Insight
October 25, 2024
If readers haven’t watched Paul Tudor Jones’s CNBC interview on the US’s financial condition where he concludes that “all roads lead to inflation,” it’s worth a watch (here). In the video, viewers can watch as the renowned macro investor tries to reason a way out of the US’s financial predicament, only to conclude that the only reasonable path forward results in inflation, thus he’s long gold, commodities, tech stocks, and bitcoin and short bonds.
While the math may be inescapable now, we are reminded of another renowned piece of macro thinking, Bridgewater/Ray Dalio’s work on big debt cycles. The full thoughts have been fleshed out in a piece, Principles for Navigating Big Debt Cycles, but the solutions come down to 4 options/levers (page 12):
The first two, austerity (reduction in fiscal spending) and debt defaults/restructuring are deflationary, while money printing/debt monetization is squarely inflationary. Wealth transfers, which could be inflationary or deflationary depending on how they are done, rarely are substantial enough to create a deleveraging, unless they are accompanied by “revolutions” where huge sums of assets are nationalized.
There doesn’t seem to be any political appetite to reduce spending, regardless of which party is in power in the US (see our piece on the Tragedy of the Commons), and defaulting on or restructuring the nation’s debt seems neither imminent nor palatable economically, politically, or socially. That leaves us with one option - printing money and debt monetization (the Federal Reserve purchases the Treasury’s debt, a form of quantitative easing).
One impact of this method of dealing with our national debts, inflating our way out, punishes savers (cash) and low-risk investors (bondholders) and benefits investors (stocks, commodities, real estate, bitcoin). It acts as a forcing function, pushing investors out of low-risk strategies and into higher-risk ones – money must be invested (risked) to maintain purchasing power (provide a real rate of return).
For investors, the river card, inflation, is on the table and Paul Tudor Jones has shown you how he’s playing the round. The only question is, will investors do the same?
This week, payments fintech Stripe made the biggest acquisition in its history, paying $1.1B for Bridge, which creates software that allows companies to move, issue, store, and accept stablecoins. Given the size of the acquisition, it’s clear that Stripe is making a big bet on the future of stablecoins. Stablecoins have already emerged as one of blockchain’s “killer apps,” collectively accounting for $172B in aggregate market cap, with the largest stablecoin, Tether (USDT), being the third largest digital asset in the entire industry. But what does the success of stablecoins say about the digital asset industry and blockchain technology more broadly? By looking at their benefits and drawbacks, their success might reveal some important aspects of the industry.
For all the lip service the industry pays to the concept to “decentralization,” it seems to be the first attribute of blockchain technology that goes out the window when other motives are at play. Fair enough. Decentralization is the hardest metric to quantify and often difficult to assess from the outside. Rest assured though that just because something is on a blockchain does not mean it is decentralized.
For the most popular style of stablecoin, off-chain reserve backed, like USDT or USDC, there is little aspect of decentralization. These are digital assets issued by a central entity in a 1:1 ratio (hopefully) with dollars held in a bank account. Coins can be frozen, minted, and withdrawn from circulation, all by the issuer, without input from any outside forces. For stablecoins, decentralization might be a bug rather than a feature.
To understand why stablecoins have been so popular, a bit of industry history is in order. In the early days, the hardest thing for crypto investors to do was to convert their fiat into crypto, oftentimes resorting to risky methods, technologies, or services to do so. The reason was that it was extremely difficult for crypto exchanges to obtain bank relationships that would allow investors to send fiat via an ACH transfer, wire, or similar technology. As a result, many crypto exchanges emerged as “crypto only,” (RIP Cryptsy) and the most popular quote currency was bitcoin (so XRP-BTC or LTC-BTC trading pairs). “Crypto only” exchanges allowed users to send crypto to their trading accounts, but only after their fiat had been converted in some other manner. One of the reasons Coinbase became the biggest US exchange (well “service” before GDAX launched) was that it was able to obtain and maintain a banking relationship, which allowed for an easier ingress into the crypto ecosystem.
Enter Tether, which performed that third-party money exchange service for users, issuing them a digital token, USDT, in exchange for their fiat. This was a great utility for both users and exchanges. Now there was a digital token that stood in for the USD, with a “stablish” value, that could act as the quote currency on crypto only exchanges that couldn’t get banking relationships, including many in Asia, a hub of crypto trading. Even today there’s a stark contrast of trading pairs on east vs west exchanges – Binance, OKX (OKEx), HTX (Huobi), and Bybit are all still mostly “crypto only” exchanges, while Coinbase, Kraken, and Gemini are fiat (USD) exchanges.
What’s the highest volume traded cryptocurrency today? Tether by a long shot, with 2x the monthly volume of bitcoin and nearly 4x that of ether.
The interesting thing about stablecoins is that they are denominated in nearly every major fiat currency, USD, EUR, CNY, GBP, CHF, JPY, and INR. None of the other fiat currencies, however, even come close to matching the size of USD stablecoins. While there has been much pontification about the USD loss of preeminence in the world of finance and trade (there doesn’t seem to be any evidence to suggest that’s true), the USD dominance is stablecoins far surpasses anything we see in the real world, accounting for ~99.8% of the stablecoin market. The crypto community loves to dunk on fiat currencies and it may just be that the USD is the best house on the worst block, but to say that crypto users love the USD would be an understatement.
