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It's not about liquidity. EURUSD is one of the most liquid currency pairs in the world. You can exchange millions or tens of millions in one trade at a firm pri

by minimax 13y ago

It's not about liquidity. EURUSD is one of the most liquid currency pairs in the world. You can exchange millions or tens of millions in one trade at a firm price. That's liquidity at scale. In spite of that, Euro is still completely useless as a currency in the U.S. The liquidity argument is not a real argument.

steveklabnik 13y ago
If you have access to currency markets, absolutely, EURO/USD is incredibly liquid. At the point of sale, I do not have access to this market, so my Euros are not liquid. If they accepted credit cards (the shop I was at did not) and I had, say, a VISA that was denominated in Euro but which the bank would change into USD, my Euro would be liquid. Another way to think about access: if I give a homeless man in the Mission 20 Euro, is that useful to him? The actual form that you have the asset in matters.
ChuckMcM 13y ago
Perhaps we're not talking about the same thing. For any national currency, a bank has a way of resolving your request to exchange their currency for a local, more acceptable, currency. That is part of what the banking system does, and BitCoin eschews. In my fictional example, if an exchange didn't have deposits to cover the conversion they would go to their currencies central bank for the $90M and then exchange the BTC they got with the BTC central bank for $90M and pay back their overnight 'loan' from the local currency bank. How does that work for an exchange with BTC? Do you clean them out of all the dollars they have? Then what happens to other people who have BTC deposited and want dollars out? How does that work? Do the later people have to wait until someone buys some BTC and puts in dollars? If you have two people waiting for dollars out, who gets the dollars you just got? First one to request to get out? best customer? first one you can satisfy their complete withdrawal? Those questions are the "liquidity argument" if you want to call it that. Who pays the price for not being able to convert coins? The exchange? The customer? Lets say the price of BTC plummets, people head for the doors and want their money in dollars now. Does the exchange give them dollars that they won't recover? Or do they wait on all withdrawals until the number stabilizes and the pay out at that price? In the former the institution takes the risk, in the later the customer takes the risk. I totally get the BTC market as an awesome way to exchange markers securely. I'm not sure how it gets to be a currency without something providing the banking function. (one of those functions being liquidity as the author points out)
- minimax 13y ago
  There are a lot of question marks in your comment and I'm sure some of them are meant to be rhetorical and maybe some aren't. Also you mentioned something about exchanges talking to central banks which isn't something that happens. Your fictional example is: I've got 150,000BTC, please convert that into dollars for me at the market rate. What? No worries I'll just wait here. You can wire the dollars to this account here ... That isn't the kind of thing you do at the teller window. That kind of liquidity doesn't exist in bitcoin (though it would be a cinch in other major currencies). At this point you are in need of a really clever broker to find you someone to take the other side of the trade at a price that doesn't totally suck. Though that probably isn't very likely... You seem to imply that the exchange has some responsibility here that I don't understand. The exchange matches buyers and sellers at a price they can both agree on. If there are no buyers for what you are trying to sell, that's too bad but it isn't the exchange's problem. Go look on the CME product list and you'll see tons of contracts that are listed but have no bids because nobody is interested in trading them. If you want to trade a shitload of a questionable thing then you just might find there's no bid. See also: people selling mortgage backed securities in 2008. The price for not being able to sell a thing is paid by the people that own the thing (especially if they purchased the thing with borrowed monies and they are forced to price the thing by marking it to the market). I think maybe your question is just "What happens if you want to sell bitcoins and nobody wants to buy them?" and in that case the sellers are just screwed.
  - ChuckMcM 13y ago
    I think maybe your question is just "What happens if you want to sell bitcoins and nobody wants to buy them?" and in that case the sellers are just screwed. Nicely summarized. We are talking about the same thing. That particular point is lost on a lot of people who are looking at Bitcoin. They see the surface aspect. Gee 1 BTC gets me $X and $X gets me 1 BTC. And from that they leap to 1 BTC is $X. That leap doesn't work because there is no equivalent of a market maker in BTC. I explain to folks who are wondering about BTC like this, "the more you want to trade the less they are worth, probably all the way to zero." So unlike Euros where 100 euros might be worth $132 and a million Euros $1.32M$ 100 BTC could be worth $X and a million BTC could be worth (small fraction x (10000 x $X)). It is the difference between a currency and a collectibles market. Euros are the former, BTC are the latter. Funny anecdote. My brother in law was buying property in europe and needed to do the transaction in Euros, prior to closing escrow he noticed that at the Hotel desk in the Caribbean where he was staying they had a better conversion rate than the bank had quoted him. The down payment was about $100,000 USD. On a whim he asked the desk clerk if he could change $100,000 USD to Euros and the clerk said, "Cash or check?" That one really through my brother-in-law for a loop! I agree though, generally large foreign exchange transfers are scheduled things but they aren't all that complicated and seem to happen in the same 24 hr transaction window that other wire transfers do.

by minimax 13y ago

steveklabnik 13y ago

If you have access to currency markets, absolutely, EURO/USD is incredibly liquid. At the point of sale, I do not have access to this market, so my Euros are not liquid. If they accepted credit cards (the shop I was at did not) and I had, say, a VISA that was denominated in Euro but which the bank would change into USD, my Euro would be liquid. Another way to think about access: if I give a homeless man in the Mission 20 Euro, is that useful to him? The actual form that you have the asset in matters.

