Imagine that two new islands are born with two different currencies. Island A has A_crypto, and island B has B_crypto. Let's assume that civilization emerges within a couple of years and both islands want to exchange products. As their currencies are different, how do they establish exchange rates?
Well, as both islands are small, they could count the total production of each island. As this can be complicated, they could establish a highly valuable product as a reference to start exchanging. Real estate is valuable in both places. So, for example, if island A has produced 20 houses and island B has produced only half—let's assume that they have the same size and quality—, it seems logical to think that A_crypto is valued double as B_crypto.
Exchange rates are a result of products created by both countries. It seems logical that if island B didn't have any houses, people from island A didn't want to exchange their currency with people from island B.
As countries grow bigger, the exchange rate formula gets more complicated, but in the end, it should reflect the relationship between the products and value of two different countries; imports v. exports—and value of both.
Now, let's go back to a simple example. If I travel to Thailand, the current exchange rate is 37.35 THB for 1 EUR at this precise moment. How can I know if THB is cheap or not? A simple way to know it as a regular traveler is transforming the price of a product in Thailand to my currency, and seeing if it's cheaper than in my country.
For example, let's take a highly valuable product that is exactly the same in both countries: an iPhone 13 Pro. In Spain, the official price at the Apple Store is 1159 EUR, whereas in Thailand is 38900 THB. Taking into account the 37.35 THB/EUR exchange rate, if I went to Thailand, I would pay 1041 EUR for that iPhone. As an EU resident, I could say that THB for me is cheap. There is an oversimplification of the problem because I should take into account more products to know if the currency is cheap, but let's make this as simple as possible.
Let's say that suddenly, the exchange rate becomes 23.39 THB for 1 EUR (24% decrease). Then, the iPhone Pro would be more expensive than in Spain (~1290 EUR), and I wouldn't buy it in Thailand.
The same logic should be applied when buying crypto. What is the value generated with crypto? What businesses operate using only bitcoin? The answer is that not many so far. If I can't go to Apple's website and pay with bitcoin, how can I know if bitcoin is cheap?
Bitcoin would be interesting if all the products produced over the internet were sold with crypto. For example, if Apple stopped accepting dollars and started accepting only bitcoin. Actually, it only takes a couple of big fishes to start accepting crypto to start rolling the ball. The problem is that companies don't seem interested in accepting crypto. Until they start to accept it (if they eventually do), it's complicated to know if you are exchanging your fiat money at a good rate. If I told a random Spanish citizen to exchange 1000 EUR to THB because it's cheap now, I bet they would roll their eyes and make some kind of excuse. But I don't know why you replace THB for BTC and people put half of their savings on it.
Hi, I'm Erik, an engineer from Barcelona. If you like the post or have any comments, say hi.