2/ Some fun debate in the comments below led me to realize I should supplement the above with a "why." That $10 trillion indicates desperation globally for a secure store of value. Such great desperation that people will pay high fees and take on counterparty risk.
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3/ Crypto doesn't yet solve this. It can't yet handle trillions in capital and currently entails substantially more 'counterparty risk' than a -0.50% annual yield implies (ignoring market volatility of both sovereign debt, fiat currency, and BTC.)
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4/ But the building blocks are there. Crypto at maturity offers zero counterparty risk (or extremely close to it), is impervious to depreciation, and has near zero administrative costs (due to transparent ledger.)
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5/ The biggest obstacle of crypto providing this service is volatility. Sovereign debt has a little volatility, fiat currency has more, but BTC currently has much more market volatility. But this is fixable.
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6/ First, any asset can generally be hedged for very close to the cheapest cost of capital on the planet, since those with the cheapest cost of capital earn money by offering swaps, effectively arbitraging their cost of capital.
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7/ Second, lots of experiments with stablecoins of all types may be a solution. Lastly, at maturity, BTC may exhibit equal or lower volatility to fiat currency.
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কথা-বার্তা শেষ
নতুন কথা-বার্তা -
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Not hard to see why many would prefer a negative 0.65% yield on 1-year German Bunds to the extreme volatility of crypto assets
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What if you could hedge as much or as little of that price volatility as you desired? What if you could use a 'stablecoin' pegged to any asset/currency/commodity/basket?
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How much would it cost me to hedge that volatility? More or less than 0.65%? And what would be the upside of pegging to a currency instead of just holding that currency?
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1. Unknown currently, but I could plausibly see swaps vs physical for less than that. Cost of custody of digital assets is fundamentally very low at scale. 2. to get the security of a bond without the guaranteed negative return of the sovereign debt.
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1. Are there loads of other risks associated with crypto - known and unknown? 2. If what you say is true (and there are no other risks) - can we not make limitless arbitrage profits?
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1. Definitely! Idiosyncratic risk can be diversified away and is thus literally irrelevant for small positions. Portfolio management 101 is that only marginal portfolio risk matters when evaluating risk of an asset. 2. No, because no one will pay you to lend to you.
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People don't generally hold developed-country government bonds as small positions where they don't mind the risk. The whole point is that they are supposed to function as nearly risk free assets. I'm still confused what you are even proposing.
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1/ My answers to
@Sharpe_Actuary were kind of out of context for this thread (therefore bad answers, ignoring the context.) - 3টি আরও উত্তর
নতুন কথা-বার্তা -
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How did they end up with negative yields? Why would anyone pay a country to borrow?
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If you have $25 billion, there's not a lot of options to park it safely. Banks are only FDIC insured for paltry amounts. You can't keep $25b in cash in a warehouse. So what do you do with it?
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I see. But, bonds usually have a positive yield, albeit small, right? I’d expect even the “country bond market” to be competitive enough to pay the lender SOMETHING. If I want to get a US bond, they offer me a small return, ya?
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1/ Yes - US bonds are currently yielding quite a bit. Lots of reasons for spreads between countries beyond default risk. It can reflect expectations of currency appreciation, but often structural requirements,
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2/ for example, Japanese pensions have to hold Japanese bonds.
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Got it. That makes sense, didn’t consider pension type scenario where you legit have no options. So, when you say negative yields here, you mean other/less developed countries than US?
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Not just less developed. German and Japanese yields for example are negative or medium-term bonds.
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That’s insane. Is there a historical precedent for this type of thing? If so, how’d that turn out? ;)
- 5টি আরও উত্তর
নতুন কথা-বার্তা -
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