Nothing New Under the Sun.
Back in 2020, when the bullish trend was just getting started, I wrote an article about why I don’t think BTC is a good inflation hedge. Those who read my emails probably already know about it, but if you didn’t read it, please do. I wouldn’t promote my writing if I didn’t think it was worth it.
A substantial chunk of that article hypothesized how stablecoins might become the default crypto gateway instead of BTC and other major cryptos. Almost two years later, the attention to stablecoin has grown tremendously.
One of the popular narratives in the stablecoin niche is “decentralized vs. centralized stablecoins.” Since the crypto market is now worth trillions of dollars, governments are paying more attention to it, making some people nervous about their centralized stablecoins like USDC and USDT. Consequently, they’re looking for censorship-resistant solutions.
Many teams joined the quest for creating a flawless decentralized stablecoin, and an increasing number of ideas are thrown at the market for testing. One of such ideas is having a basket of currencies.
Recently, Luna Foundation Guard, the company behind Terra and UST, announced purchasing $100 million worth of AVAX for UST reserves. At the same time, the company is still buying $BTC for the same purpose. I wonder what currency will be next.
Supporting a currency with a basket of other currencies isn’t new. Pretty much every central bank in the world has foreign currency reserves. And sometimes, these reserves are used to keep domestic currencies afloat.
Remember Diem (Libra). When Facebook initially wanted to enter the crypto space, it proposed a stablecoin that should’ve been backed by a basket of other currencies like USD and EUR. The U.S. government wasn’t happy about it. Keep this in mind.
Terra wants to back UST with a basket of currencies, which is a classic approach. Moreover, it seems that other teams may catch on to this trend. However, I see one fundamental problem here.
The correlation between cryptocurrencies is still sky-high. Generally, the entire market follows BTC with alt seasons in between. And when it’s an alt season, everything is pumping to various degrees.
So, if you have a basket of crypto currencies, you don’t necessarily protect your stablecoin in the best way. If the market dumps, your basket will dump too. You need non-correlated assets, which lie outside of crypto. And if you’d go and find a way to bring these assets onboard, the regulators won’t like it.
This is not to say that decentralized stablecoins are doomed. On the contrary, I think it’s fascinating that the system becomes more “pro” and self-organized, even if it means taking some tricks from traditional finance’s playbook. However, when you do this, you also “copy” risks.
SIMETRI Portfolio – Sideways
BTC had a mediocre performance over the past week, which affected the Portfolio. The ROI retraced to around 2,000%.
