Discussion thread of Haseeb Qureshi's AMA: Bitcoin Volatility vs. Stable Coins


#1

I really enjoyed Haseeb’s AMA on stable coins. It had a bunch of good info and got me looking into the viability of a Bitcoin-only world (AMA link).

Hopefully this will spark a bit of discussion on the long term prospects of Bitcoin vs Stable Coins. And kind of just curious if anyone had some similar or dissenting thoughts. Plus, I still do not think I’m convinced of the need for a stable coin (even one built on top of Bitcoin) in the veryy long run.

Glossary: MoE - Medium of Exchange, SoV - Store of Value, UoA - Unit of Account

Primary summary of Haseeb’s Talk (tried to take mostly direct quotes):

  • Stable coins will not get obsoleted. Common argument for stable coins becoming obsolete is Bitcoin will become less and less volatile and be the stable MoE.

  • Gold is not actually super stable. Over a period of 10 years, there is quite a bit of volatility in gold as it is counter-cyclical. We should expect Bitcoin will continue to have a normal level of volatility for a commodity.

    • A> To assume that Bitcoin would be extremely valuable and at the same time non-volatile (the magical price stability of Bitcoin at some point in the future) doesn’t describe any asset that we know of except for centrally managed assets like currencies that are designed to be stable. Stability means that the forces of supply and demand cancel each other out at exactly the same time. So while Bitcoin will probably lower in its volatility from where it is today, because today it is highly speculative risk asset, it will still be much more volatile than a coin that is designed or managed by an algorithm or central party.
  • If you create a Bitcoin backed stable coin, that should be more stable than Bitcoin. If you can’t imagine that, you’re not thinking hard enough.

  • If Ether becomes a SoV, we should think about it like Gold. If Ether becomes a commodity, then we should think about it like Oil. If Ether becomes a currency and mediates an economy, we should think about it like the Yen or Yuan. We don’t know right now what Ether is going to be.

  • PK Question: Stable coins will be valuable as long as there is no cryptocurrency that serves as a MoE?

    • HQ Answer: Something serving as a stable coin, doesn’t mean it has to have stability. It is basically strictly superior to have a stable version of an asset. And if you can get that for free, then why not have that? It is fairly clear that most economies have a strong preference for non-volatile assets. B> You need stable assets for paying salaries, or paying debt denominated over a long period of time. If the underlying principle is extremely volatile - e.g., you took out a loan and now it worth 10x more or 10x less, it makes a lot of things very difficult because a lot of things rely on having stability in the future.
  • C> Centralized stablecoins may fail due to regulators - direct shutdown / ban.

  • Take lessons from BitTorrent - people only used piracy in the past because the experience is better

  • What are the rules people want to break that they are willing to bear the pain of a worse UX, UI, uncertainty, etc.?

  • If you do not fulfill all three (UoA, MoE, SoV), an economist would not consider that a currency.

  • Ideal traits for money: price stability, cheap to transact, digital first, low latency, highly liquid, global

My thoughts / questions:

  • A> Is comparing volatility of Bitcoin against the US Dollar a fair comparison? Bitcoin is a truly global form of money. While the US Dollar is global, it does not flow freely across borders. If you are a company (or person for that matter) in France and want to do some time of Commercial Activity in the U.S., you have to take into consideration exchange rate volatility.

    • The dollar is not volatile, but over the same 10 years it is volatile in the Foreign Exchange markets. For example, if I travel from the U.S. to France, my dollar has very different purchasing power depending on the year I go.

    • So if you look at Bitcoin as a globally used currency, the volatility may be even with the EURO/USD - and much more stable than gold

    • My assumption: the world will continue to become more globalized, with more trade (exchange of goods across borders) and more travel - business + personal (exchange of people across borders) requiring stability to be redefined as something like "stability adjusted for global usability"

    • Chart (https://woobull.com/bitcoin-volatility-will-match-major-fiat-currencies-by-2019/): "Dearest Bitcoin, how long will it take for you to be as stable as fiat currencies?"

  • B> Does it make more sense to compare the “stability of a currency” to pay salaries/debts/etc with what we currently view as cross border debts? This Currency Risk is an issue for many companies (e.g., accounts payable or receivable denominated in another currency than their home currency). They deal with this by hedging in other ways (holding some amount of / contract for a neutral or alternative currency or asset, forecasting changes in their debts or receivables ahead of time, etc.).

    • I could see similar actions being taken on a broader scale in a Bitcoin-only world
  • PK asked "So maybe the better question to ask is that stable coins will be valuable so long as there is no cryptocurrency that serves as a real MoE?"

