[EduardoBautista]

Imagine you buy a house worth 100k one day in bitcoin. The next day, bitcoin increases its value 25%. That same house is now worth 75k, but you still owe 100k plus interest.

This is one of the biggest flaws in bitcoin that people just can't seem to understand (or just don't _want_ to understand). You can't have a good loaning system with an unstable currency.

Edit: I posted a better explanation below:

"You take out a 100k mortgage in USD. Over the next year, the USD suffers suffers from extreme deflation (increases in value). It is now worth twice what is was worth last year. As a consequence, wages begin to go down. Now let's say you were earning 50k a year while paying down a 100k mortgage (not assuming a downpayment, this is for simplification). Next year, you are now being payed 25k but still owe that 100k mortgage. And the house is now worth 50k."

[lucb1e]

> The next day, bitcoin increases its value 25%.

Yeah because the Dollar was perfectly stable when it was five years old and accessible to only a select percentage of the population (how many people are really able to use a wallet with the cryptic addresses? Not my parents at least).

Besides, when many people buy their house in Bitcoin the market cap would be much higher and the price would not fluctuate 25% in one day. Not without a fatal flaw in the algorithm or World War III anyway.

The only reason Bitcoin is unstable is because it's not used by that many. That's not a flaw from Bitcoin, that's the network effect. Like Facebook versus Google+, though that's a bad comparison because G+ has no game-changing advantages, at least none that Facebook couldn't replicate.

[rhino369]

That's not the ONLY reason bitcoin is less stable. The dollar is actively managed to be very stable over the short term.

Gold is pretty volatile compared to the dollar as well, and it's hugely traded.

[superuser2]

Lending and credit are fundamentally, irreconcilably opposite to anonymity. It doesn't make sense to talk about taking out a loan in a decentralized/anonymous cryptocurrency system.

A reputation system (credit reports/scores) only works because each human who borrows money can have at most one identity. In an anonymous/pseudonymous system that cryptocurrency advocates want, I could take out a loan, spend it, and then take out another loan with a new pseudonym (or Bitcoin address) minutes later.

There is no threat of inability to get credit in the future. Even if you had agents willing to commit violence to coerce people to pay their loans (or, if we're in civilization, a state that will do asset seizures and wage garnishment with some semblance of due process) you wouldn't know who in the real world to point them at. Why would anyone lend Bitcoin?

If you were going to do that, you would need to verify government-based identity and use government to recover your money from deadbeats. In which case, why are you using Bitcoin anyway? At that point you could just lend the local fiat currency so your debtors could use it to buy Bitcoin (or whatever else they wanted.)

[CodeMage]

I don't understand. Did you buy a house in BTC or in USD? If you bought it in USD, then the value of it in USD hasn't changed. If you bought it in BTC, then your debt is in BTC. What am I missing?

[EduardoBautista]

OK, let me explain this better using USD.

You take out a 100k mortgage in USD. Over the next year, the USD suffers suffers from extreme deflation (increases in value). It is now worth twice what is was worth last year. As a consequence, wages begin to go down. Now let's say you were earning 50k a year while paying down a 100k mortgage (not assuming a downpayment, this is for simplification). Next year, you are now being payed 25k but still owe that 100k mortgage. And the house is now worth 50k.

[EduardoBautista]

If you bought it in BTC, the house is now much more expensive then when you originally bought it.

[CodeMage]

It's more expensive in USD, yes. Which is a problem if you're being paid in USD, instead of BTC. In other words: if your debt is not in the same currency as your income, that might be a problem. Is that what you're saying?

[jordigh]

If it's the only currency in Ecuador, the price of a house in Ecuador in bitcoins doesn't have to match the fluctuations of BTC<->USD. If Ecuador also tightly controls exchange with foreign currencies (which they likely already control, just not tightly?), then they can make the value of bitcoins within Ecuador as stable as any other currency.

As for how they would acquire bitcoins in the first place, all they have to do is mine enough for most citizens to access them and then distribute them. Or fork off a new blockchain with a different cryptocurrency that can only be mined by the central government (say, because it requires private keys to mine that only the government controls).

[tinco]

The private key idea is a catastrophe practically begging to happen ;) They'd base their entire economy on the idea that at no point in the future a meager kb of data will not leak from a government or bank in a historically rather unstable country.

Bitcoin's designed to be decentralized, and I don't think it's possible to force Bitcoin into centralized control. If they are going with a virtual currency that's in their control their best bet is going to be a Ripple like currency, like the one Stripe backed last week.

[jordigh]

Yeah, I know, it's just a stupid suggestion. :-)

There were many other online currencies proposed before bitcoins. The real innovation in bitcoins is decentralisation, so I suppose if you want to centralise it again, you can just throw out the whole blockchain idea.

[tinco]

It is suspected (and I think reasonably so) that Bitcoin volatility will decrease over time[1].

Regardless, I think with the financial tools we have developed in the past few hundred years we are very well equipped to deal with volatile assets.

Perhaps it is you who doesn't want to think longer about Bitcoin than the two seconds it takes to realize that loaning Bitcoins might be a difficult problem.

1] http://elidourado.com/blog/bitcoin-volatility/