Bitcoin starts to grow up with a quasi peg

I got lots of flak from the Bitcoin community when I suggested a currency peg to ease the transition for universal acceptance of bitcoin.

From the current price of around $100 to an interim target of $1,000, where it will achieve a market capitalization of approximately $15 bn., and a level where more sophisticated institutional products can be created, guidance on pricing needs to come from outside the bitcoin protocol.

The outcry heard from Bitcoiners is that any price peg destroys what Bitcoin stands for. This is untrue, but it sounds nice. Just like stakes are used to support young trees as they grow to keep them growing straight, Bitcoin needs similar support at this stage of its development. The Bitcoin protocol, as ingenious as it is, is a mining protocol, not a pricing protocol. This bit of the project was left hanging when Bitcoin was introduced and the community was left to deal with it as best it can.

BitPay, one of the pillars of the Bitcoin community (full disclosure: I am an investor in this company) has now switched from using MtGox (the largest Bitcoin exchange, handling approximately 75% of all Bitcoin trades) for pricing their merchant transactions – – to a new index-like composite price.

As I’ve said in previous blogs, the exchange piece in the bitcoin econo-metric ecosystem is the weakest link; it results in monopoly-pricing that precludes sufficient competition in the market to generate worthwhile price discovery.

Maintaining a peg (or something like it), as such, as I wrote about earlier; is an interim solution to get around the ‘MtGox problem.’ And implementation of said peg; like Bitcoin itself, can be original in design, but with results equal to a more traditional currency peg.

In other words, when I described the peg idea I pointed to the Bitcoin Foundation as a potential body to capitalize and maintain the bitcoin peg. My point was that the Bitcoin Foundation could be the oversight group to organize a price quote, but capitalizing and maintaining the ‘official’ BTC price does not necessarily mean putting up equal, (or significant partial amounts) relative to to the current float of BTC (approximately $1.4 bn.). It can mean doing what BitPay is doing; creating an indexed price; offering guidance for transactions that in turn boost confidence in price discovery which in turn increase liquidity and market capitalization.So far, so good.

The new price guidance effort is a good step in the right direction for Bitcoin. It’s something I predicted would be necessary given the fact that the Bitcoin protocol is a mining protocol and not a pricing protocol.

As the market capitalization of Bitcoin climbs into the 10’s and 100’s of billions of dollars – drawing in more institutional players along with its ascent, (a virtual guarantee now that the global banking system appears to be on the verge of another round of bailouts and money printing), another step toward another variation on the peg theme a peg will probably take shape. Will it be something closer to a traditional peg? Probably not, but that model still serves as a handy guide.

Bitcoin is our (i.e., the community of hacktivists who fight centralized, monopoly politics and economics) baby. We willed it into existence as counterpart to our complete dissatisfaction (and horror) at what the global banking (organized theft) system has become; a system of crony kleptocrats printing gads of cash for pet projects and wars destroying civil society and the environment while simultaneously inflating the cost of basic goods and services.

We’ll get to the goal of frictionless, math-based, cryptocurrency that redefines money in the end. All that’s needed is a little patience, some solid price discovery.