bitcoins, however, derive their value, if any, purely from self-fulfilling prophecy, the belief that other people will accept them as payment.

[Benton D Struckcheon]

13. Bitfloor, Number Four Bitcoin Exchange, Closes

http://arstechnica.com/business/2013/04/bitfloor-number-four-bitcoin-based-exchange-shuts-down-for-good/

Once these markets (the regular ones, not the Bitcoin ones) settle down a bit, or maybe over the weekend, I'll post something re the hedging mechanism that's standard for currencies, and then what it appears is done by the vendors of Bitcoin, which looks to be a different method.
And then throw in some ruminations on the nature of currencies and their uses and abuses, in reply to the ones about that above. Might as well have some fun with this.