[Green_man]

This is very helpful, thanks. I guess the part I'm still confused on is the link to bitcoin:

>You know that the supply of Bitcoin is fixed. If you settled up your current account deficit in Bitcoin instead of dollars, you know that you'll have an asset that you can trade back at a later date, and that the supply of that asset will not have increased (devaluing your own holdings).

Doesn't the historic price volatility of bitcoin make it a very poor solution for these problems? Despite the supply being semi-fixed (for now), the value in USD or Yuan or whatever is the furthest thing from fixed. It's gained more than 8% in the last five days, and lost ~4% today alone. I guess if these were all very short term conversions USD --> BTC --> Yuan and vice versa, then maybe price volatility would burn users less often, but they'd still get burned eventually. In my mind, Bitcoin has inherent risk (in volatile pricing), and transactional cost (measured in either time or fees, as I understand it). As long as the (risk + fees) of BTC are greater than the fees charged by banks for money conversions, I don't expect widespread adoption.

[shawnz]

Two things to consider: First of all, as a totally new asset class we are probably still in the price discovery phase of Bitcoin. In 20-50 years we will have a much better understanding of the nature of cryptocurrencies economically and I'd bet the volatility at that time will be much less.

Second, it's possible there could be a mean-reverting effect such that the long term volatility is less than you'd expect by looking at the short term volatility. Some claim that gold has this property and it's possible that Bitcoin might as well (not really enough data yet to tell).

[hnick]

You may like this somewhat recent story, I enjoyed the link a lot for some background on the petrodollar idea.

https://news.ycombinator.com/item?id=25407583

[nostrademons]

It's important to make a distinction between price volatility now, when Bitcoin is a speculative asset that might become useful in the future, vs. the price volatility if it actually does become useful. They have different dynamics.

Imagine that AMC launches a promotion where they announce that once COVID is over and theaters reopen, you will be able to exchange acorns for movie tickets. You'd expect a mad scramble for acorns, because a useless nut will suddenly become tradable for something of value to many people. When all the acorns have been snatched up, you'd expect a trade to commence in acorns themselves, with people paying for them on the expectation that they're convertible to tickets worth something in the future. Moreover, AMC didn't announce a price for this conversion, so there's a lot of uncertainty about what acorns are actually worth. If AMC then says "Oh, by the way, acorns will be the only way you can pay for movie tickets in the future, and we won't accept dollars", then you might see acorns bid up to totally brain-dead levels, because there's no ceiling for how high it might go, and you know that you won't be able to go to the movies with dollars anymore. Only when theaters actually reopen, and you find out how many people have acorns and how many people want to see movies, can you put an accurate price on them.

This is analogous to the scenario where the dollar loses its reserve currency status. You don't know what the eventual valuation of each country's local currency will be against Bitcoin. You do know that the dollar is going to be worth less. So you can get wild price swings as people FOMO into Bitcoin but have no accurate data to base their purchase price on.

Once a switchover does occur, then yes, the price of Bitcoin will still be volatile. But this volatility is the point! The idea is for each country's local currency to float up or down until it equalizes the demand for the country's imports & exports. So if American manufacturing is uncompetitive, few people will desire American goods, which means there will be little demand for dollars relative to Bitcoin, which means that the price of the dollar relative to Bitcoin will fall. Falling dollar prices mean that foreign countries can get more American goods for a given amount of Bitcoin, which raises the price-competitiveness of American exports, which raises the demand for dollars. Eventually you end up with equilibrium prices that reflect the overall competitiveness of the country's economy within the global economy. As a country produces more & higher value goods, the value of their currency relative to Bitcoin will rise, and they can afford to consume more. As a country's industry declines, the value of its currency will decline as well, which makes its product attractive as a low-cost alternative.

[zie]

All of this is based on the premise that

1) Countries want external control of their international transactions

2) They accept Bitcoin as said thing.

They are sort of , to some degree, forced to 1, by the US Govt. there is likely near zero chance they WANT this as a property though.

2) This is also not very likely. With some 70% of BTC being mined inside of PRC and a 51% attack possible, there is a lot of trust required of the Chinese govt. Unless this changes, I don't see countries wanting this to happen, either.

So while what you say is theoretically possible, I don't think it's very likely. I think what will happen, and what already is happening to some degree, is countries are just deciding to convert in direct currency transactions and not use USD as the base contract amounts, because the US reserve currency status is slowly declining. I.e. they are using the dominant currency in their region ( Yuan/Yen, Euro, USD, etc)

It's unknown how the US will respond at this point, with Trump in office they were basically ignoring the problem(that I'm aware of). How Biden's team will handle this is still unknown(or if they also will kick the can down the road).

We do see some corporations using BTC as a store of "cash", TSLA the latest big company to do so. It's still unknown if this is just a short-term thing to make some extra dollars on otherwise boring cash, or if this will be a long-term situation.

[anglepapi2345]

Hi,

I liked your answer here on https://news.ycombinator.com/item?id=26093675. Would you like to write for our website on topics finance and crypto as a volunteer?

[reportgunner]

Volatility doesn't matter because 1 BTC = 1 BTC