I was minding my own business enjoying the latest @johnnybitcoin video on How to Create bitUSD when, I suddenly remembered an old BS (Before Steem) article I wrote back in '14 using a similar pawnshop analogy. Seemed like a good time to update it as a companion article to help call attention to @johnnybitcoin's very helpful video.
Bookie Bob’s Solution to Bitcoin Volatility
Ben’s Diner and Lube Service was offering my favorite breakfast special – a spam and vegemite pizza on a flaky cinnamon crust. For only $10 bucks! But when it came time to pay, I realized I’d left my wallet in my other pants. So I pulled a crumpled piece of paper out of my pocket and handed it to Ben.
“What’s this?” he asked, looking at me suspiciously. “That’s a note from Bookie Bob’s Pawn Shop across the street,” I said with a smile. “Its good for $10 bucks worth of bitcoins.”
“Nah, I can’t take bitcoins no more,” he said. “Last time I did that they dropped in half before I got around to cashin’ 'em and the missus nearly handed me my haid.”
“But this is different,” I enthused. “This is always good for ten bucks worth of bitcoins! If they go down in value, Bookie Bob just gives you more of them. You can’t lose!”
Now Ben was really dubious. “C’mon”, he said. “I know Bookie Bob. He ain’t a-gonna take no loss like that. What’s the catch?”
“No catch,” I said, “Last week Jane and Mary Bitmeister booked a bet with him on whether bitcoins were headed up or down. “
- Jane gave Bob 10 dollars worth of bitcoins betting they were headed up.
- Mary gave Bob 10 dollars worth of bitcoins worried they might go down.
- Bob gave Mary this note good for 10 dollars no matter what bitcoins were worth whenever she wanted to cash out.
- Then he gave Jane a note good for 20 bitcoins minus 10 dollars of bitcoins at any time she wanted to cash out.
- Bob held their $20 worth of bitcoins in escrow and charged them both fifty cents for his book-keeping efforts.
Ben was still scratching his head, so I continued, “Don’t you see?”
and has more left over to give back to Jane – who profits from her bet.
If bitcoins go down, Bob needs more of his stash to pay Mary her ten dollars
and has less left over to give back to Jane – who then takes a loss.
“Either way, Mary has a stable note that is always worth 10 dollars and Jane gets to gamble with twice as many bitcoins using the ones she borrowed from Mary via Bob. Bottom line is that Mary has transferred all her risk and reward potential to Jane. This made both happy since Mary wanted stability and Jane wanted leverage!”
Ben thought he spotted a catch. “That looks like it would work pretty good as long as bitcoins don’t go down by more than half. If that ever happened Bob’s whole stash wouldn’t be enough to fetch Mary her full ten bucks!”
“That’s true,” I admitted, “But you said yourself Bob’s no dummy. Any time he thinks its getting close to using his whole stash just to pay Mary, he goes ahead and sells them to get Mary her ten bucks and then gives Jane whatever change is left over. Otherwise, he just lets it ride until either Jane or Mary wants to cash out.”
“Anyway, that’s why this note is always good for 10 dollars. Mary passed it on to me as a tip for telling her about Bookie Bob and now I’m offering it to you to spend just like cash!”
Ben grumbled, “I admit that’s pretty cool for Mary, Jane, and Bob, but that still don’t make me want to get involved. I’d still rather have cold hard cash. Why didn’t Mary just keep her 10 dollars and tip you in cash?”
“Well,” I said, “You still haven’t heard the best thing about this piece of paper! Bookie Bob has a deal with pawnshop dealers all over the world. You can call your son Joey over in Hong Kong and give him the number on the back of this note and he can cash it in over there right away. No more waitin’ five days for a wire transfer to clear! Of course, as soon as you use that number all the pawn shops find out about it, so don’t be thinking you can spend it twice!”
Ben nodded, “Yeah, I guess if I needed to send money around the world a lot that could be good. I’m not sure I want to spend my time wandering the streets looking for a bookie and pawnshop I can trust…”
“Oh, so you want one of these that lets you buy and sell on-line from an incorruptible unmanned company”, I said, “Let me tell you about BitShares!”
Image Credits: laurelzuckerman.typepad.fr, static.spplus.com,
About the Author -- Stan Larimer
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Bitcoin and the Three Laws of Robotics
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