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Stablecoins: The Next Gold Rush? – Article by Adam Alonzi

Stablecoins: The Next Gold Rush? – Article by Adam Alonzi

Adam Alonzi


What money should be has been explored by more than one economist. What it is, strange as it may sound, is also up for debate. Yet amidst these disputes, practical and abstract, there is consensus.

At this time the entire crypto market is valued between 380 and 560 billion USD. The value of all the world’s stocks is around 70 trillion USD. The daily volume of the Forex is 5.1 trillion USD. Despite the excitement it periodically sparks in mass media and high finance circles, crypto is barely a drop in the bucket.

As I stated in my response to Robert Shiller’s critique of Bitcoin, tokenization is a means of dividing an asset. Tokenization, easily dividing an asset among stakeholders, is a strength of blockchain technology. Tokens can represent abstract entities issued on the blockchain, but they can also be tethered to a piece of real estate, a work of art, a trademark, or a freighter of Chilean copper.

A Stablecoin is related to this concept. A Stablecoin (SC) is a cryptocurrency that is pegged to fiat currency or a commodity in a fixed ratio. Stablecoins are being developed by massive corporations like JPMorgan Chase and are being looked into by governments around the world. The backing of mature institutions, whatever your opinion may be of them, can give crypto credibility and capital to move forward.

At this time cryptocurrencies are for the most part speculative toys or safe havens for those expecting for the fiat system to implode. In any case, common use remains elusive. While milk and eggs can be bought with crypto, it is not a normal occurrence. The major barrier to this is volatility.

Stability could come after a stampede into crypto by a reasonable percentage of the world’s population. Some authors have claimed an economic catastrophe could precipitate an exodus from fiat, but this seems to spring from wishful thinking – the same sort gold bugs have been indulging in for the last half century.

This is not meant as disparagement of gold or its advocates. Gold is a fine investment, but the issue at hand here is common use, something gold is not likely to readily lend itself to ever again – at least not in its most familiar forms. Several Stablecoins are currently backed by gold. By doing so, they combine the benefits of crypto with the timeless tangibility of precious metals.

Stablecoins are digital representatives of an item that may not be readily divisible and therefore inconvenient or impossible to use for daily transactions. Very few shoppers would want to overnight a tiny gold nugget to an eBay seller. Those hoping for a speedy ingress of users should consider that an equally rapid egress could follow.

Slow and steady wins the race?

While more users and more merchants could curb price swings, how and when this will happen remains an open question. If stability is not established, at least for long enough to secure investor confidence, conventional cryptocurrencies will never outgrow their reputations as dangerous playthings.

Some members of the crypto community are philosophically opposed to Stablecoins because they betray the vision of total decentralization. High ideals can clash with reality. Decentralization is not a strong selling point for most folks. It is not easy to explain beyond “no one controls it”, which is as likely to make them feel uneasy as it is to instill confidence.

It’s not as though Stablecoins are taking anything from the crypto community. Aside from bringing in new converts, they also add diversity to the cryptosphere. An orchard of identical apple trees is doomed when the right pest arrives. Monocultures are inherently weak. A diverse financial ecosystem is a resilient one. The proliferation of new blockchain projects, as overwhelming as it may be, is good for all of us.

There are a plethora of cryptocurrencies aiming to be “just” mediums of exchange. Monero (XMR), Ripple (XRP), and Dash (DASH), for all their differences, are innovating and are finding their niches. Anonymity, speed, and low transaction fees are attractive, but is it enough to convince Uncle Fred to begin buying his sweaters with them?

Although some have nuanced algorithms managing their supply, Stablecoins make crypto more understandable to the average person. Finance and technology are boogeymen to most consumers; there is no need to make either more arcane or frightening than necessary.

Adolescence is difficult because we feel pressured, from within or without, to choose a path. We are under the impression that our choices are final and our one-dimensional trajectories are set. Whether Stablecoins are a passing phase or a critical bridge to the materialization of Satoshi Nakamoto’s original vision, they seem poised to become permanent fixtures in high finance and daily life.

Adam Alonzi is a writer, biotechnologist, documentary maker, futurist, inventor, programmer, and author of the novels A Plank in Reason and Praying for Death: A Zombie Apocalypse. He is an analyst for the Millennium Project, the Head Media Director for BioViva Sciences, and Editor-in-Chief of Radical Science News. Listen to his podcasts here. Read his blog here.

