Modern financial markets operate between the bookends of hoping for Amara’s proverbial expectation of overestimating the short run to prove wrong and waiting for the cataclysmic impacts from Lorenz’s butterfly effect to play out. Broadly speaking, investors price in the upside until headlines dictate that its time to adopt a margin of safety.
Some assets are burdened with more conservatism in outlook than others. Ultimately, the attractiveness of individual assets varies with volatility when an asset’s value is more volatile than the overall market. In other words, the investments that look good are the ones that behave like the overall market.
Confirmation bias, herding instincts, loss aversion and other human psyche are behind this self-fulfilling prophecy (too optimistic, adjust, value drops, not more than the S&P, I’m ok, start over again).
Stable, intrinsic value and store value coins viewed in this context are either too optimistic in valuation or doomed to perform much worse than the overall market. Growth forecasts orders of magnitude above the average aren’t feasible, and speculators adopting those outlooks are going to be the clown at the Christmas party when they deliver sub 15% annual returns.
Regulation and fraud are elephants in the emerging markets room of investors. Neither are rare in modern markets, and both are phenomena which investors mitigate through diversification. Money laundering in cash occurs as a level of approximately 2 – 5% of global GDP. Annually. Ponzi schemes befall securities markets every year. 60 last year, according to CNN.
Willingness, demand to hold an asset, ultimately depends on a more diverse set of considerations than volatility, regulation and fraud alone. Equities in 20-30% of S&P 500 companies are more volatile than BTC. Are the investors in those 100+ companies actually speculators?
Liquidity and return weigh heavily in all investment considerations. Volatility in share price doesn’t preclude paying dividends (c. 80% do) and investment grade securities (c. 80% are) can not only be sold, they can be borrowed against as collateral or leveraged.
Defi recognized this early on and have quickly developed similar features, made them much more accessible and removed a significant amount of the human factor associated with the conventional markets. Defi’s level of sophistication and potential is spectacular, and arguably a few years too early. More on that below.
Markets look at aspects of an asset which could maintain short runs and sustain storms precipitated by uncorrelated events. I’d like to make money but, if the going gets tough, I’d like to be able to sell. Stable, intrinsic value and store value coins are not viewed differently by modern markets.
Most professionals in the conventional market are aware that smart contracts are and adaptation of most securities traded today. Adaptations in nature are slow and incremental. A habitat, or a market, is a collection of resources. Invasions of species from other areas subject the habitat to change. Change is the rule. Tracking or variations of species is standing on your tip-toes to see the Mona Lisa at the Louvre ; eventually everyone stands on their tip-toes and no one is better off. Extinction is an option for species who don’t track invasions. Species that don’t vary are destined to be extinct much more quickly. Adaptation is requisite to survive.
BTC, ETH and the innumerable coins are adaptations of the most frequently traded index, security and currency assets in the market today. Most bankers are also waking up to the fact that Defi has replicated most features of the modern market in a matter of years. And Defi, combined with intrinsic value and store value coins, can do what the market does faster, cheaper and for anyone with a mobile phone.
So, why haven’t markets adopted coins more widely?
Attractiveness or willingness is not the issue. There are equities more volatile, more exposed to fraud, more at risk of being impacted by regulation and less liquid than BTC or ETH. Access to conventional markets is more restricted and expensive. These are facts. But markets are still waiting on the sidelines. What are they waiting for?
Utility. Investors seek utility ultimately. Look at the correlation between JPY/CAD and oil price. The Yen moves in the opposite direction of falling oil price because the usefulness of the currency has increased. People can buy stuff they weren’t buying before when they were paying higher prices at the pump. The Canadian dollar follows the oil price down because there are suddenly less uses for the currency.
JPY/CAD vs WTI Crude Oil. Source: TradingView
Currencies are useful because of their status as legal tender. Staple goods and commodities, the stuff we need to live day to day, is bought with those yens, dollars and pounds. The store or gas station that sold the alvacado or gallon of gas bought the same from an import company in the local currency. The import company sells in local currency, but buys in USD (50% of global trade finance is settled in dollars) or EUR (30% of global trade finance is settled in euros). The import company can hedge their costs by simply having their bank enter into a swap contract for them.
BTC could be swapped to USDC on SUSHI. Then USDC needs to be off ramped to USD. Before the local grocery store starts accepting BTC and the importer starts swapping and off ramping both, independently, have to decide to switch. What is the incentive to switch to USDC and BTC and leave JPM for SUSHI? International trade is still in USD and EUR, until that changes, there is little incentive for an importer and local businesses to switch.
Back to the assertion that Defi was a few years too early. BTC or other stores of value replacing the USD and EUR in trade would validate the utility of Defi. Local currencies, legal tender in producing countries, can/could/might/probably will remain in place and the BTC paid for a barrel of oil would be swapped into a stable version of the local currency. Smart ledger features of BTC provide efficiencies and optimisation to invoicing in addition to being a store of value being exchanged for the goods.
Concluding, or just getting started, market participants are aware that smart contracts can serve as currencies, securities and stores of value. We’re also aware that Defi just better than how we do it. But we’re waiting for utility. Don’t confuse convenience with utility. Show us the utility, baby!