ChuckMcM 13y ago

Perhaps we're not talking about the same thing. For any national currency, a bank has a way of resolving your request to exchange their currency for a local, more acceptable, currency. That is part of what the banking system does, and BitCoin eschews. In my fictional example, if an exchange didn't have deposits to cover the conversion they would go to their currencies central bank for the $90M and then exchange the BTC they got with the BTC central bank for $90M and pay back their overnight 'loan' from the local currency bank. How does that work for an exchange with BTC? Do you clean them out of all the dollars they have? Then what happens to other people who have BTC deposited and want dollars out? How does that work? Do the later people have to wait until someone buys some BTC and puts in dollars? If you have two people waiting for dollars out, who gets the dollars you just got? First one to request to get out? best customer? first one you can satisfy their complete withdrawal? Those questions are the "liquidity argument" if you want to call it that. Who pays the price for not being able to convert coins? The exchange? The customer? Lets say the price of BTC plummets, people head for the doors and want their money in dollars now. Does the exchange give them dollars that they won't recover? Or do they wait on all withdrawals until the number stabilizes and the pay out at that price? In the former the institution takes the risk, in the later the customer takes the risk. I totally get the BTC market as an awesome way to exchange markers securely. I'm not sure how it gets to be a currency without something providing the banking function. (one of those functions being liquidity as the author points out)

minimax 13y ago
There are a lot of question marks in your comment and I'm sure some of them are meant to be rhetorical and maybe some aren't. Also you mentioned something about exchanges talking to central banks which isn't something that happens. Your fictional example is: I've got 150,000BTC, please convert that into dollars for me at the market rate. What? No worries I'll just wait here. You can wire the dollars to this account here ... That isn't the kind of thing you do at the teller window. That kind of liquidity doesn't exist in bitcoin (though it would be a cinch in other major currencies). At this point you are in need of a really clever broker to find you someone to take the other side of the trade at a price that doesn't totally suck. Though that probably isn't very likely... You seem to imply that the exchange has some responsibility here that I don't understand. The exchange matches buyers and sellers at a price they can both agree on. If there are no buyers for what you are trying to sell, that's too bad but it isn't the exchange's problem. Go look on the CME product list and you'll see tons of contracts that are listed but have no bids because nobody is interested in trading them. If you want to trade a shitload of a questionable thing then you just might find there's no bid. See also: people selling mortgage backed securities in 2008. The price for not being able to sell a thing is paid by the people that own the thing (especially if they purchased the thing with borrowed monies and they are forced to price the thing by marking it to the market). I think maybe your question is just "What happens if you want to sell bitcoins and nobody wants to buy them?" and in that case the sellers are just screwed.
- ChuckMcM 13y ago
  I think maybe your question is just "What happens if you want to sell bitcoins and nobody wants to buy them?" and in that case the sellers are just screwed. Nicely summarized. We are talking about the same thing. That particular point is lost on a lot of people who are looking at Bitcoin. They see the surface aspect. Gee 1 BTC gets me $X and $X gets me 1 BTC. And from that they leap to 1 BTC is $X. That leap doesn't work because there is no equivalent of a market maker in BTC. I explain to folks who are wondering about BTC like this, "the more you want to trade the less they are worth, probably all the way to zero." So unlike Euros where 100 euros might be worth $132 and a million Euros $1.32M$ 100 BTC could be worth $X and a million BTC could be worth (small fraction x (10000 x $X)). It is the difference between a currency and a collectibles market. Euros are the former, BTC are the latter. Funny anecdote. My brother in law was buying property in europe and needed to do the transaction in Euros, prior to closing escrow he noticed that at the Hotel desk in the Caribbean where he was staying they had a better conversion rate than the bank had quoted him. The down payment was about $100,000 USD. On a whim he asked the desk clerk if he could change $100,000 USD to Euros and the clerk said, "Cash or check?" That one really through my brother-in-law for a loop! I agree though, generally large foreign exchange transfers are scheduled things but they aren't all that complicated and seem to happen in the same 24 hr transaction window that other wire transfers do.