Stable Coin Returns Are Non Existent

I don't own any stable coins, nor do I plan to, despite the obvious failure in my local currency to hold any relative purchasing power, a flight to the US dollar is not something I see as an attractive proposition.

I've always said that stable coins of any kind are still shitcoins and with so much financial engineering and misunderstanding of nominal numbers as purchasing power, many people are making poor economic calculations or worse misallocating capital.

If we look at apps like BlockFi and Celsius we can see that rates for stable coin lending sit at between 8 - 10%, yet US CPI inflation sits at around 7% and that is inflation based on a basket of goods and discounted through hedonic adjustments. If we look at current YOY growth for M2 money supply based on US dollars, the rate is around 13.07% which doesn't even include the increase in the offshore dollar reserves like the Eurodollar market.

A conservative estimate would probably be around 14 - 15% YOY growth in the number of dollar expansions.

The fisher effect

I've spoken at length about the fisher effect in the past and that if the expansion of the denominator is higher than the rate of return, you are likely to either see no return or worse a negative return. Despite stablecoin's crazy gains, of up to 10% and even in some cases 12% on the high risk platforms, it's still not enough to beat out currency debasement. Yes you're doing better than your counter parts not investing but you're not engineering a postive return.

You're simply taking on more risk to reduce your downside when compared to others. In most cases, people who invest in stablecoins aren't using that as their primary holdings of cash, and even if your stablecoins are netting a better return the vast majority of your cash is netting a negative return that brings down your overall preservation of purchasing power.

A foolish return

At this point, it seems as if stable coin investors are joining bondholders in the trade of return-free risk. You are taking on a larger and larger amount of risk to get no return. As bonds are negative yielding in real terms across Europe and nominal terms in the US, yet people accept it. So too have stable coins become a negative-yielding asset.

The appeal of stablecoins is a call to the familiar, I understand why people fall for these negative returns. I understand why some people would hold stablecoins, because it's still a method of payment most people would accept, and pay liabilities in something that devalues is the smarter option.

But most people aren't using stablecoins in a manner that channels the debasement to their advantage, in fact, they are using it as a store of value to try and take advantage of short-term lending rates to try and outpace its debasement, but this is a losing game.

The fact that we cannot verify the growth in the US base money and Euro-dollar expansion makes it harder for any investor to use the currency to beat the market. Forex traders, stable coin investors and bond holders are all falling into the same boat and have yet to realise it.

Their economic calculations are based on the underlying asset debasing at a steady rate, but these rates of purchasing power losses continue to increase, far faster than investors can hedge or take on more risk as compensation.

Not here to convince anyone

At this point, I honestly don't care if anyone believes me, we're all making bets and everyone thinks they've found the formula that best works for their risk appetite. As someone who holds bitcoin, I am hedging against all of this and my risk-adjusted returns have safety outpaced the expansion of central bank balance sheets for years.

I don't need to lend it out, I don't need to lock it into any smart contracts, I take on zero third-party risk and I am still beating the market by a bunch. I'm often amazed how few people have caught onto it but I am not complaining, if they did I wouldn't be able to stack the bitcoin I can today and for that I am grateful.

Have your say

What do you good people of HIVE think?

So have at it my Jessies! If you don't have something to comment, "I am a Jessie."

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