What you believe shapes your perception of the world;
Your perception of the world determines how you think about it;
How you think about it determines the paths you choose to take.
In this way, everything we do, and everything we don’t do, is distilled from our thoughts. Understanding this is simultaneously liberating and empowering.
Liberating, because you can see how the narratives you are exposed to affect your life in very deep ways that you may not be consciously aware of. These narratives can range from uplifting to outright destructive, from constructive to pernicious. In being able to perceive this, you realize that you no longer have to accept and live with what those narratives are telling you. You can walk your own path.
Empowering, because in choosing to walk your own path, you are now free to choose your own beliefs, your own values, and draw your own conclusions.
Put simply: Change the way you think, and you change your reality.
The articles that we have collected here are ones that we wrote with this in mind – articles that hope to provoke thought, show different perspectives, and question what we think we know.
Just because the existence of a one world cryptocurrency isn’t a plausible economic reality doesn’t mean that cryptocurrencies cannot offer any real world value.
Because they do.
Both countries have been mired in multi-year struggles with the value of their currencies, especially versus the Dollar. While Venezuela is obviously in a much more dire situation, economically and politically, the citizens of both countries have increasingly turned to crypto.
While we do not know to what extent private citizens in both countries use crypto to conduct trade with each other, we know that at the very least, they see crypto as a valuable means of protecting their purchasing power, at least for now.
On a lesser degree of seriousness is El Salvador, which has made Bitcoin legal tender, released its own crypto wallet, and installed 200 Bitcoin ATMs.
What all three have in common is their need to find an alternative to the hegemony of the world’s reserve currency, the USD. El Salvador has been explicit about this, publicly stating that it moved towards accepting Bitcoin partly because of expensive Dollar remittances.
Whether the citizens of Venezuela and Turkey realize it or not, their enthusiasm for cryptocurrencies is also underpinned by the same need to escape the harsh realities of the global USD system.
That is, the necessity for every country on the planet to be able to obtain Dollars in order for them to participate in global commerce. The instability within these countries, economically, politically, or both, drives their domestic currencies’ value against the Dollar sharply lower.
This in turn creates a whole host of problems for their citizens, not least of which is spiraling inflation and the loss in value of what they earn or save.
Crypto provides them with an alternative to being caught in that trap.
Whatever your view on crypto and its viability is, Venezuelans and Turks are grateful for its existence at this point in time. Which highlights how, under the right circumstances, cryptocurrencies can not only be of use, but also prove to be invaluable.
In this case, it is the accessibility of the blockchain to all who have access to the internet, and the relative ease of swapping in and out of it. Bear in mind that the market for the currencies of many countries can be illiquid. This makes swapping out of such a currency into another fiat currency an expensive endeavor.
Furthermore, whether or not an asset is a “safe haven” is a matter of perspective. The Venezuelans and Turks flocking to cryptos demonstrates this clearly.
In addition, there’s a broader point to this discussion.
We know that individual countries with their own domestic currencies already chafe and struggle with having the Dollar as the global reserve currency. This has been the case for the past few decades, where Dollar funding crises have popped up all over the globe.
The American establishment is aware of, and acknowledges this fact. John Connally, a former US Treasury Secretary, summed it up succinctly with his now infamous quip that “The Dollar is our currency but it’s your problem”.
How much worse would the situation be for countries having to use a one world cryptocurrency without having the pressure valve of their own domestic currency?
Now, if Greece was issuing its own currency, exporters would not have been as firmly stuck between the relative strength of the Euro and their high costs.
This is because a country’s exports get cheaper as its currency devalues (this is balanced by a rise in the cost of imports, which will drive up the cost of imported products).
This means that exporters might not have suffered as steep a fall off in revenues as they did by using the Euro, reducing the need to lay off as many workers.
If this is too confusing or abstract, think of a traditional currency as a pressure valve customized to the needs and idiosyncrasies of a particular economy. When too much economic pressure builds up, it can be released via devaluation, instead of blowing up the economy’s labor force.
Which brings us back to the plausibility of a crypto-one-world currency.
The issue at hand isn’t government irresponsibility with printing (even though central banks do not actually print money) and borrowing in fiat.
It’s whether or not a single currency, traditional or crypto, can act as a pressure valve that encompasses all of the economic peculiarities of the world’s countries.
If the Euro, used by 19 countries in 2021, and is the closest real life example of a modern day single currency we have, couldn’t account for Greece a decade ago, how can any currency account for all 195 countries in the world?
It can’t; economies are simply too diverse in their activities and levels of competitiveness for the idea to be plausible.
Similar to Greece’s experience in the Eurozone, uncompetitive economies using a one-world cryptocurrency will struggle against the deflationary effects of a currency that is too strong for its level of competitiveness.
Compounding matters is the fact that labor suffers the most during deflationary episodes, with massive layoffs the norm.
Without the “emergency release” option of a traditional currency, economic recovery takes place over decades instead of years (post bubble Japan is a good example).
This sets many workers back years in terms of lifetime earnings, and many give up looking for work altogether, resulting in the country’s workforce not only decreasing over time, but also losing relevant skills.
This obviously creates an economic headache, as over time the economy can no longer produce the goods and services the rest of the world demands, leaving the country trapped in the economic doldrums.
On top of this, the country will also have to deal with increasing levels of economic inequality.
As more and more citizens find themselves stuck outside the labor market and unable to find a job that matches their skills, they become trapped in a low (or no) income situation with no way out. This breeds resentment and over time can fester into social and political unrest.
As such, an economy’s choice of currency has far reaching consequences and second order effects, which are not all obvious at first glance.
