Thursday, November 21, 2013

The Problem with Bitcoin Volatility

Neil Irwin gets it:
Think of it this way. Say your local coffee shop accepted Bitcoin as payment. In the last 24 hours, the shop's price for a grande latte would have risen 50 percent and then fallen something like 15 percent. The coffee shop might have chosen to let its real price fluctuate by leaving the price of a latte at some fixed level (say 0.05 Bitcoin). Or it could have kept the real price unchanged by switching up the nominal price every hour, or even in real time. As in, a latte that cost 0.05 Bitcoin in the morning might have cost 0.03 Bitcoin in the afternoon.
That's called a menu cost -- the hassle factor of constantly changing prices. It is usually discussed in the context of high inflation. In Weimar Germany, for example, there were restaurants where the price you were charged for a meal was higher by the time you were finished eating it than what the menu said when you sat down to order. The menu cost also applies just as much to deflation, or falling prices, as it does rising prices.
In other words, as long as Bitcoin is volatile, it won't be a particularly good currency for use in routine commerce. But why is it so volatile?


13 comments:

  1. Apparently companies like bitpay, or other online wallets, protect against the volatility by fixing the exchange rate to fiat.

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  2. The free market solved this problem already.

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  3. It's volatile because it is going through a phase of "hyper-monetization" and the price discovery process is a bumpy road as it swallows every other currency on its way to potentially becoming the new global reserve currency.

    As previously mentioned, one could exchange out immediately using services like BitPay. Alternatively, if the merchant believes in the long-term appreciation potential, he can simply hold the bitcoins as a speculative investment using his "cost of goods" as a way to acquire bitcoins at a discount.

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  4. Showing your ignorance on Bitcoin again Robert. Multiple enterprises have set up payment systems that INSTANTLY exchange Bitcoin for retailers into the Fiat of their choice. No risks on the vendor end.

    Keep trying Robert. This is getting fun.

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    1. This does't solve the problem. It merely shifts the problem from seller to buyer.

      Keep trying, This is getting fun.

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    2. I explained the risks had shifted away from the vendor. I didn't dismiss them. But explaining what happens after wasn't necessary since the post wasn't about that. I was merely explaining that Wenzel's "Menu Cost" problem was non-existent in regards to Bitcoin.

      Keep the stupidity coming boys.

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    3. anan @3:18

      How does that fix the menu cost problem? even if bitcoin is instantly converted to USD, why wouldn't the bitcoin menu price need to be constantly adjusted? if a coffee is 1 bitcoin at noon, and 1 bitcoin is 1 dollar at noon, the seller gets that 1 bitcoin automatically converted to 1 dollar at noon ... but if 1 bitcoin is then 10 dollars at 1pm, why wouldn't the menu price need to be adjusted? i.e. making it 0.1 bitcoin?

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    4. Simple. There is no Bitcoin menu price. The price is always in fiat. That way the buyer acn choose to pay in Bitcoin or fiat, but the menu stays the same.

      Delete
  5. Why is it volatile? Maybe cause it is nothing but a bunch of 1s and 0s. Fiat still dominates world transactions and thereby something close to a set value is established. What the hell id bitcoin buying? A latte in Kreuzburg? Making donations to Wikileaks? Some hash on Silk Road?
    Oh, yah, and the day trader types are sloshing around in it cause they think they can time the market instead of being the a**hole who BTATFH at $900 the other day.
    At some point someone needs to establish just who does, what precipitates, or when the "mining" is done. Sounds a bit too much like Bernanke and his "printing press".
    Sure buy in at $100 and then it goes to $500? Sounds great. But like anything it's just paper until you take the profit.
    And in case everyone hasn't noticed it's still "valued" in fiat FRNs. Duh.
    I'm all for a worldwide "ledger" so to speak. Bucky Fuller sort of envisioned something like that in critical path. But I think we are a long, long, long ways away from even being able to consider such wholesale reorganization such as that. We'd have to rethink and remake the whole concept of money.
    Perhaps Bitcoin is the genesis of that process. We'll see.

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  6. Is Robert really quoting a guy who quite seriously not only said that BitCoin needs a central bank, but that they should hire Helicopter Ben for the job?

    How about quoting Lindsay Graham next time you want to explain how someone "gets it" about peace?

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    1. RW even quotes Krugman when he gets something right, duh.

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  7. Even with the dramatic rise as of late, the market cap of BTC is under 10 billion dollars. This opens them up to quite a bit of easy manipulation from pretty much organization with political power or money.

    I'll say it again, the entire market cap of BTC can be found in the couch cushions at the CIA, Pentagon, or about 200 various other government agencies. There will have to be A LOT of outside money from individuals before this becomes not true.

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  8. Bitcoin is volatile because it is held by investors who hold on to it, expecting it to rise in value, and so it does. BitMint, LLC is considering to offer a digitized hybrid coin comprised of 90% US dollar, and 10% Bitcoin -- and thereby introduce Bitcoin to the trading public.

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