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HEALTH, WEALTH, AND HAPPINESS |
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| "Learning is the beginning of wealth." - Jim Rohn |
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| Cutting-Edge Crypto Coins Tout Stability (Wall Street Journal): First you read it in Bitcoin Market Journal, then you read it in the Wall Street Journal.
As we discussed in Friday's newsletter, the new crop of "algorithmic stablecoins" are more risky than fiat-backed stablecoins, because you have both inflation risk and technology risk. We'll take these separately.
Inflation risk: Because most stablecoins are tied to the U.S. dollar, they are subject to U.S. dollar inflation. If you're earning a 6% annual percentage yield on a stablecoin yield-bearing account, but inflation is 8%, you're actually losing 2% (because 6% - 8% = -2%).
Technology risk: If you're holding your crypto in a risky algorithmic stablecoin (these are not backed by dollars or similar fiat currencies), the stablecoin is just "backed" by faith in the code. As the WSJ article explains, code is no match for human emotions.
Investor Takeaway: Can stablecoins deliver higher "interest rates" than traditional bank accounts? Absolutely. As smart investors, look to lower your risk by sticking with the largest and most trusted stablecoins. If you decide to go with newer, riskier stablecoins, demand a hefty "risk premium" with a much higher APY.
And as always, don't invest more than you're willing to lose. |
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In case you missed Friday's newsletter, here are the largest stablecoins by market cap. All things being equal, more money tends to lead to greater stability. |
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| Top stablecoins over $1 billion: Tether, USD Coin, Binance USD, TerraUSD, and Dai. (Courtesy our DeFi Interest Rates page)
Investor takeaway: Where investors run into problems is chasing new stablecoins with ridiculously high APYs. These generally come crashing down to earth, sometimes taking investors with them.
Read our Guide to Crypto Interest Rates before investing. |
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| Hi Everyone,
It might be hard to imagine now, but it was only six years ago that the biggest problem facing the global economy was deflation.
In an attempt to thwart the low-growth effects of money that rises in value over time, central bankers reacted by cutting benchmark interest rates. However, some found this hard to do, because these rates were already at or near zero.
It was then that policymakers of the Swiss National Bank, along with those of the European Central Bank and the Bank of Japan, shocked economists by setting their key interest rates below zero.
This historic move, known as breaking "the zero lower bound," was met with harsh criticism by one of the most prominent central bankers at the time, former Bank of England Governor Mark Carney, who called the policy a zero-sum game.
More specifically, he meant that negative interest rates would only succeed in helping nations achieve growth by stealing it from other jurisdictions, and that producing them would soon result in a race to the bottom on a race track that no longer has any bottom. |
Heeding Carney's warning and hearing his logic, policymakers were hesitant to go much lower than zero for fear of creating this beggar-thy-neighbor dystopia, until now. ... |
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The technological solution
Fast forward to today, with inflation at its highest level in decades and possibly still rising, and researchers at the International Monetary Fund have now released a gut-wrenching new article describing how moving to a cashless system could essentially eliminate the zero-bound problem. |
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| Completely ignoring Carney's warning, the two co-authors of this piece view the zero bound as a technological issue that can be solved by reducing access to cash.
Perhaps it wasn't Carney at all who warded off the nonsense of negative interest rates, but the realization by central bank policymakers that they can't really enforce a negative rate because it would likely inspire people to hold paper money rather than let it sit in an account that charges them for having a positive balance.
Had they continued down this path, it may have caused the largest bank run in history.
Now, with central bank digital currencies quickly becoming more prevalent, monetary authorities will be able to simply and effectively enforce a negative interest rate on all savers, regardless of where they store their wealth.
But that's not all. The passage that really sent chills down my spine is about halfway through. ... |
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| And here we come to the crux of the issue, the mistaken thinking that if only authorities had more power, they would be able to fix problems more efficiently. If only they were able to move rates into deep negative territory, we wouldn't need inflation.
For those of us who see inflation as a hidden tax on savings, it's pretty clear that this could be accomplished more easily by taking money out of bank accounts directly, rather than letting the money itself lose value. At least it's more transparent this way. |
Bitcoin goes up
If we could count on policymakers to always do the right thing, then giving them more power would indeed be helpful, but the thing is we can't.
As it stands, it's proving difficult enough for the Federal Reserve to raise interest rates off zero. Can you imagine how hard it would be to raise these rates from deep negative territory into positive?
According to Mohamed El-Erian, one of our favorite economists, the Fed is now extremely late in tightening monetary policy.
Lately, there's been a lot of talk about the Fed possibly raising its inflation target from 2% to 3%, which seems a bit funny to me, given that U.S. inflation reached 8.5% in March, but I digress. |
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| As El-Erian puts it, the decision to raise the target would be met with a lot of backlash, but it's really the result of policymakers waiting so long to do something about it in the first place.
When asked point blank what would happen to crypto and gold in such a situation, his answer was quite clear. "They both go higher in a world like that," the economist predicted.
In the end, all money is a game of confidence. Some people, like the two authors of the IMF report, have a lot of confidence in the bankers running the show, and they believe that we should bestow more power on them because of new technologies.
Many of us, however, have very little confidence in bankers and politicians, which is why bitcoin and blockchain were invented in the first place.
Have a wonderful week ahead!! |
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| Mati Greenspan Analysis, Advisory, Money Management |
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We love Cathie, even if she is a bit conservative. |
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We're here to protect you. |
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| Bitcoin Market Journal is a daily newsletter that makes you a better crypto investor. It is created by Evamarie Augustine, Charles Bovaird, Mati Greenspan, John Hargrave, and Alexandre Lores.
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