Bitcoin is gradually becoming dollarized

The emergence and development of Bitcoin should gradually Bitcoinize the world. However, the opposite is true. I believe that Bitcoin is being dollarized.

A successful medium of exchange should be used by four types of people or organizations: retailers, consumers, financial intermediaries, and speculators. However, given the inherent volatility of Bitcoin, Bitcoin is currently more used by passive speculators than by the general public, and is denominated in US dollars by default.

Let's first talk about the adoption of Bitcoin by retailers or merchants. Entrepreneurs who want to bring Bitcoin to the mainstream market find that while merchants support the idea of ​​consumers paying with Bitcoin, they themselves refuse to transact in Bitcoin. Even if they are willing to accept Bitcoin as payment, they will immediately convert the Bitcoin received into US dollars through payment processors such as BitPay or Coinbase. Retailers choose to dollarize instead of Bitcoin because they are afraid of Bitcoin's volatility, which is of course normal.

Now let's talk about consumer adoption of Bitcoin. I have explored this question in previous posts: Do consumers get any relative benefit from using Bitcoin to pay compared to using USD? It is questionable. If people want to convert USD to Bitcoin, they have to bear the transaction fees of buying Bitcoin, and they have to bear the volatility of Bitcoin.

In order to drive mainstream consumer adoption of Bitcoin, these intermediaries (i.e. Bitcoin payment processors) must provide consumers with protection from Bitcoin price fluctuations, just as they currently do for merchants. For example, providing a permanent stable Bitcoin wallet that allows consumers to purchase Bitcoin but store funds in US dollars, with the intermediaries taking the risk of Bitcoin price fluctuations and improving the means of processing consumer transactions. Of course, this will only further dollarize the world, not Bitcoinize it.

The inevitable product is an instant Bitcoin solution. Buyers hold their dollars until they press the buy now button, at which point an intermediary exchanges their dollars for Bitcoin. The switch from the dollar "rails" to the Bitcoin "rails" is instantaneous. Upon receiving the Bitcoin payment, the merchant's payment processor immediately converts the Bitcoin into dollars and provides it to the merchant. Since both the buyer and seller have chosen to dollarize their payments, both parties are protected from Bitcoin's volatility. Consumers and merchants still enjoy the cost savings of using instant Bitcoin payments. Only the intermediaries and speculators who handle Bitcoin transactions between consumers and retailers avoid dollarization.

But if everyone involved in the transaction only wants dollars, wouldn't it be easier to remove Bitcoin from the process? Bitcoin wallet providers and merchants' Bitcoin payment processors can reach an agreement to use dollars as a means of payment without the hassle of handling Bitcoin. In this way, transaction fees disappear, the obligation to pay the spread of Bitcoin quotes also disappears, and the risk of Bitcoin price fluctuations is no longer borne.

This puts the situation of those Bitcoin intermediaries in a very awkward position, as they seem to no longer be part of the Bitcoin world but have become a bit like PayPal, providing consumers with US dollar accounts and US dollar payment solutions.

So, in order to promote mass adoption of Bitcoin, we seem to be going in the opposite direction, and the Bitcoin payment network, which was supposed to be a Bitcoin payment network, is now completely dollarized. Consumers and merchants are backed by dollars, and the so-called middlemen such as wallets and payment processors no longer trade Bitcoin. Only speculators hold Bitcoin. This will create a personalized PayPal system built on the US dollar system, which is exactly what Bitcoin is designed to overthrow.

This is not to say that Bitcoin is a failed retail payment option. It’s just that I’m less certain about Bitcoin becoming a mainstream payment method. Even if Bitcoin continues to be a niche payment method, adopted by a group of like-minded consumers and retailers, it will be quite successful. Even if it has not yet reached the level many people dream of.