Stable prices are important for a new currency to be accepted widely as a tender, which means a new currency should have a stable value. The reason for this is, that money is not only used as a medium of exchange or storage of purchasing power, but also to measure the value of goods and services. Deflation might not be a problem in this context if it is only a few percent, but it gets difficult to compare the value of things when deflation gets too high.

Currently, the supply of bitcoins is increasing, and it will keep increasing asymptotically until 21 million bitcoins are reached. This means, bitcoins would have an approximately stable value if the bitcoin economy would also be increasing asymptotically and stop growing when 21 million bitcoins are reached. The way I see it is, that the bitcoin economy is growing much faster than the money supply which leads to higher and higher prices for bitcoins, one can verify that by taking a look at mtgox. Also I think it's impractical for the bitcoin economy to stop growing when 21 million bitcoins are reached.

My suggestion for keeping the value of bitcoins stable is to change the number of bitcoins generated per block dynamically and link it to some average of the number of transactions that took place.

If you take a look at http://en.wikipedia.org/wiki/Equation_of_exchange, you can see the identity that "money supply" * "velocity of money" equals "price level" * "transactions". To keep the price level (and the value of the currency) stable money supply should increase with the number of transactions, assuming that the velocity of money stays the same.

A great thing about bitcoins is, that the  number of transactions can be calculated exactly from the solved blocks and i believe, also the velocity of money (please correct me if i'm wrong). Traditionally, to use the equation of exchange economists had to use the crude approximation that "price level" * "transactions" equals GDP. This means, that supply of bitcoins can be adjusted exactly to the demand of bitcoins, which in turn means that bitcoins could be the first currency completely free of inflation or deflation, in other words have an absolutely stable value.

I'm looking for people which share a similar interest in bitcoins. Please PM me.


alexk