Quote from: vector76 on June 19, 2011, 08:31:00 PM

There is a difference between backing and pegging.

Not Really. The market value of a currency is merely a function of the supply and demand of that currency. The "backing" only really comes into play when the demand for the currency falls, so that the price can be supported. The classical gold standard was basically a currency peg to gold.

Quote from: vector76 on June 19, 2011, 08:31:00 PM

Bitcoins do not back themselves because they have no use other than currency. You cannot use them except to spend them, and you cannot spend them without someone else accepting them. Silver dollars and copper pennies have non-monetary value because you can melt them down and you have metal which has industrial uses. Bitcoins do NOT have this type of value.

Agreed.

Quote from: vector76 on June 19, 2011, 08:31:00 PM

Pegging a currency means manipulating the market to maintain a certain exchange ratio.

I don't think pegging a currency is a matter of manipulating the market. It's just a matter of managing the supply. The price is at all times set by the market.

If you are issuing a currency, there must be some supply of it. To say that a fixed supply, or a supply growing at a constant rate is somehow more "free market" than a supply that varies with demand is just silly.

Quote from: vector76 on June 19, 2011, 08:31:00 PM

Because it's a money-losing proposition, market participants are not in a position to peg a currency. Hoping that speculators will effectively peg a currency at a certain ratio is the same as hoping that the market in general will peg a currency. Not going to happen.

How exactly, is it a money-losing proposition? You buy when the price is low, and sell when the price is high. Sounds to me like a way to make money.

Quote from: vector76 on June 19, 2011, 08:31:00 PM

Through mining, you can flood the market with new currency if its value rises above a certain level, but there is no mechanism to contract the quantity of money if its value falls.

Protection against rising value is not really protection (except for borrowers I suppose). Falling values are really what you need to protect against, to give people confidence that their currency holdings won't be wiped out.

I agree that this is a challenge, but if no new currency can enter the market while the price is suppressed, and you expect demand to pick up in the future, there is an incentive to buy more of the currency when it is low. I have a few ideas that I am working on about how to make this mechanism more reliable.

Also, when there is an effective ceiling on the price of the currency, no one would hoard the currency in order to profit from appreciation above this level. Only people who actually wanted the currency as a medium of exchange would want to buy the currency at its parity price. So there could never be a speculative bubble in the currency. This would make sudden falls in demand less likely.

Richard Andreassen

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