3 Stock-Market Tips from an Economist – Article by Robert P. Murphy

3 Stock-Market Tips from an Economist – Article by Robert P. Murphy

The New Renaissance Hat
Robert P. Murphy
September 11, 2015
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Recent volatility has Americans talking about the stock market — and getting a lot of things wrong in the process. Let’s discuss some general principles to help clear things up.

(Let me say up front that I won’t be disclosing which stocks are going to go up next month. Even if I knew, it would ruin my advantage to tell everybody.)

1. Money doesn’t go “into” or “out of” the stock market in the way most people think.

On NPR’s Marketplace, after the recent big selloff, host Kai Ryssdal said, “That money has to go somewhere, right?”

This language is misleading. Let me illustrate with a simple example.

Suppose there are 100 people who each own 1,000 shares of ABC stock. Currently, ABC has a share price of $5. Thus, the community collectively owns $500,000 worth of ABC stock. Further, suppose that each person has $200 in a checking account at the local bank. Thus, the community owns $20,000 worth of checking account balances at the bank.

Now, Alice decides she wants to increase her holdings of cash and reduce her holdings of ABC stock. So she sells a single share to Bob, who buys it for $4. There is no other market action.

In this scenario, when the share price drops from $5 to $4, the community suddenly owns only $400,000 worth of ABC stock. And yet, there is no flow of $100,000 someplace else — certainly not into the local bank. It still has exactly $20,000 in various checking accounts. All that happened is Alice’s account went up by $4 while Bob’s went down by $4.

2. Simple strategies can’t be guaranteed to make money.

Suppose your brother-in-law says: “I’ve got a great stock tip! I found this company, Acme, that makes fireworks. Let’s wait until the end of June, and then load up on as many shares as we can. Once the company reports its sales for July, we’ll make a fortune because of the holiday numbers.”

Clearly, your brother-in-law would be speaking foolishness. Just about everybody knows that fireworks companies do a lot of business around July 4, and so the price of Acme stock in late June would already reflect that obvious information.

More generally, the different versions of the efficient market hypothesis (EMH) claim — with varying degrees of strength — that an investor can’t “beat the market” without access to private information. The reason is that any publicly available information is already incorporated into the current stock price.

Not all economists agree with the EMH, especially the stronger versions of it. If two investors have different theories of how the economy works, then to them, the same “information” regarding Federal Reserve intentions may imply different forecasts, leading one to feel bullish while the other is bearish. Yet, even this discussion shows that it can’t be obvious that a stock price will move in a certain direction. If it were, then the first traders to notice the mispricing would pounce, arbitraging the discrepancy into oblivion.

3. An investor’s “track record” can be misleading because of risk and luck.

Suppose hedge fund A earns 10 percent three years in a row, while hedge fund Bearns only 4 percent those same three years in a row. Can we conclude that fundA’s management is more competent?

No, not unless we get more information. It could be that fund A is highly leveraged (meaning that it borrowed money and used it to buy assets), while fund B invests only the owners’ equity. Even if A and B have the same portfolios, A will outperform so long as the portfolio has a positive return.

However, in this scenario, fund A has taken on more risk. If the assets in the portfolio happen to go down in market value, then fund A loses a bigger proportion of its capital than fund B.

More generally, a fund manager could have a great year simply because of (what we consider to be) dumb luck. For example, suppose there are 500 different fund managers, and each picks a single stock from the S&P 500 to exclude from their portfolio; they own appropriately weighted amounts of the remaining 499 stocks. Further, suppose that each manager picks his pariah company by throwing a dart at the stock listing taped to his conference room wall.

If the dart throws are random over the possible stocks, then we expect one manager to exclude the worst-performing stock, another to exclude the second worst-performing stock, and so on. In any event, we can be very confident that of the 500 fund managers, at least many dozens of them will beat the S&P 500 with their own truncated version of it, and the same number will underperform it.

Would we conclude that the managers with excess returns were more skilled at analyzing companies, or had better money-management protocols in place at their firms? Of course not. In this example, they just got lucky. What relevance our hypothetical scenario has for the real world of investments is not as clear, but the tale at least demonstrates that past performance alone does not necessarily indicate skill or predict future performance.

Studying economics won’t show you how to become rich, but it will spare you from making a fool of yourself at the next cocktail party.

Robert P. Murphy has a PhD in economics from NYU. He is the author of The Politically Incorrect Guide to Capitalism, The Politically Incorrect Guide to The Great Depression and the New Deal, and  Choice: Cooperation, Enterprise, and Human Action (Independent Institute, 2015).

This article was originally published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.