Circle: Solving Bitcoin Volatility with the Hybrid Model

[crypto_coiner]

Companies like Circle and Coinbase has the right approach to solve Bitcoin’s #1 problem - Volatility. Sure, in the long run Bitcoin will likely prove to be a longterm store of value but in the meantime the average Joe will not touch it b/c they don’t want the risk of it going down. Circle’s USD/Bitcoin wallet makes it very compelling use case for the average person.

Volatility is a major issue even for the die hards. I bought my first Bitcoin at $1000 and bought it all the way down to $200 with a cost average at $385. I held since 2013. What do you mean by Bitcoin’s Volatility isn’t any issue? I am down 45% and I invested/traded into stocks my whole life. How would someone who knows nothing about finance feel about buying Bitcoin? Its pretty risky even for us die hards. When we pair the dollar with Bitcoin it finally makes it useful. Otherwise its a long time before any Joe would use it.

source: https://www.reddit.com/r/Bitcoin/comments/34ng2o/bitcoinusd_payments_accounts_are_the_future_of/

New feature outlined

The company’s new account features mean users can hold their funds in both bitcoin and USD.

Customers who choose to hold their funds in dollars rather than bitcoin can still make payments to people or merchants who accept bitcoin. At the time of payment, Circle will instantly convert funds from dollars into bitcoin.

Also, customers can accept bitcoin payments and Circle will convert the funds instantly into dollars in their Circle accounts, if they wish. Those who prefer to keep their funds in bitcoin can do so, CEO Jeremy Allaire explained in a new interview.

“We’re putting forward this hybrid fiat-digital currency model, which gives users the benefits of digital currency – instant settlements, global interoperability, no fees and high levels of security – but without having to use a new currency,” Allaire said.

He reiterated:

“This hybrid model allows customers to have all the benefits of digital currency, without the risks.”

Source: http://www.coindesk.com/circle-raises-50-million-with-goldman-sachs-support/

[cryptog]

I do not know why they are missing it, but adoption cannot solve volatility. It s a mechanism to control supply.
So bitcoin will never be stable.
So why do goldman sachs or nyse invest in bitcoin related startups? Because they have forgotten economics 101?
I do not believe so. It s because they do not invest in bitcoin per se. They do not buy bitcoins. If it is satoshi-based, those startups can adapt their code to any crypto asset. If bitcoin is not adopted, they will adopt something else.

[zoro]

i don’t know about circle. but do they have control of your wallets?
if yes, then the risk is always there. it is a matter of volatility vs mtgox like risks. your choice. nu tries to solve both issues

[crypto_coiner]

Yes, they have mostly certainly control over the wallets.
There are many ways to see it, but one way: Nu is a distributed and decentralized Circle

[creon]

They simply make the promise to customers to have a security of their BTC available in fiat and a security of their fiat available in BTC. This allows to display your “balance” independent of the currency as long as you stay within their infrastructure. This will most likely be a fractional reserve model, i.e. if all people simultaneously would want to make use of their BTC balance as fiat, then Circle will have a problem - but I might be wrong about that.

This service is a logical consequence from the infrastructure they built up and it is extremely useful. Note that this would also allow LPCs to transform their hedging risk into an exchange default risk on circles side (which is unlikely). As with so many big exchanges, I am not able to make a real account with bank account here from europe, otherwise I would immediately check how feasible this would be.

But it is not a direct competitor to Nu, because once you leave their centralized environment then you also lose the possibility to use this service.

[crypto_coiner]

Note that this would also allow LPCs to transform their hedging risk into an exchange default risk on circles side (which is unlikely).

Could you elaborate?

[creon]

Run a nubot on Poloniex NBT/BTC which also connects to your circle account.

Whenever someone buys an NBT from you on Poloniex, the nubot will transform 1 USD of your BTC balance on Circle into USD.

Whenever someone sells an NBT to you on Poloniex, the nubot will transform 1 USD of your USD balance on Circle to BTC.

This was suggested numerous times (I think @GreatScott was the first one), and can theoretically be done with any kind of exchange, but this Circle service makes it exceptionally easy. You will have to pay the circle fee, which in turn would need to be covered by shareholders in the end. Of course the other danger is that Circle makes a MtGox, but considering their investors this is kind of unlikely.

[cryptog]

Whenever someone buys an NBT from you on Poloniex, the nubot will transform 1 USD of your BTC balance on Circle into USD.

Whenever someone sells an NBT to you on Poloniex, the nubot will transform 1 USD of your USD balance on Circle to BTC.

That way,you always keep a constant fund value?

but this Circle service makes it exceptionally easy.

What would it be easier than say BTC-E?

[creon]

That way,you always keep a constant fund value?

Yes, as long as you say that USD = NBT your fund amount will remain fixed. Its not your fund value though. If you start with 10 BTC buy side and 1000 NBT sell side, then this method will assure you that you will have 10 BTC and 1000 NBT/USD afterwards. The value of your BTC of course changes.

What would it be easier than say BTC-E?

BTC-E, or any other normal exchange, does not allow you to specify a price for an arbitrary large trade at a time, because it depends on the liquidity of their order book.

So let’s say the BTC-e price (average of ask and bid price) is 240 USD and you want to buy 10 BTC. How much will you have to pay? Certainly something around 2400 USD, but in fact its more, because maybe the bid price is an order which only offers 1 BTC and the following order has a higher price.

On Circle / Coinbase, these are promised fixed prices. If Circle says the BTC price right now is 240 USD, and I want to buy 10 BTC, then I have to pay 2400 USD (+ fee), in any case. This simplifies the calculation in the described order mirroring of the bots extremely, because the nubot only has to stick to the Circle price at any time and Circle promises you that you can exchange any amount at any time at this price (where any of course will be limited in reality, but probably out of scope for any LPC here).

[cryptog]

The value of your BTC of course changes.

Right.
I think this solution is promising. At first glance, I felt this had something to do with nubot’s book order mirroring but it is different in fact; you need to not only place but also get the order executed, and an order in opposite direction. So it is rather some sort of anti-mirroring or negative mirroring.

Circle promises you that you can exchange any amount at any time at this price

Sounds wonderful like that but they would undergo a lot of losses in a downtrend market.

.