Value Denomination and Stablecoins – Kerman Kohli

It’s been almost three weeks now since the aftermath of the whole SVB situation that played out. As a custodian of an entity with a non-significant amount of USDC, seeing your treasury drop by 10% for an asset which you assumed to always be $1.00 was not a fun experience to say the least.

I think the biggest takeaway from the whole episode for me was that stablecoins will never be first class citizens and their risk isn’t as low as we have collectively priced it to be. This whole event really exposed how fragile the system we’ve built is in some cases. When USDC went down, it meant so did DAI + FRAX (because they contain USDC) and then other regulated stablecoins (because they had the same banking partners).

During that time, the two safe havens to park assets were BTC and ETH. Their value proposition of being hard, immutable assets was very clear. The market confirmed this through the sharp increase in price for ETH and BTC as this went down. In a world where most banks (outside of the big ones) are basically insolvent and can have bank runs caused by Twitter (read the thread below)

Inflation being an inevitability given the US can’t finance its. interest payments through cash but rather through printing more money which gets them tangled in a recursive mess. By bailing out SVB they’ve once again shown that between making hard calls and pressing the button, they’ll choose pressing the button. Precedence has been set and letting anything else fail isn’t an option given they’ve “bailed out the rich Silicon Valley technocrats” (not accurate but rather the political narrative I’ve seen). The list of problems isn’t over, rather they’ve only just begun and starting to unravel in-front of our very eyes.

As you think logically through this progression, you start to realise the world starts to look very different in the next few years:

• Stablecoins are fragile contraptions that are only as good as the banking partners they rely on

• The US is becoming increasingly hostile to anything crypto related and any banks that touch crypto are being assaulted

• Stablecoins will be be second class citizens in the crypto with volatility dampened assets being an alternative to “stablecoins”. In this world stablecoins will be great to borrow as the cost of debt will go down relative to the collateral asset they’re being borrowed against.

• There isn’t enough real value created to service the debts so the only way out is to further debase the currency

• Debasement will encourage other entities, people, countries to further reduce their reliance on the US dollar. This will have trickle on effects to other fiat currencies

• In a world where there is no single currency but a myriad of currencies, everyone has to take directional bets (there is nothing that is stable since stable is only a relative measure to something else)

• Assets will go up, and crypto will be one of the only places where people can reliably park their wealth without being subject to hidden inflation taxes (mainly BTC imo) although everything else including ETH/Real estate/stonks/tokens will go up as well (just with more volatility along the way)

This read from Arthur Hayes is great to get a better understand of what’s going on at a much larger scale. The deeper you go down this rabbit hole, the more you learn about the cosmic forces that are changing at scale around us.

In this new world that we’re entering, how you denominate your value will become increasingly important since every asset makes assumptions about the underlying mechanics of what powers it. US Dollars? Sure, but you better know how the FED and central banking system works. Crypto? Sure, but know about the risks that exist out there and how you will actually protect yourself against them. There is no right answer unlike before. Gold is always a popular answer but unless you have physical custody over it, don’t rely on it since it’s probably being re-lent out 10 times and redemption at scale isn’t possible.

If you want something to chew on, read this blog. The articles are almost two years old but perfectly predict what’s happening. http://howfiatdies.blogspot.com/

Learn how the system you’re participating works otherwise be prepared for the side effects it produces.