We review stablecoins and safe havens; if you’re considering stablecoins, you might want to think again
Our bucks have fallen and life may never be the same. Early 2018, Europe’s central banks started replacing dollar reserves with the yuan.
Why does this matter? Ever since 1944 with the Bretton Woods Agreement, the United States Dollar has been seen as the currency to haul you through the roughest of times. It is, therefore, known as a “safe haven”. As recently as last year (2017), banks in Japan, Germany, France, and Britain held more liabilities in dollars than in their own currencies. About 65 percent of dollars are used outside the United States. Seven countries have adopted the dollar, while others keep their currencies in a tight trading range relative to the dollar. In foreign exchange trading, the dollar makes up more than 85 percent of its dealings, so foreign banks require a significant amount of dollars to keep themselves afloat.
Other safe havens include gold, U.S. Treasure bonds, defensive stocks, the Japanese yen, the Chinese yuan, the euro, and the Swiss franc. Gold is notable because it is physical in contrast to legal tender that retains its value only because of government say-so. It’s also highly fungible and easy to transport from place to place, and it seemingly has timeless value. United States Treasury bonds gain their value from the Dollar. Defensive stocks provide staples like food, healthcare, and biotech that are always in demand. The euro and the yen gain their safety from historic stability, low unemployment, and strong economic growth. The Swiss euro, for instance, rests on Switzerland’s neutrality from war and the E.U.
Safe havens depend on four factors:
- Economic growth
- Strong country finances
- Stable political system
- Liquidity (i.e., the availability of liquid assets to the market)
The last explains why the USD is no longer safe. An unpredictable Trump administration makes for an unpredictable dollar, subsequently devaluing its currency. Hours after Trump threatened North Korea, global investors sold the dollar, and the same dynamic played out after President Vladimir Putin of Russia expelled 755 American diplomats. In fact, even the British pound that plunged last year, gained more than seven percent against the dollar since January, 2017. The USD has simply declined.
Inflation, or the rising cost of living
Even if America’s Dollar clung to its perch forever, safe havens remain unsafe because all yield diminishing power. In other words, you end up losing rather than gaining money.
Michael Sonnenfeldt of Tiger 21, a network of “ultra-high-net-worth” investors, minced no words when he said: “There is no safety in safety. All of the historical places you could get safe income from – dividend-paying stocks, bonds – they’ve all been bid up because of quantitative easing to the point where it’s just trash.”
A recent study by Investec Wealth & Investment (IW&I) conducted by 108 financial advisors reports many investors to have second thoughts about cash being the “safe haven” due to its reduced spending power. To elaborate, in 1950, one dollar would have bought you four gallons of gas. Today, that same dollar may buy you a cheap pen in the dollar store – and that’s before tax. So, you end up losing rather than gaining money. And if you’ve invested in safe havens for your retirement, you may find you can buy far less with your investments than when you started out.
Stablecoins are cryptoassets that hook onto some safe haven to stabilize cryptocurrency. Cryptocurrency fluctuates day-by-day. It functions in an uncertain universe, where anything can happen, and so a growing number of merchants refuse to accept them as payment, as time goes on. If cryptocurrency wouldn’t have that miserable scale of volatility, you could use it for regular commerce, just like you use USD.
Myles Snider, a Research Associate at Multicoin Capital, recounted how as an American student in Argentina in 2014, he lived through a currency crisis brought on by a 2001 market crash that ended with its government freezing bank accounts for more than a year. Locals flooded a black market for U.S dollars and hoarded dollar bills under their mattress, but their dolar supplies were capped. Bitcoin was attractive at the time. It’s only fault was its volatility, which rendered it useless as a unit of value, namely for regular commerce.
For a stablecoin to work, it needs to have, at least, two elements: Company transparency and price stability
- Transparency – You need to believe that the issuing party actually owns the alleged reserves and that they will honor their IOUs. Most have been found wanting. Tether, for instance, pegs its cryptocurrency to USD, euros and yens, all held in accounts under Tether’s control. There have been major concerns about the legitimacy of Tether’s reserves and its audits. A CoinCentral review noted allegations of money laundering, collusion and fraudulent Tether “printing.” In another 2017 review of stable cryptocoins,Goldmint showed how eight out of ten of these stablecoins lacked transparency in some way or another, from having no whitepaper to lacking information on how the coin is secured. Additionally, many stablecoin companies store their reserves in just one vault, risking their clients’ investments.
- Stability – Maker’s Dai pegs its cryptoasset on the dollar, Augmint pegs to the euro, and GOLDX uses gold. These and other stablecoins like them peg themselves to an asset they call secure. But as we saw, gold fluctuates in tune with USD volatility (it moves with the USD), while America’s greenbuck has only transitory value. When the Dollar falls, Dai investors, naturally, lose money since, as cryptocurrency reviewer Preston Byrne tweeted: “Stablecoins only work as long as you have the financial firepower to subsidize them.” In the same way, stablecoins that peg to the euro or yen risk going through market downturns, too.
Furthermore, since all stablecoins are linked to hyperinflationary assets, all stablecoins provide diminishing power of returns. Even if you trust the company and continue to value your particular safe haven, you end up investing far more than you gain.
In short, Byrne’s review on Dai says it best: “Eternal inflation works in cosmology. It does not work in economics.”
Stable coins? They’re neither a “stable” nor, a seemingly, functional “coin”.