Why Stablecoins are Sh!tcoins
How to read the current crypto carnage
This post is going to be “quick and dirty” as the crypto space is seeing a lot of anxiety. Before I go any further I am going to imitate one of my favorite Substack writers at Quoth the Raven: I am a nobody in the traditional world of finance (which is why I think you should read what I write). I hold no credentials (one more point in my favor, actually). I am going to state here how it is I am weathering what is happening to my relatively modest positions in GBTC (Bitcoin) and ETHE (Ethereum). I am not making any recommendation to you as a reader one way or the other. I am just going to tell you how I am set up and what I am seeing. Like me, you are on your own as far as anything I write has anything to do with anything.
The Stablecoin carnage is really an indictment of the Dollar
TerraUSD is in the news for losing its 1:1 peg to the Dollar. Let’s start by first avoiding the shiny object - Stablecoins. The underlying idea behind Stabelcoins is an avoidance of the volatility some believe is intrinsic to crypto. But is Bitcoin (or any other true crypto-currency) really volatile?
Writing here about gold rather than crypto, Alasdair Macleod observes an assumption made by every crypto-skeptic I have ever read. Indeed, it is also made by every Bitcoin maximalist I have read who thinks Ether is a mere payment system. As you read this, simply replace “commodity” with “crypto-currency.” Italics have been added.
It is this factor that completely escapes popular analysis with every commodity analyst assuming in their calculations a constant objective value for the dollar and other currencies, with price subjectivity confined to the commodity alone. The use of charts and other methods of forecasting commodity prices assume as an iron rule that price changes in transactions come only from fluctuations in commodity values.
I call this the “Tyranny of the Y axis.” For us to understand the specific instance of what has happened to TerraUSA, and the general reason why Stablecoins are “sh!tcoins” we have to first understand what I will call “the immutable pair.”
From your labor to your living
As I have written in my Case for Crypto, money is first an incentive to work before it is a medium of exchange, a store of value, or a unit of measure. Money is how we translate our labor to our living. If our labor is valued in a monetary unit of measure by a time unit of measure (an hour), we must first observe that the time unit is immutable. If I work an hour, I cannot go back and add to it, nor can my employer go back and subtract from it. It is like ringing a bell; you cannot “unring” it.
The problem with accepting a fiat monetary unit like the Dollar is now becoming clear - it is revealed as a completely unreliable way to exchange one’s labor for one’s living. In order to fix this, we need to have an immutable pair - accepting something for our labor which is equally immutable over and against our time.
Gold and silver come first to mind, mainly for historical reasons. But we have to understand what it is that makes both gold and silver immutable. The chemistry of the Noble Metals is such that neither gold nor silver will rust. This means a gram of gold or silver will weigh a gram a hundred years from now. It is the physical laws of chemistry that make gold and silver immutable for the purposes of an immutable pair by which we might exchange our labor for our living.
The problem with both gold and silver is neither are easily divisible. You cannot easily take an ounce of gold and divide it up into ten 1/10th oz. units; you cannot make change. On the heels of the English Civil Wars, when goldsmiths started issuing receipts for gold deposits, using the receipts as “paper money” solved that particular problem, but introduced a new problem. The goldsmiths realized they could issue “extra” receipts and lend them at interest - becoming the forerunners of the fractional reserve banking sector. This introduced the notion of “real” value (in gold) vs. “nominal” value. The nominal value in ounces of gold was higher than the real ounces of gold held on deposit. This had the effect of turning gold deposits into a mutable unit - subject to the whims of those who determined what the fraction would be.
Labor for crypto: the ultimate “immutable pair”
This is the base case for crypto - it creates an “immutable pair” with math doing for crypto what chemistry does for gold and silver. It is easily divisible without requiring pre-set “denominations.” In Dollars we are forced to use $0.01 units (the penny); $0.05 (nickel); $0.10 (dime); and $0.25 (quarter). We also have a $0.50 coin, but they are rarely used. Crypto can be exchanged in any fraction needed without requiring a mint to issue coins or notes.
One cannot understand the problem with Stablecoins unless one first understands that the fiat unit to which they are tied is mutable. In that sense, Stablecoins are “pretenders” in the crypto space (as are/will be Central Bank Digital Currencies - CBDCs). They might have all the trappings of a crypto currency, but by their tie to a fiat Dollar, they lack the sine qua non (literally: “that without which”) of a crypto currency - immutability.
