Say you want to transfer a billion dollars 3000 miles. A billion dollars is 10 million Benjamins, which weighs 10 tons. You're not fitting that in a Tesla. More likely, you'll put it in an armored car and hire a few armed guards to go along with it. If you need to transport it overseas, you need a freighter (and a week) too. Now the energy cost of that Bitcoin transaction doesn't seem so bad.
The institutional interest in Bitcoin I've seen lately seems to assume a thesis of dollar depreciation and Bitcoin usurping its role as the global reserve currency. Ordinary people are not going to transact in Bitcoin under this thesis: they'll use dollars, pounds, deutchmarks, lira, yuan, etc. for their ordinary domestic transactions. Only banks, importers, and other major financial institutions need to convert the local currency into Bitcoin and settle up on the international markets, and these transactions will be in the tens-of-billions. Most of Bitcoin's drawbacks go away with this use-case - it doesn't matter that the network is limited to 4 TPS when only ~hundreds of transactions are conducted daily, and the energy use per transaction is similarly minimized. Bitcoin's advantages in trustlessness and lack of a central authority are hugely important in international relations, where nobody trusts anybody else and there's no higher authority to appeal to.
(Stellar's even better for this use-case, and has had a similar recent run-up, but currencies have strong network effects and it's unlikely that Stellar could get the name recognition or trust that Bitcoin has gotten.)
I'm not very well informed on the modern banking system, but I remember hearing an anecdote about banks flying people with bags of checks on airplanes to handle exchanges (before the system was updated in the 70s iirc). In your example of transferring a billion dollars in cash 3000 miles, couldn't that transfer be done using the banking system for much cheaper than the armored car and guards? Is the metaphor valid only for transactions that don't want to trust some third party? Is there some reason why moving a billion dollars cash is something that anyone other than the CIA would want to do?
I'm also curious about your claim:
> Bitcoin's advantages in trustlessness and lack of a central authority are hugely important in international relations, where nobody trusts anybody else and there's no higher authority to appeal to.
Is this really true? I mean, what do large international exchanges use now? A majority of them certainly don't currently use bitcoin. Many large banks have a significant international presence, and most parties interested in exchanging can find a bank they both trust.
We've got plenty of mechanisms (SWIFT, ACH, wire transfers) that work pretty well for large electronic inter-bank transfers within the same monetary authority. The trouble is what happens when you want to trade between currencies.
Say that I want to buy a DJI drone, which is made in China. The workers who made the drone all get paid in yuan. I get paid in dollars. I want to spend my dollars on Amazon, receive a drone, and have those dollars automagically converted into yuan to pay DJI. Behind the scenes, Amazon takes my orders and my dollars, and has a contract with DJI to send them a certain number of yuan. Similarly, behind the scenes DJI is spending yuan to buy ads on Google.cn (hypothetically), which Google then wants to turn into dollars so it can pay my salary. Both Amazon and Google have relationships with banking institutions, so they say "I need to convert $X of dollars in CN¥0.15X of yuan".
The banks net out all the purchases made by Americans with the purchases made by Chinese, and then they need to trade on the currency exchange markets for any shortfall. On the national level, the shortfall is called the current account deficit, which has been persistently growing since 1991:
That article lists a lot of hypotheses for why the current account deficit has been growing for the last 30 years, but the primary one relevant to this thread is the dollar's status as the world reserve currency. This means a few things:
1) Historically, since WW2, the U.S. has been the most economically stable nation in the world, and so holding U.S. government debt is the most stable place you can park any excess savings that you get from a current account surplus.
2) Because of this stability, a lot of trade in other currency markets is denominated in dollars. Rather than trade directly between Iranian rial and Chinese yuan, Iran takes the dollars they receive for oil, pays China for infrastructure improvements with them, and then China converts the dollars into yuan to pay their employees. (In practice it's a bit more complicated because since 2015 China has been doing their best to reduce their dollar holdings, so now China might pay Caterpillar or Bechtel to build a road in Zimbabwe, with a contract that lets China take over the road if Zimbabwe defaults on the loan that funds it.)
3) Oil is priced in dollars, meaning that most countries on earth need to buy excess dollars in order to afford a fundamental energy source.
The dollar's status as a reserve currency means that the U.S. can get away with certain things that would cause other countries to default. For example, take the recent $6T COVID stimulus. Who's paying for that? It's literally holders of U.S. treasuries: all the countries that have sold more to the U.S. than they've bought and parked the excess in treasury bond purchases. They're not exactly happy about that, but the U.S. controls the world supply of both dollars and of U.S. government debt, so if you own either of those, you are at the mercy of the U.S. government's decision to print more.
This is where the trustless aspect of Bitcoin comes in. 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). This makes it very appealing to other governments who are sick of bankrolling Americans' propensity to consume more than they produce. It's potentially bad for Americans (though the effect of this is complex: it might actually bring manufacturing back to the U.S at the expense of the financial industry, because a major reason U.S. manufacturing is non-competitive is because the dollar is overvalued, which is because the dollar is the world's reserve currency), but it's good for foreign countries with a trade surplus, and for holders of Bitcoin.
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.
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).
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.
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.
What percentage of transactions are 1 billion dollars? I'm pretty sure VISA has never had anything over $10M.
This is excessively hypothetical.
