Bitcoin Volatility: Problem Solved?

By Kyle Torpey Aug 29, 2014 6:27 AM EST

bitcoin volatility

NEW YORK (InsideBitcoins) — One of the main criticisms thrown at bitcoin on a regular basis is that it’s too volatile to be used as money. When the price has the potential to skyrocket or crash 20% in a matter of hours, not many people will want to use it for their day-to-day purchases. While there are a countless number of obvious advantages to using Bitcoin as a payment system, the prospect of using bitcoins as money is an idea that not many people are comfortable with right now.

BitShares is the development team behind the idea of DACs (distributed autonomous companies), and the first project to be built on their platform is an attempt to achieve the holy grail of cryptocurrency.

With BitSharesX, users may be able to trade cryptocurrencies pegged to the value of dollars, gold, stocks, or any other real world asset. Unlike other projects built around similar ideas, these new “bitassets” do not require any counterparty risk.

How does it work?

BitSharesX is a rather complex topic, but what makes it possible to issue various bitassets — such as BitUSD and BitGLD — are “contracts for differences.” For any bitasset to come into existence, it first needs to be shorted by someone who owns BTSX (the cryptocurrency for the BitSharesX platform).

Using BitUSD as an example, the idea is that the market for short and long positions on BitUSD will always stay around the real value of the U.S. dollar. The reason that the price should stay near its real world counterpart is that everyone in the system benefits from predicting that this market will act as intended.

For example, the speculators on the BitSharesX distributed exchange have an incentive to bid up the price of BitUSD when it is below the real value of the U.S. dollar because, in order to make a profit, they want to take action before anyone else. Basically, the only logical price to be determined by the market for a bitasset on BitSharesX is the price of that asset in the real world.

The experimental phase

Plenty of criticism has been thrown at the basic idea of BitSharesX because it is a completely new idea in money and finance. Some may even say it is a crazy idea, but there are others who believe the idea is so crazy that it just might work.

The platform currently in place is not dissimilar to Bitcoin in 2009. No one really knows whether or not it can work because the first bitassets were only created a few days ago. This is the kind of system where people will need time to figure out whether or not a bitasset could actually hold its value over the long term.

Even Dan Larimer, one of the creators of the BitShares concept, agrees that this is an experiment. When you throw in the fact that BitSharesX uses a completely new blockchain technology, known as delegated proof-of-stake, it’s definitely going to take some time before the general public will put any kind of trust, money, or faith into the system.

Written by Kyle Torpey
You can follow @kyletorpey on Twitter.

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