It has been over 7 years since some members of the crypto community began to publicly question Tether’s operations and backing. What has Tether done in those 7 years since those questions were first asked, a time that includes fines paid to CFTC and NYAG? Explode in popularity. It is not only essential to the functioning of many crypto exchanges, but it has emerged as one of the largest holders of US government debt, enshrining itself as systematically important to both the digital asset industry and the US Treasury.
In 2018 – 2019 there was an industry move to supplant USDT as the pre-eminent stablecoin. It was believed that better clarity, through monthly asset and liability attestations performed by third parties, would be favored by users. Hence, we had the launch of USDC, GUSD, BUSD, and PAX, to name a few. While USDT would go on to lose some share in the stablecoin market, definitionally it had to with nearly the entire market to itself (except for DAI issued by MakerDAO), the challengers were never able to unseat USDT. Either USDT’s grip on the market was too strong, or the clarity benefits brought by other off-chain reserve-style tokens weren’t great enough (or worse, were a liability for some stablecoin users) for users to make the switch.
While volatile cryptocurrencies like bitcoin have always offered the promise of being used for commerce, cross-border payments, and other medium-of-exchange applications, for technical (speed) and psychological reasons (hindsight bias) that use case has largely taken a backseat to the store of value/digital gold use case. But it is these applications where stablecoins could potentially shine. Certainly, the ability to lower credit card processing fees, which could eat up an entire merchant’s margin, is appealing from the merchant’s side. From the payor’s side, there could be benefits as well. Speed of money movement, ability to transact 24/7, and lower-cost international transactions are all things that stablecoins enable, benefiting those who send stablecoins.
One downside is that these USD stablecoins all inherit the economic, monetary, fiscal, and political policies of the US. That may be too much for those who have opted out of the regime entirely for something like bitcoin, but for many that is an improvement on either their current home country fiat currency, banking system, or both.
While the Federal Reserve, US Treasury, and politicians have given a tepid response to an official US CBDC (central bank digital currency), perhaps they don’t need to do more. The current digital asset ecosystem seems to be promoting the USD just fine. Given the overwhelming response for USD stablecoins over any other fiat currency, maybe the reality is that if we broke down the fiat silos created by national borders, the USD is underappreciated, instead of overappreciated as many economic and financial pundits would argue.
Bitcoin rose 2.3% on the week as bitcoin continues its rangebound trading. We had hoped that after last week’s performance and breaking through the $69K level on Sunday, the asset would be off to the races. Alas, it was not to be, and the asset has yet to break the reigns from which it seems to be bound. It may be that bitcoin will have to move meaningfully above the price range before traders chase higher.
What may cause that? The election, whichever candidate wins, should be a benefit for the industry. Trump, who seems to have taken a lead in the polls as we head into the final stretch, would benefit the industry more, with Harris’s crypto policies nebulous at best. Bitcoin’s recent price performance might’ve been a reflection of the change in polls, but given how close the election seems to be, we’ll have to wait until the polls close (and then maybe some days later) to know the eventual winner.
ETFs have seen big flows recently but given bitcoin’s stagnant prices and the rise in futures shorts by leveraged funds, our guess is most of those flows were from hedge funds putting on the basis trade (short futures, long ETFs as a hedge). The basis, in annualized gross percentage terms, has hit teens percentages, making it appealing for many funds.
Investing:
Paul Tudor Jones: Market Reckoning on Spending Is Coming After Election - CNBC
Polymarket Identifies a French Trader Behind Big Trump Bets - NYT
Bitcoin ETFs, Crypto Equities and Retail Sentiment 'Scream Risk-On,' Bernstein
Regulation and Taxation:
Federal Investigators Probe Cryptocurrency Firm Tether - WSJ
Approximately $20 Million In Crypto Likely Stolen From US Government, Sleuths Arkham And ZachXBT Say - The Block
Who's Afraid of Gary Gensler? Not Don Wilson, the Trader Who Beat the Regulator Once Before - CoinDesk
International Body's BIS and FSB Flag Tokenization Risks to G20 - CoinDesk
Companies:
GSR Co-CEO Rich Rosenblum and its CTO Leave the Crypto Market Maker - The Block
Chainlink Teams Up With Botanix Labs to Expand Into Bitcoin for the First Time - CoinDesk
Meet ZachXBT, the Masked Vigilante Tracking Down Billions in Crypto Scams and Thefts - Wired
Metaplanet Raises $66 Million Through Stocks Acquisition Rights Program - CoinDesk
Northern Data Group Accelerates Focus on AI Solutions Business and Explores Potential Transaction of Mining Business - Northern Data
Nov 1 - Oct jobs report
Nov 5 - US election day
Nov 7 - FOMC interest rate decision
Nov 13 - Oct CPI reading
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