The more obvious benefit is that a Tesla can't drive 3000 miles in 15 minutes. But a VISA transaction is faster and uses 1/100,000th the electricity. And neither are "anonymous".
If you think BTC is anonymous you have a mistaken understanding of how permanently public blockchain transactions are.
A given transaction might be "anonymous" today(for some definition of anonymous), but chances are it won't be anonymous at some point in the future. This may or may not matter given your definition of anonymous, but to think your transaction will STAY anonymous forever is just asking for trouble.
The problem w Bitcoin as a global reserve currency is that it cannot be manipulated by the nation-state. Manipulation in this case is not a bad thing it is actually a safety feature for society against pure supply/demand dynamics. The prevailing wisdom is that having a fiat currency which value and velocity can be manipulated by, granted the Fed Reserve is a quasi govt agency, in times of emergency helps preserve the social order and smooth fluctuations. So Bitcoin has no value as a reserve currency unless it could be manipulated by the state, which it can’t, so it won’t.
The state can still manipulate their national currency (which Bitcoin likely won’t replace). Positive things with Bitcoin are that:
1. When the US dollar eventually loses its status as the global currency for settlement and reserves, no individual country needs to have the same perverse control that they US had as a consequence today.
2. Citizens have an exit ramp from the local currency. This means the state doesn’t have the same totalitarian control of the national economy, limiting the impact on citizens of demonetization and hyperinflation.
> The institutional interest in Bitcoin I've seen lately seems to assume a thesis of dollar depreciation and Bitcoin usurping its role as the global reserve currency.
Aren't we losing the assumed federation in this system? A country whose banking system is under strain (Nigeria) or has collapsed (Zimbabwe) will have a bad-faith government acting to constrain the free-flow of money (because they want a transaction-fee cut).
Wouldn't that still lead to me wanting to go buy my groceries with BTC? Do we create a localised version/model where people can transact with each other without touching the blockchain (because of the low throughput), or how do we address this use-case; as it seems to be the most attractive one?
Has the energy requirement peaked, or is it still going to increase? Linearly or not?
>Do we create a localised version/model where people can transact with each other without touching the blockchain
This is what the lightning network is for: scalable, instant, low-cost, and off-chain TXs. All transactions between the opening and closing of a payment channel are consolidated into two TXs. One to open it another to close it. This means energy cost per TX goes down pretty significantly with adoption.
It'd have a similar role as gold. In cases state failure, you absolutely do have people trying to buy groceries with gold coins. But it's inconvenient, and people tend to run out of gold coins. So the incentives - when times are good - run toward normal credit systems like Visa & Mastercard, and hard currencies gain adoption only when times are bad.
Similarly, we've had folks transacting personally with Bitcoin in Venezuela and Zimbabwe. It tends to work out fairly well for them - at least their money holds value. But transaction costs in Bitcoin during the 2017 bubble were about $20/transaction, which makes it a pretty high-friction experience for groceries. There's a lot of market pressure to create other solutions (Lightning Network? Stellar? Local fintech companies?) for payments when Bitcoin costs $20 for everything.
So what? Almost all transactions are going to be significantly smaller than a billion people usd. You are just focusing on an edge case. Bitcoin is a horrible system for conducting the vast majority of transactions.
I can see smaller bitcoin transactions running on an alternative networks like Stellar, where assets (like bitcoin, USD, etc) can be issued by a trusted 3rd party.
> Say you want to transfer a billion dollars 3000 miles.
I don't. You don't. Nobody does. In the one-off case that you do, we can special-case it, instead of blowing energy on every single transaction as though everyone did.
You’re arguing we should be zipping around town in a car with a W12 engine in case somebody wants to drag race an airplane.
They do exist and are still redeemable for Euros at fixed rate. Little weird but germany is a big country that wants people to trust it, so 20 years after Euro was adopted it's still worth 1.95 deutchmarks.
Many of the same people who buy the Bitcoin-as-global-reserve-currency scenario also believe the Euro is going to collapse. It has known problems as a monetary union without a fiscal union, which lead to periodic bailout crises.
Here "deutsche mark" (and lira, which is another dead currency) are stand-ins for whatever national currency emerges after a Euro collapse. It may not be called that, but the point is that there will be some German national currency that settles up into Bitcoin in the international markets.
The institutional interest in Bitcoin I've seen lately seems to assume a thesis of dollar depreciation and Bitcoin usurping its role as the global reserve currency. Ordinary people are not going to transact in Bitcoin under this thesis: they'll use dollars, pounds, deutchmarks, lira, yuan, etc. for their ordinary domestic transactions. Only banks, importers, and other major financial institutions need to convert the local currency into Bitcoin and settle up on the international markets, and these transactions will be in the tens-of-billions. Most of Bitcoin's drawbacks go away with this use-case - it doesn't matter that the network is limited to 4 TPS when only ~hundreds of transactions are conducted daily, and the energy use per transaction is similarly minimized. Bitcoin's advantages in trustlessness and lack of a central authority are hugely important in international relations, where nobody trusts anybody else and there's no higher authority to appeal to.
(Stellar's even better for this use-case, and has had a similar recent run-up, but currencies have strong network effects and it's unlikely that Stellar could get the name recognition or trust that Bitcoin has gotten.)