    • I think this becomes especially valid if/when a dominant cryptocurrency becomes the Unit of Account - I see no reason why people living in 2030 cannot have somewhat dynamic pricing of goods. In economics the barrier to dynamic pricing are "Menu Costs" aka the cost incurred to a restaurant due to having to print a new menu to update their prices.

    • This argument becomes less and less valid with the invasion of technology in our lives. Uber dynamically prices, Airbnb dynamically prices, some restaurants even dynamically price depending on what’s on the menu for that day, B2B services like AWS might dynamically price (? - I can imagine this is the case, but not sure).

    • Makes me wonder why should we aspire for the future money system to adhere to the current system’s needs? In terms of how we engineer stability and for what purpose.

  • C> Agreed. This is why I believe if you take some measure of “true stability” or “real stability” - Bitcoin’s risk adjusted stability could be greater than any stable coin in the long run. (?) Under a ban-on-stable-coins scenario, Bitcoin becomes the primary stable coin. In any scenario, except for a competing stable coin with equivalent decentralization as Bitcoin, there is political risk.

    • Thought experiment - every person on the planet ONLY uses Bitcoin. Every company ONLY transacts in Bitcoin. There are no preferred alternative forms of currency. How would the price of Bitcoin rise?

    • Increased demand (assuming the supply of Bitcoin stays the same). What drives increased demand?

      • 1/ Productivity growth in an economy (producing more ouputs with the same amount of inputs)

      • 2/ Increased credit (lending), hence increased spending [opaque how this would work in a Bitcoin only world]

      • 3/ More people using Bitcoin (in this scenario: only through population growth)

    • Does this mean in this hypothetical the price growth of Bitcoin (i.e., by that point - purchasing power) will directly correlate with Productivity Growth and our Population Growth Rate?

    • Source to learn some more - Ray Dalio’s How the Economic Machine Works

Remaining summary of Haseeb’s Talk:

3 Models for Stable Coins

1. Fiat collateralized: Tether, USDC, Gemini Dollar - basically a digitized dollar, centralized

2. Crypto collateralized: Dai - margin calls the collateral (forces stable coin holder to sell stable coin for the value of their BTC, Ether, etc.)

3. Algorithmic*: “growth collateralized” - sell a promise of future growth in the system (e.g., selling shares for future growth - when it does grow, the stable coin will pay these buyers back)*

  • *“Every successful currency in the world grows forever - economies and populations grow. If this assumption fails for a specific Algorithmic Stable Coin, they will fail.”

  • Issues with stable coins:

    • When price is going UP, everything is great

    • If the value of Stable Coin goes over it’s peg, print more, sell on market and re-reach equilibrium

  • MakerDAO:

    • I would not over index on how successful Maker is. It’s a testament to how little people care about centralization

    • Maker is a leverage system - you can deposit ETH into a CDP and you receive some DAI. You can cycle the DAI for more ETH. Then repeat, creating leverage (e.g., 1.8x long exposure to ETH)

    • Those who lockup funds in CDP can be paid interest

    • 2.5% of all ETH is locked up in CDPs. Means a lot of people want long exposure on ETH (shown by high velocity and low transaction value)

    • Maker is robust so long as the slope of ETH decline is not super steep

    • VC Rationale for investing: If demand for DAI grows sufficiently, holders will receive fees based on their holdings (fees that will hopefully rise with time)

Thanks Haseeb for taking the time to do the AMA - I learned a lot!

Lastly, some fun charts:
Sources: Woobull | Fed | Bitvol


#2

@zareef1992 @DanielKoff something your might be interested in thinking through ^^^


#3

Some really interesting questions and analysis. I think the assumption in question 2 and 3 about a Bitcoin only world is a bit far fetched, but if we did get there, then I think you’re right to imagine that a stable coin would be unnecessary because everything would be priced in only one asset.

I think we’re likely to see stable coins become important because unless e.g. BTC becomes supremely valuable and globally accepted as currency (MoE, SoV, and UoA), BTC will have a level of volatility that makes it untenable for certain financial transactions, as BTC price discovery would remain dynamic over any significant amounts of time.

I agree that a sufficiently decentralized stablecoin is a hard challenge to be solved. Perhaps we’ll find a way to collateralize a wide range of relatively uncorrelated assets on a decentralized smart contract platform - assets like cryptos and security tokens representing real estate, commodities, and other assets. I agree with Haseeb that we need a stable digital asset because it’s paramount for many types of financial transactions, especially transactions involving commitments over longer periods of time e.g. a 30-year mortgage.

