Hamish MacEwan

Now in Bitcoinia (as we might call the Bitcoin economy) that means volatility currently matters very much. Almost every good one can purchase with Bitcoins is actually priced in dollars and sold at a Bitcoin price reflecting the prevailing exchange rate. So there is almost no Bitcoin frame of reference independent of the Bitcoin-dollar exchange rate. Bitcoinia mostly lacks internal supply chains, in which contracts for intermediate goods are denominated and settled in Bitcoins. People aren’t taking home Bitcoin paycheques. To put things simply: every good in Bitcoinia is an import and every job must be offshored. In that kind of economy, exchange-rate volatility matters a very great deal indeed.

But just because that’s how Bitcoinia operates now doesn’t mean that’s how it will operate always and forever. The more purchasing power there is in Bitcoinia, the greater the incentive there is to cater to Bitcoinian demand. The more transactions there are in Bitcoinia, the more entrepreneurs will want to hedge their exposure to foreign exchange volatility by paying suppliers or employees in the same currency they’re accepting as payment. And Bitcoin wage payments reinforce the demand for goods and services that can be purchased with Bitcoins. The greater the ability one has to buy and sell what one needs exclusively within Bitcoinia, the less foreign-exchange volatility matters.