So as for Stablecoins I am not in the least bit surprised by what is happening in the larger crypto market right now. There are two things to note beyond what I have said above. First, heed Macleod’s observation above when considering the assumption that the “Y axis” in your (or anyone else’s) charts is an objective way of measuring volatility. Your Y axis is either in nominal Dollars or in a percentage of nominal Dollars. Your charts’ Y axis is only as reliable as the Dollar is a reliable way to translate your labor to your living.
DO NOT FORGET THAT LAST SENTENCE!!! READ IT AGAIN!!! MAYBE EVEN PUT IT ON AN INDEX CARD AND READ IT EVERY TIME YOU GET GROCERIES OR FILL UP YOUR CAR WITH GAS!!!
Second, anything tied to a fiat currency like the Dollar will suffer the same fate as the Dollar. (See picture above.)
I am hedging the Dollar’s slow motion burial
So, if your charts aren’t really telling you much of anything useful, what can one do in this environment? Here is what I have done at a relatively low level ($45k-$55k retirement account). And disclaiming again: I am not recommending “investments.” (Indeed, if I am doing anything I am trying to get my reader to stop thinking about crypto as an “investment” of any kind). I am merely telling you how I am set up and what I am seeing:
I have positions in Drexion inverse (short) tech and inverse (short) small cap ETFs as well as long positions ETHE and GBTC. Between ETHE and GBTC I am weighted to ETHE because I think Ethereum’s use cases are broader than Bitcoin (read here to see why). I also have some uranium, gold, and silver longs. The GBTC and ETHE have taken really serious hits - well beyond what I would otherwise tolerate in terms of a stop. I have tolerated the loss, though, because the short positions in tech and small cap have successfully offset those losses in percentage terms. So when I measure for a stop strictly for the crypto positions, I am using my gains on the short side to offset my losses on the long side. (I just stopped out at a 26% loss in another area).
It is not lost on me that I am measuring all of this in nominal fiat Dollars. It has been observed that crypto is tightly correlated to tech. My response is of course it is - in nominal fiat Dollars. If writers like Zoltan Pozsar (I cannot find a link to the article not behind a paywall) are correct about the emergence of a new monetary order (he calls it Bretton Woods III, and I believe he is) there will be a point in the future where this correlation breaks.
My theory is the Federal Reserve now has two choices: Hike rates into the current recession or go all in buying corporate bonds. First, the Fed will not cause the recession; it is already here, but hidden by fake CPI data. Inflation is likely north of 12% (per John Williams at Shadowstats.com). When GDP is calculated, if the rate of inflation is understated, the rate of economic growth is overstated. If the Fed hikes into this recession tech and small cap in particular will be faced with lower nominal earnings (from the recession) and higher borrowing costs. The other way to put this is the tide will go out quickly and we will see a lot of tech and small caps swimming naked.
If the Fed runs to give them all towels to hide their (and its own) shame, they really only have one way to do it: buy corporate bonds. This is no different than propping up government borrowing by buying Treasuries or propping up real estate by buying up mortgages. Now corporate credit will need propping up. This will only throw gasoline on the dumpster fire of inflation, stealing more real purchasing power.
Otherwise the Fed has to leave them all standing there buck naked. The problem with that is the counterparty Federal Reserve System banks who bought their bonds in the first place. If the counterparty banks get in trouble, and the Fed cannot bail them out again by buying up their tech/small cap bond portfolio, they will have to go the “bail-in” route allowed under Dodd-Frank. Rather than the purchasing power of deposits being stolen, part of the deposits themselves will be stolen. But make no mistake, it is theft either way in a rush to cover their nakedness. And we will see - again - my base case for crypto - no one likes a thief.
Either way, the fiat Dollar as a reliable way to mediate your labor to your living is wheezing its last breaths. This means the price of crypto in dollars will eventually soar. But the price of tech/small cap stocks, also in Dollars, will likely collapse. The only question for me at that point will be when to take the Dollar hit of the penalty for cashing out the retirement accounts early in favor of cold-wallet crypto.
One more time, just in case it didn’t register: I am a cyber security professional, not a financial advisor. I hold no licenses in the financial sector. I have relatively small positions in ETHE and GBTC which hold Ether and Bitcoin in trust on behalf of shareholders. While I believe crypto currencies are not an investment, this does not mean there is no case for owning crypto. It just means the current case has nothing to do with traditional investment theses. In any event, do not - under any circumstances - make investment decisions on the basis of anything I write.