Going back to your scenario where Bitcoin is the ONLY currency, in that case I don’t think a stable coin would be necessary. If Bitcoin is the only currency, then your loan for e.g. 100 bitcoins is always 100 bitcoins, whether that loan settles in 1 day or 10 years.

This relates to your third question about whether the price of BTC would continue rising in a world where the only currency (MoE, UoA, SoV) was BTC. I believe the answer is that 1 BTC would always equal 1 BTC, and it would be meaningless to talk about the price of a bitcoin, except in so far as we could talk about the purchasing power of a bitcoin in relation to a basket of goods. Similar to how today we talk about the purchasing power of 1 USD, but we never ask how much a USD is worth :slight_smile:


#4

I’m a little conflicted here @DanielKoff. Because if we believe and want Bitcoin (or any cryptocurrency for that matter) to become useful, doesn’t it imply that is must be accepted as currency? Otherwise, what purpose would it serve besides speculative investments? What is the point of having “censorship-resistant value” if it never becomes money?


#5

@preethi this is a great question. First, I believe that for Bitcoin to fulfill its greatest promise and become globally dominant it must be accepted widely as currency. I believe there are many paths to this including layer 2 scaling and what I call ‘collateralized abstraction’ services like Veem and Abra (discussed below).

That said, I believe bitcoin can still become a very valuable asset by serving as an unseizable SoV, even if it does not become a widely adopted currency. There are very valuable vehicles for storing wealth today that approximate an unseizable store-of-value but do not function currencies:

SoV Vehicles
Gold: $7.5 TN
Wealth held Off-Shore: $20-30 TN

I believe Bitcoin can continue to take market share from these vehicles and become more valuable even if it does not scale to become a widely adopted payments network. After all, both of these vehicles have their own weaknesses - gold is not highly portable, and is much easier to confiscate than Bitcoin. Wealth held off-shore is still subject to inflation and rule changes in foreign jurisdictions. Bitcoin has superior qualities relative to both of these, and at ~$60BN could become a $TN asset by grabbing small amounts of marketshare, even if it does not scale for day to day payments.

Bitcoin ‘abstraction’ and collateralization of cash and equities
You might have heard of companies like Abra and Veem https://www.coindesk.com/bitcoin-startup-align-commerce-raises-24-million-rebrands-as-veem. Abra is enabling everyone in the world to buy and hold any liquid asset (starting with USD, equities and cryptos) through a simple interface that gives users the impression they are buying e.g. Apple stock, but in reality this asset is backed by underlying bitcoin (check out abra.blog for more on this mechanism).
Veem (https://www.coindesk.com/bitcoin-startup-align-commerce-raises-24-million-rebrands-as-veem) gives users the impression that they are making overseas payments using any fiat currency they like, but the transaction is often being settled to the bitcoin blockchain.

Large dollar amounts invested in assets that are collateralized by Bitcoin necessitates more BTC being ‘locked up’, causing BTC to become more valuable, even if Bitcoin does not achieve the grand vision of becoming a globally adopted currency.


#6

I think the assumption in question 2 and 3 about a Bitcoin only world is a bit far fetched

Agreed, but interesting to think about. Right now, it seems to me a single universal ledger (be it Bitcoin or something else) is the only way to get to the vision Bhaumik shared a few days ago: “The same goes for economies…all numbers know about each other…the value of your stock knows about the amount of change in my pocket…”

Screenshot%20from%202019-02-14%2009-25-51

This would be a very cool world to live in as every human would have a unified financial basis, not just a cultural + moral foundation.

Good point on that we’d talk about the purchasing power of 1 BTC in this world.

There are very valuable vehicles for storing wealth today that approximate an unseizable store-of-value but do not function currencies

Yes, I think our definition of “currency” will get looser and looser in the future. I’d say Gold can still be used as form of currency, just at a different scale and time horizon (e.g., repatriation of gold between different nations’ treasuries). I think the base layer of Bitcoin will end up as relatively: slow, small number of high value transactions.

I’d hope Bitcoin also takes some share of the “Real Estate SoV Vehicles.” [https://www.bloomberg.com/news/articles/2019-01-16/london-nyc-hong-kong-are-no-longer-immune-to-the-housing-slump]

Lastly, what Abra is doing with smart contracts is really really neat [https://support.abra.com/hc/en-us/articles/360001818392-How-do-Abra-s-synthetic-currencies-work-]

“For any fiat (e.g., USD, EUR, PHP) or cryptocurrencies other than bitcoin (e.g., XRP, DGB) that Abra supports, we provide users with exposure to that currency via smart contracts on bitcoin/litecoin.” It’s interesting they don’t allow you to claim forks/airdrops/etc. for the coins you hold (obviously since you actually hold a smart contract, not the underlying asset, but still wonder how their users will react).

