0

Neither a Crypto Borrower nor a Lender Be

PUBLISHED Jul 23, 2022, 3:00:28 AM        SHARE

img
imgAleph Blog
Image credit: Diverse Stock Photos || Would that those shiny coins were the real thing. Metal coins are real. Code, not so.

As I have said before, look at the underlying economics of an investment rather than its external form. It doesn’t matter whether it is public or private. The form of an investment does not affect its returns, for the most part.

I grew up in investing as a risk manager within life insurance and fixed income. We faced three main risks: credit, liquidity, and duration. We had lesser risks as well, like FX, sovereigns, convexity, etc. My main goal was to see the firm survive under all reasonable circumstances. My secondary goal was to improve profitability over those same circumstances.

In doing that, we could make some small “side bets.” Buy an underpriced Canadian dollar bond. Buy a broken convertible bond of a beaten down company. Buy underpriced MBS where the models are overstating refinancing risk. Things like that. We could not make those side bets too large, but we could put a few on to try to make some money for the firm.

We would match assets against our likely liability cashflows. We knew that 99%+ of the time, we would be fine.

I can’t imagine what the so-called crypto banks are thinking. Much as they deride banking generally, they don’t have the vaguest idea of what they are doing. They should hire an investment actuary to limit what they do.

Imagine a world where banks don’t care about currency risk, and some fail because the temptation to reach for yield causes them to buy asset in currencies that are weak… leading them to lose capital on net.

This is the nature of crypto lending and borrowing. As Aristotle might have said, “Crypto is sterile.” It doesn’t produce anything. So don’t lend out crypto for a return… you may lose you principal in the process. There is no good reason why you should earn a return exceeding Treasuries plus 1% in lending crypto.

But no one in crypto considers risk control. In one sense, I’m not sure how it could be done, unless you limit yourself to one major cryptocurrency — Bitcoin or Ethereum.

The grand questions should be:

  • Can I be sure of making payments over the next three months?
  • Is my leverage low enough that the mélange of assets that I own will be able to cover my liabilities?
  • Is there anything I can do to promote long-term survival?

With cryptocurrency banks and stablecoins these concerns are ignored. They take risks that no bank or insurance company would take and with far less capital than would be reasonable.

I encourage you to sell your crypto and buy gold, stocks, bonds, and other dollar-denominated assets.

Originally Posted on alephblog.com


Sound investments
don't happen alone

Find your crew, build teams, compete in VS MODE, and identify investment trends in our evergrowing investment ecosystem. You aren't on an island anymore, and our community is here to help you make informed decisions in a complex world.

More Reads
Dismal EMU Flash PMI on Heels of First ECB Rate Hike since 2011
Image

The euro is over a cent lower from yesterday’s peak, pressured by the drop in the flash PMI composite below 50 for the first time since early last year.

Verasity: Revolutionizing AdTech Through Web3
Image

With blockchain technology on the rise, what happens when disruptive technologies meet with adtech? We're going to explore this topic in depth by looking at a company called Verasity.

Is Gold Still Precious?
Image

The outlook for gold in the context of its long-term price trend

Investing Basics: 7 Common Types of Mutual Funds
Image

A quick guide guide to the 7 types of Mutual Funds

Paying Off Debt and Your Credit Score
Image

Some people are surprised to learn that paying off debt does not instantly increase a credit score.

A look at the Manufacturing Sector
Image

One of the foundational principles in the theory of international trade has to do with comparative advantage.

The Price Earnings Ratio
Image

As a follower of the stock market, you most likely might have heard analysts or commentators referring to what are called Price Earnings Ratios (PER). In this article, Piggy would like to demystify PER ratios and also educate folks on how they can make use of this metric to pick stocks on the market.

Market Musing 7-18-2022, Dollar dropping, Earning Season is here
Image

High Volatility: VIX > 24. SPX overall is bearish, however we have been range bound for the last 3 weeks.

Stocks vs Real Estate
Image

Exploring Where to Put Your Money

Estimating Future Stock Returns, March 2022 Update
Image

Well, finally the bear market… at 3/31/2022 the S&P 500 was priced to return a trice less than zero in nominal terms.

Calm before the Storm?
Image

The biggest rally in the S&P 500 in three weeks helped lift global equities today.

The Dollar is on its Back Foot
Image

The dollar’s downside correction continues today, helped by hawkish signals from the Reserve Bank of Australia and unnamed sources who have played up the chances of a 50 bp hike by the European Central Bank on Thursday.

7 Ways of Diversifying your Personal Investment Portfolio
Image

Diversification is one of the most important aspects when it comes minimizing risk within an investment portfolio

Focus on Dividends
Image

Piggy has always advocated for individuals and households to consider ways of generating passive income.

Macro Overview for the Week Ahead
Image

Investors will focus on three types of events next week.

Feeling Risky? Marijuana Stocks May Jump From Legislation
Image

Senate Democrats Working on Bill to Decriminalize Marijuana

Paying Off Debt
Image

There are different tactics and strategies to pay off debt easier and faster. The debt snowball method is the best to use

Business and Society
Image

One great discussion topic and area of study has to do with defining exactly what a business is and what its obligations are to society at large

Frenzied Week Ending with a Quieter Tone
Image

After a frenzied week, the markets appear to be going into the weekend more subdued.