The strong dollar comes to Bitcoin-istan

Although the U.S. dollar is worth significantly less today than a year ago if you are buying gasoline in Des Moines, American currency looks a lot different if you are living in Europe or Japan. They, as well as us, have seen their own domestic prices for staples shoot up (which, Republicans insist, must somehow be Joe Biden’s fault as well), but their price for purchasing U.S. dollars themselves has gone up even more. If you are buying U.S. dollars in order to complete an international transaction using euros or pounds sterling, you are paying about 12% more now than you were a year ago, just in the money exchange.

I have made the comparison before that, in rarely discussed ways, cryptocurrencies can be seen as “foreign countries” as alternative currencies to your local sovereign money form. And so, if you are trying to convert bitcoin or most other cryptocurrencies back into dollars to transact real, as opposed to imaginary virtual business (i.e., buying NFTs), you are likely paying at least 35% more for dollar-denominated goods and services than you were at this time last year.

Even if you don’t leave the United States and you don’t trade in cryptocurrency, you are still affected by the “strong dollar” and its “bullet that you didn’t hear.”

The confusing “strong dollar” terminology

In economics-speak, the dollar has been getting “stronger” over this past year in comparison to most major world currencies. Germans paid about 83 euro cents last year to purchase one U.S. dollar. Today, they are paying about 93 euro cents, over 12% more. Conversely, I can purchase 12% more euros with my U.S. dollar than I could last summer if I want to tour the Continent. Here is the trend over the past year for the euro, the pound, the yen, and the yuan against the dollar in percentage terms from last June’s base:

Strong-dollar-2022

Data source: x-rates.com

A “strong dollar” sounds like it is wearing a red, white, and blue flag, and many politicians treat it that way.  And it is good if you are an American traveling abroad, or a big importer, say Walmart, of goods made in countries with “weaker” currencies seeking cheaper goods to sell to Americans. The Japanese yen, for instance, is about 18% cheaper than last year, and the same holds true for the currencies of other Far East manufacturing and service-providing countries. India has fared a bit better, currency-wise, but still, if you have off-shored your technology services to Chennai, your dollar will go 5% further than last year.

A strong dollar is bad, however, if you are a farmer trying to sell your crops abroad, or if you want Britain to adopt your dollar-denominated new technology. Many Americans, especially in Iowa where the farmers want to export soybeans and John Deere wants to export tractors, would be far better off with a weaker dollar, but you rarely hear any politician run on that platform. It sounds so unpatriotic, but it is just unfortunate economics terminology. There are always both winners and losers when currencies change value relative to one another.

The strong dollar hits many other nations around the world even harder, since many commodities, such as oil, are internationally priced in U.S. dollars. I have noted before the Argentine student of mine who explained, “When my country wants to buy oil, they first need to buy dollars; then they can buy oil.” Today Argentinians are paying 25% more than a year ago just to buy the dollars they need so that they can then buy a barrel of crude oil, which is itself up almost 70% from a year ago. And we wonder why people get pissed off at Americans, and why Jesus beat up the money-changers in the Temple.

The accountant’s dilemma

When I was working in England for a company with a Canadian parent and several U.S. “sister companies,” the currency differences were mostly an accounting distraction. Changing exchange rates caused nagging pricing problems for products going in either direction. We discovered one large “arbitrage” transaction, where someone found it cheaper to buy from the U.K. company and ship to the U.S. than it was purchase in America because our pricing adjustments lagged the currency market movements.

I have discussed in the recent past four different pricing issues that come up for companies with cross-border transactions. The cryptocurrency community has yet to come to grips with most of these issues, but eventually it will hit them, as they are a form of “foreign currency exchange” whenever they “cross the border” from the virtual world to the real world.

In my company’s case, we often used the well-established dollar-pound-euro “futures market” to smooth out those nagging price differences. This market essentially bets billions of dollars (and most other currencies) on where each currency might be in relation to the other currencies at various points in the future, a complicated multi-player “game theory” triangulation.

The participants in this market may be wrong when the future actually becomes the present, but the odds of being high or low on their bet six months ahead of time gets really close to 50-50 odds over time. The massive size of the currency futures market means that the good (or lucky) currency prophets and bad prophets offset one another. In other words, if a business needs to plan for a cross-border financial transaction at some point in the near future, “hedging your bets” by purchasing currency futures consistently over time theoretically evens out the bad calls for a relatively small transaction cost.

And by the way, the futures market for oil is really the prime determinant of current oil price movements. Not Joe Biden or any other politician. Hundreds of tankers full of the stuff move around the globe continually and hang outside of ports waiting for the optimal time to turn their oil into U.S. dollars. Their future oil delivery is likely bought and sold numerous times electronically before hitting port. Think of those tankers as the precursors to cryptocurrency.

The accountant in Bitcoin-istan

If you ever plan to put more U.S. dollars into, or take dollars out of, the cryptocurrency market, you have a whole new level of market manic depression to deal with. As I have written earlier this year, two of the key “bets” by cryptocurrency investors, it being a new way to “count” economic value and also being a secure “store of value” itself, have proven to be very elusive.

Here is the same graph shown above, but asking the question, “How many dollars will my one bitcoin buy?” Bitcoin (the turquoise line) has shown swings of nearly +35% to -36% compared with the U.S. dollar at various points over the last year. Some other cryptocurrencies have had even wider swings.

Strong dollar; weak bitcoin 2022

Data sources: x-rates.com; xe.com

In this sense, bitcoin and its competitors, although they hate the term “fiat currency,” have some of the characteristics of the currency of a wildly unstable third world country. Theft and “bank failures” are rampant. And yet, if you are “living” inside this country, Bitcoin-istan, we’ll call it, you may well get the illusion of normalcy. Everybody on your street takes your peculiar currency in exchange for stuff, and life rolls along.

At some point, however, there is some good or service that is not denominated in your currency and so you must engage with the dreaded money-changers. You are now the tourist in London’s Leicester Square trying to change your dollars into pounds to score some theatre tickets, and your options are limited. Somebody is eager to both sell you the tickets and take your dollars, but you then learn there is a steep price to pay when your money crosses the border in the wrong place and at the wrong time.

There is a futures market for the biggest cryptocurrencies, but the market is neither big enough nor mature enough to yet shake out the charlatans from the prophets enough to stabilize the big currencies. It is just one more virtual bet on top of a bigger virtual bet on a virtual “something.”

It may well be that the decline in the value of most cybercurrencies against the dollar over the last six months as more conventional currencies have likewise grown weaker is only “correlation without causation.” But at some point, the “international border” between the real world and the virtual world must live by some of the same cross-border economics that the the rest of the world has been living with for decades. Just remember that, at some point, the “big currency guys” will likely step in and slap alongside the head any rogue country that is doing crazy things with its own fiat currency in order to maintain stability in their own markets.


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3 thoughts on “The strong dollar comes to Bitcoin-istan

    1. @rklindgren Post author

      That is a great rent! The Dominican Republic accepts the US Dollar as a reserve currency, and much commerce in the DR is done in US$ As a result there are basically “bumpers” on prices that prevent their own currency from getting too out of whack, and at the same time prevents the DR from exercising a great deal of control over their own currency. El Salvador gave up on their own currency a number of years ago and adopted the US$, but that basically gave them zero monetary flexibility. This is largely why they wanted to go with bitcoin as a state currency, but that has not worked out well.

      Reply
  1. Peter Robinson

    That change was over about seven years, so not an alarming rate of change for the Dominican peso.

    I retired here and that was a good decision. My SS money goes much further.

    Reply

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