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WHAT IS THE RELATIONSHIP BETWEEN THE DOLLAR AND THE BITCOIN

However, Bitcoin acts barely anything like the US dollar, proposing that its relationship with the world’s it isn’t that clear to lead government issued money. While Bitcoin was intended to be cash, we contend that the digital currency is best portrayed as an innovation adventure with critical guarantee however restricted foothold as “cash”. While Bitcoin fans accept that the digital currency has clear advantages over the US dollar, it has neglected to build up some decent forward movement to exchange like cash. Like other innovation adventures, Bitcoin will in general exchange conversely to the US dollar.

The US dollar is the world’s reserve currency

Because of the peculiarity of globalization, both worldwide exchange and cross-line monetary speculations are typical today. As increasingly more business and speculation action becomes worldwide, there is an undeniable requirement for a solitary benchmark to think about costs across nations. As the world’s save cash, the US dollar is basically the world’s money related measuring stick. A new release distributed by the Bank of England gives a decent outline to the US dollar’s worldwide job.

Significant resources (like wares) are principally exchanged against the US dollar, while by far most of worldwide exchange is led in the dollar. This is valid in any event, for two gatherings who don’t execute locally in the US dollar (for instance: a Swedish purchaser paying for a Japanese car). As portrayed over, the US dollar is utilized in such a circumstance given the requirement for an autonomous proportion of costs.

Beyond its role as a monetary yardstick, the dollar is a global safe haven

While the buck is the most used currency for making international payments, the majority of cross-border lending is also conducted in US dollars. This is because the US has some of the world’s deepest and most advanced capital markets. The dollar’s additional role as the world’s liability currency gives it the characteristics of a “safe haven” currency. When global economic growth is accelerating, borrowers seek US dollars (as bank loans or as debt securities) in order to fund future growth. As more and more dollars chase foreign investment opportunities, the dollar depreciates as a result. Given the significant cost of hedging dollar debt, many borrowers accept foreign exchange risk in order to raise financing.

The problem starts when global growth decelerates. Once economic conditions start worsening, foreign borrowers struggle to repay US dollar loans. At the same time, US dollar credit taps dry up as lenders begin to doubt the creditworthiness of borrowers. When borrowers struggle to repay their debt, they often sell their assets and buy US dollars to repay their loans. This causes a fire sale, and the US dollar surges relative to other currencies in response.

The fact that the dollar depreciates during a boom and appreciates during a bust makes the currency a classic safe haven asset. Unlike most other currencies, the dollar trades inversely to global risk sentiment. Most currencies do not trade like safe haven assets (as they are not used heavily for cross-border lending), and they are considered “risk-on” assets. “Risk-on” currencies appreciate when global growth is accelerating and depreciate during downturns. With the exception of the Japanese yen, the US dollar and the Swiss franc, all other currencies exhibit qualities of “risk-on” assets.

Bitcoin is a “risk-on” asset, but not a currency

As a whole, currencies tend to be less volatile relative to riskier financial assets such as equities or commodities. This is for a good reason: when currencies become excessively volatile (such as some emerging market currencies), the currency fails as a domestic monetary yardstick. This causes domestic trade and investment to slow fairly dramatically. If the value of the dollar swung 1% on a day-to-day basis, investors and businesspeople would reduce their dollar transactions and seek a more stable alternative currency.

While Bitcoin has enjoyed success as a speculative asset, it has mostly failed as “money”. Despite its strengths, the cryptocurrency suffers from many issues, including (1) high volatility, (2) unsolved security issues relating to storage, (3) the risk of technology obsolescence, (4) inefficient payment networks, and (5) limited usage as a means of payment and store of value.

High volatility means Bitcoin is more a technology venture than a currency

Today, Bitcoin’s rolling 30-day annualized volatility is north of 80% according to BitMEX, a leading cryptocurrency broker. By comparison, the NASDAQ’s rolling 30-day annualized volatility is under 30%. Note that the NASDAQ stock market index is considered a risky asset given the large number of technology stocks that trade on the exchange. The rolling 30-day annualized volatility of safer assets such as short-term government bonds is just 1%. Without pegging its value to a stable asset, Bitcoin has no chance today of competing against the US dollar today.

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