And your specific point on “Large dollar amounts…collateralized by Bitcoin necessitates more BTC being locked up” is actually one of the reasons I had this thought of a Bitcoin-only world. I think whichever universal ledger the world ends up on, it will accrue a lot more of the hidden value in the world than most expect.


#7

interesting. I have not heard of them doing this until now.

yeah, I see your point.

Would you agree that the SoV use case is applicable to anyone in the world, while the collateralization of cash and equities use case is mostly applicable to people who don’t currently have access to those assets?


#8

Also a great question, and I believe your analysis is exactly right. The traditional equities collateralized by Bitcoin will initially be most valuable to those who cannot gain exposure to these assets through traditional means. Abra is focused on citizens in emerging markets for this reason.

With respect to Bitcoin as unseizable SoV I believe it’s an emphatic yes, everyone could benefit. Looking at the global economy, there’s two primary scenarios where I see Bitcoin being a valuable SoV, and almost everyone in the world might live through one of these scenarios at some point:
Scenario #1. You live in a wealthy country like the US, whose debt is denominated in its own currency. There is a lot of government debt, and interest rates are already near zero, meaning there is little room for central bank to lower interest rates to stimulate the economy in a recession. In this scenario, when a recession hits your government will likely print money to stimulate the economy which makes the cash you hold less valuable. They may even introduce negative interest rates, raise taxes or engage in outright confiscation (look at Cyprus and the EU sanctioned government seizure of wealth in citizens bank accounts as an example in 2013).
Bitcoin is a valuable tool in this scenario for retaining control over your wealth by protecting it in an inflation proof asset, that’s portable, and that exists beyond the reach of middlemen like banks which governments can enlist to enact their policies.

Scenario #2. You live in a poor or corrupt or unstable and indebted country. Perhaps your national currency is already losing 5-10% or more of its value annually. Perhaps you would like to flee with your wealth so that you and your family are not impoverished refugees when you arrive in a new country. Your current country has strict capital controls (because the economy is unstable and probably it’s national debts are denominated in another country’s currency e.g. USD, making your government’s ability to manage a debt crisis a lot harder) so you cannot withdraw or wire cash out of the country.
Bitcoin is a valuable tool for the millions/billions who might find themselves in this situation in parts of the globe e.g. Venezuela, Argentina because of its portability, inflation resistance, and unseizability. Even if you are searched at the border, you can carry a lifetime of earned wealth anywhere in the world with a password in your head.


#9

yes, but only if we assume that Bitcoin holds its value in this scenario. i.e. it’s totally possible that if an economy isn’t doing well, people lose faith in everything, including Bitcoin. Don’t you think?

Generally speaking, I resonate with your argument that Bitcoin serves a function when a wealthy economy is going through a recession and people are flocking to Bitcoin for security, or in unstable economies where Bitcoin is a much better alternative than the local fiat currency to begin with.


#10

Totally possible bitcoin drops in a recession, especially a deflationary one, but I think that wealth will look for an uncorrelated asset (hedge) during a downturn, and as previous studies have shown, Bitcoin has had a very low correlation with other asset classes. If the recession is inflationary, I think Bitcoin would perform well relative to cash.

While I don’t think people view bitcoin as a ‘risk off’ asset like gold, if it remains broadly uncorrelated it will probably fortify bitcoin’s perceived utility as a hedge which would make it attractive to hold a portion of one’s wealth in. Ray Dalio is famous for is “All Weather Portfolio” which is engineered to preserve value by investing into uncorrelated assets, which each perform differently in all 4 types of economic environments - The 4 Quadrants:
a. recessionary/inflationary
b. growing economy/inflationary
c. recession/deflationary
d. growing economy/deflationary

If a small allocation to Bitcoin can offer a similar type of protection as a sophisticated diversification strategy like Dalio’s, it will probably grow in its adoption and market cap.

Of course one never knows! But to quote Ali Hamed from CoVenture VC “Bitcoin is long us not solving our (fiscal) problems. I am long not us solving our problems”.


#11

excellent point.

Now, I’m going to divert the discussion a bit and ask this: If Bitcoin is a good hedge in a declining economy, do you think Ethereum and other cryptocurrencies are as well? why or why not?


#12

I think other cryptos would attract wealth if there was a run up in Bitcoin that resulted from inflation and economic turmoil. However, I believe the coin(s) that are disproportionately strong in security, have low or no inflation, are highly predictable (static?), and have a brand/track record as a SoV will attract a disproportionate amount of the capital flowing into crypto for safety.


#13

This is a fair question. Thanks for noting.