[MichaelBurge]

Volatility literally doesn't matter at all.

You can reduce it to 0 by shorting Bitcoin futures contracts. You can make it even more volatile if you want. You can change the multiplier on base price change i.e. volatility to be any number between -300% and 300% of its base rate(the caps depend on margin requirement), with appropriate setup.

That's for Bitcoin, but you can do other cryptocurrencies indirectly.

And these are government-regulated contracts, marked-to-market daily.

[JamisonM]

If you have to do all this fancy footwork to make volatility not matter doesn't that prove that volatility does matter.

If you price asset X in crypto in the market and then buy options on USD to ensure that your sale price will be redeemable for a certain amount in USD in the future if it sells then aren't you really just pricing in USD? And then suffering a loss on your USD options if the asset doesn't end up selling?

[MichaelBurge]

No, it changes the argument to "Bitcoin is inconvenient and requires a lot of maintenance. I have to track margin, not lose my wallet, not get scammed, etc. and if I forget to roll my futures and it collapses I lose 80% of my money"

Which I would agree with, but the original "volatile instruments cannot be used for pricing" isn't true.

> doesn't that prove that volatility does matter.

It doesn't matter for making it "possible" or even "safe in principle". It does matter if you want it to be convenient.

> aren't you really just pricing in USD?

Sort of, but you can choose to price 90% of it in USD and 10% in Bitcoin. So arguments with a discrete "impossible" seem in conflict with this continuous ratio.

The point is: If there's a maximum volatility an agent is willing to accept, one can construct a financial setup that meets the constraint. So the volatility itself shouldn't be a reason against it.

[JamisonM]

> It does matter if you want it to be convenient.

A sincere thank you for this reply.

It matters in terms of if you shift the argument from "volatile instruments cannot be used for pricing" to "volatile instruments have prohibitive costs that make using them for pricing very impractical" too, right?

Your example that you could price in bitcoin and then structure your sale offer in a way that 90% of the proceeds translate to a particular USD amount and the remainder are at risk to Bitcoin volatility is interesting to me because I think of it in terms of a Real Estate transaction. I offer my house at a price that translates to $100k USD in bitcoin and, for simplicity's sake let's say someone instantly purchases it. Now the deal is done but there is a time for all the paperwork, land title transfer, bitcoin is held in escrow, etc.. so the instant the deal is signed I buy some kind of option that ensures that the 90% of the bitcoin amount will be 90K USD when the transaction is consummated. That has a cost, right? And then if the deal falls through that cost and more is lost, right?

So those costs lower the value of my asset, so it is more than convenience is my conclusion. You agree with this, right?

[MichaelBurge]

I think you are right, and together with mining fees, dilution, negative attention from governments, block confirmation times, exchanges that aren't CME going bust, etc. mean it's generally not a very useful commodity.

However, one thing that should be mentioned is that Bitcoin is expected to increase in value. I don't mean that in a trader sense or that you should buy it; I mean Bitcoin futures are in contango(i.e. priced higher than the commodity) so you can lock in a risk-free profit by 1. Buying Bitcoin and 2. Selling a future. Specifically, the spot price is currently $47,150 while the September 2021 futures are $47,340 for a profit of $190 or about 4.8% annualized.

So currently, any financial institution would have a strong incentive to denominate any escrow accounts in Bitcoin for times of less than 4 months(there's not as much liquidity further out). I believe this is what's happening here: Regulators ask questions if banks buy the Bitcoin themselves, but if it's in escrow on behalf of your customers it's more acceptable.

Conversely, customers should prefer to pay in USD, because paying in Bitcoin is equivalent to either a short position(if they sell their Bitcoin and never buy any again) or an expected cost of 5% interest due to (directed) volatility.

So the original claim that it has "no impact at all" is probably too strong, but a 5% interest rate is not what people mean when they reference Bitcoin's wild price swings i.e. volatility: The capital appreciation/loss can be accounted for if you really want to.

Note: I'm not recommending this strategy, just attempting to calculate carrying costs in the context of a mortgage lender holding Bitcoin in escrow.

[eloff]

Because my mom is going to do that when she wants to buy something. Crypto logic sometimes...

[MichaelBurge]

Your mom doesn't matter. The topic is finance companies. I'm sure the "second largest US mortgage lender" has someone who understands this.

[eloff]

Your crypto logic doesn't matter. If the end good isn priced in dollars, why would the finance company price it in something else?

How many US mortgages are priced in gold or Yen? Even internally?

[MichaelBurge]

Fixed-income products are generally priced in yield, even though the actual agreements mention dollars. The futures for treasury bonds are literally denominated in yield points, but most (fixed-income) things it's more "people denominate in USD and think in yield".

That is, everyone trading bonds/certain commercial real estate/mortgages/preferred stocks/etc. converts them to a % return, with different yields falling in different risk categories. So you might get 3% on a relatively safe commercial bond, 10% lending to Turkistan, 4% on a property in the middle of a desirable city, 13% if it's filled with asbestos and shut down by the city.

It would be possible to price a mortgage in any continuous ratio between USD/Bitcoin, though I suspect the imputed interest rates for an already-low mortgage rate would make it undesirable. Someone would just have to punch current prices into a spreadsheet to see how it affects the yield.

I would expect Bitcoin specifically to have a high interest rate holding a long position(since Bitcoin people want high leverage), and the short position to have an implied positive yield. So banks should want to price in Bitcoin since they like leveraged low-risk low profit. But I haven't looked at a price chart for that assumption.