Comment by mightybyte | Hacker News Reader

Comment by mightybyte | Hacker News Reader

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> I still do not understand why it even exist?

Imagine you're a restaurant (or any other business) and you want to allow your customers to pay with digital transactions on a blockchain. If your customers pay you in Bitcoin, you are taking on a huge amount of risk due to Bitcoin's price fluctuations. I just looked up the price of Bitcoin and it has dropped 6% in the last 24 hours. If you sell a $100 steak dinner for Bitcoin in the morning and it drops 6% by the time you're converting it to dollars at the end of the day, you've just lost 6%. You have to pay your expenses (labor, food, etc) in USD no matter what but you're holding a currency that is now worth 6% fewer dollars than what the customer paid. The reason I picked the restaurant business for my example is because restaurants have really thin margins. A 6% loss due to currency fluctuation is a huge problem for a restaurant.

That is why people have created stablecoins that are constructed in a way such that their value is pegged to some kind of external asset (like the USD). This allows business to accept payment via a blockchain without being exposed to the price risk of volatile cryptocurrencies.

I get it now, but someone, somewhere has to take a loss, right? If tether is sold for dollars, and someone traded 10btc today, but btc loses 10percent of value overnight, that someone can cash out for the price of yesterday, that's great. But who takes the 10percent hit?

If the restaurant uses the stablecoin, nobody takes the loss because the transaction is happening with a different currency. The restaurant isn't holding BTC, it's holding a USD-equivalent.

If BTC loses 10 percent of its value overnight, the people who lose are the people who sold at the lower prices. When we say "the price of BTC is X", what we really mean is that a trade happened at that price. That means that someone thought selling at that price was the right thing for them to do and someone else thought that buying at that price was the right thing to do.

Someone doesn't have to take a loss. There's a distinction to be made between "realized" and "unrealized" capital gains. Realized gains are those that exist because you have now sold your assets and converted it back into money; unrealized gains exist only on paper and are premised on people continuing to value the asset the same.

So it can be the case that no one takes the 10 percent loss. Everyone who is selling may have bought at a lower cost basis (and thus will realize a gain). The price is lower because it had to go down to entice new buyers to bet it will go back up again.

There is a funky situation where you try to sell your assets and you find nobody willing to take it at any price. At that point, you can turn around and say "I don't want to own this worthless piece of paper anymore," strike it from your assets list (i.e., "write-off"), and now you realize a 100% loss.

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