If Bitcoin was the worldwide money system...

Suppose that you work and save your bitcoins, to purchase something big like a house or car, but the value fluctuated like crazy, as the stock market does.

Whats to say you wont be rich today, but broke tomorrow? Today you could buy your necessities but tomorrow you would be back to zero?

How can individuals in a society live like that? You would revert back to the caveman system of bartering hard goods for goods in trading because the concept of money would be too erratic.

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    I upvoted you for making an astute (if not blatantly obvious question), but you can expect many irrational anonymous downvotes when ever you speak rationally against Bitcoin in this site. Don't forget there is a lot of money "invested", that is nervous about shining a rational spotlight on weaknesses. – Shelby Moore III Mar 23 '13 at 20:59
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    @Vali, It's precisely because it is not used as a daily currency that it's value changes erratically. The lack of volume allows easy volatility swings. – Pacerier Feb 15 '14 at 18:45

If Bitcoin becomes the predominant worldwide money system, the volatility due to speculative FX would greatly diminish. The problem is that it is not, and will not likely be the reserve currency any time soon (if ever).

I can not think of any counter-measure within the current design of Bitcoin, except to exchange into dollars (or gold since we are in a gold bull cycle) for storing and only use Bitcoin for a short-term holding for transactions. However, many Bitcoiners ostensibly prefer to speculate on its appreciation and hold it.

Every small cap currency has this problem, because of economy-of-scale network effects they will always be measured against the reserve currency.

This is why there was a U.S.A. Treasury official who was rumored to have quipped in reaction to some smaller country's protest, “it’s our currency, but your problem”.

So the small cap currency has no choice but to try to make itself stable relative to the reserve currency, unless it just wants to be a small cap “investment” speculation. It may be impossible to maintain stability in all scenarios. For example, the Asian Crisis of late 1990s was caused by speculative capital flows, that stampeded to Europe to invest in speculative opportunities opened up by the creation of the Euro at the turn of this century.

This is precisely why I propose an alternative design for Bitcoin.

  • What do you mean by "small cap currency"? If Bitcoin becomes the predominant worldwide money system, how can it still be a "small cap currency"? – Pacerier Feb 15 '14 at 18:46

a liquid options market will provide adequate cheap insurance against price fluctuations, while preserving gains in the purchasing power.

an already existing liquid futures market can provide adequate insurance against price fluctuations while preserving the initial purchasing power.

the options market scenario is cheaper in short terms, where one would buy near the money puts relative to their buying portfolio. in a volatile market they would gain value or expire in the money, adequately hedging your portfolio. or they will expire worthless, slightly decreasing your initial holdings.

the flexibility of both of these derivatives denominated in bitcoin is that they can be filled in any fractional contract size. so arbitrary wallet sizes can be hedged adequately without having to worry about multiples of 100 or so.

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