While the idea of a one-world cryptocurrency (or a one-world fiat currency) is seductive in its simplicity, it really doesn’t serve anyone’s economic interest in the long term, except maybe for the folks promoting their version of it.
Is it plausible for a single cryptocurrency to replace all fiat currencies?
That is, can there be a crypto-one-world currency?
Before we begin, some definitions are in order, for the purposes of clearly delineating the scope and hence applications of this discussion.
Note the use of the term “traditional” currencies as opposed to “fiat”. What’s the difference?
For our purposes, a “traditional” currency is one that is associated with a particular country, and fiat is government backed currency associated with a particular country. In other words, fiat, here, is a subset of traditional currencies.
Why the need to draw this distinction? Because geography really matters.
The geography of a country pretty much determines what its main economic activities are; a nation blessed with natural resources and access to deep coastal waters will gravitate towards the extraction and export of those resources. Australia is a great example of this.
On the other hand, a country with little to no natural resources will have to produce and export something else.In our modern economy that would be financial services such as wealth management and capital markets expertise. Hong Kong, Singapore, Luxembourg, Switzerland all come to mind.
What does this have to do with a crypto-one-world currency?
Consider that, at any one point in time, different economies will have different economic conditions, because of the variety of economic activities they undertake. That is to say, a country focused on digging up stuff from the ground and selling them is exposed to different economic cycles than a country whose economy is focused more on the provision of services.
As such, each country needs its own currency to reflect its own specific set of economic conditions in order to keep its economy in balance.
Greece’s experience with the Euro during the continent’s debt crisis provides a good example. As borrowing costs for the Greek government skyrocketed from 2010 – 2012, global investors refused to lend them any more money.
This exacerbated already poor economic conditions, driving the country into a deflationary quagmire.
If Greece wasn’t using the Euro and had its own currency, the FX market would have driven its value much lower.
While this sounds like a terrifying prospect, and in many ways, currency volatility is terrifying (just ask the Argentines and the Turks), it is exactly what the Greek economy needed to rebalance itself and regain some measure of competitiveness.
Unfortunately for the country, they couldn’t do so because of the Euro.
This is most easily seen from the perspective of Greek exporters. As economic conditions deteriorated, the strength of the Euro meant that Greek exporters’ sales fell off a cliff even though their costs did not change.
Greek exporters simply were not competitive enough to be able to stay in business with the Euro trading at the levels it was back then.
Consequently, the only course of action they could take to survive was to lay off their employees. This in turn led to mass layoffs and all the attendant negative second order effects.
What would it have been like if Greece had control of its own currency?
To be continued…
For a modern parallel to Newton’s misadventures in financial markets, think of Bitcoin’s sharp rise, and subsequent tumble.
Bitcoin rose sharply over 2017 – 2018, and topped out at just below $20,000, then proceeded to crash. Another meteoric rise followed in 2020 that peaked near the end of 2021 at around $68,000.
While stories of crypto traders who have made millions (or even billions) abound and draws even more people into the craze, there are many more folks who have traded Bitcoin in much the same way as Newton did during the South Sea bubble.
These traders either made a fortune and lost it plus more, or just lost their shirts without making a fortune at all.
The reason we only hear of those who made huge profits is the survivorship bias; people who lost big are simply forgotten or not discussed. After all, who goes around bragging that they lost a fortune?
It is important to note that all of this is extremely clear to us today because we are looking at the price chart with the benefit of retrospect. When we are in the midst of a market bubble, or a trade that has started to finally rack up asymmetric returns, it is impossible for us to know when prices have reached their zenith.
Consequently, in order to not fall prey to the disposition effect while trading to make asymmetric returns, we must trade in a fashion that works to mitigate the disposition effect, as detailed here.
On a broader level, astute readers would note that all of this sounds very similar to the concept of convexity, and how it applies to markets and real life. That is, to pay a small fee in return for a large payoff; and that’s because it is!
Trading for asymmetric returns is, at its core, an exercise in going long convexity in order to exploit the Paretian nature of markets.
More importantly, as the examples of Newton and Bitcoin so clearly illustrate, financial markets have always produced opportunities which generate asymmetric returns.
Regardless of the form they take; an old fashioned stock market bubble and crash, a housing bubble/crash, banking crisis, or hyped up new technology, all involve the same combination of greed, fear, and the opportunity to make, or lose, a life changing amount of money.
Unfortunately, while everyone wants to make a life changing sum of money, trading bubbles and crashes, or pursuing asymmetric returns in general, is a very difficult endeavor, again clearly illustrated by Newton and Bitcoin.
However, if done well and consistently, such an approach can, over time, produce significant returns, although requiring tremendous discipline, emotional control, and mental stamina.
Nothing is ever easy in life, much less trading the markets profitably. Give yourself as much of a chance to succeed as possible by starting on the right foot with a well constructed trading plan.
Understanding how to go about making asymmetric returns is simple enough, but actually being able to do it is not.
Since no one knows with certainty beforehand whether or not a trade will be profitable, much less be able to produce significant returns, one has to treat every trading opportunity as if it can.
This means that within whichever framework traders use to identify asymmetric trading opportunities (trend following, distressed debt investing, etc.), they have to be prepared to take losses.
Of course, this necessitates disciplined risk management, in order to keep the losses small enough so as to not limit their ability to make it all back when they do hit their asymmetric trade.
However, incurring many small losses is emotionally exhausting, and most traders give up and either stop trading, or change strategies before they ever hit a trade that produces asymmetric returns.
In addition, human traders are also susceptible to the disposition effect. This results in them exiting their winning positions too early, while letting their losing ones run for too long – the exact opposite of what they need to do when trading for asymmetric returns.
Sir Isaac Newton provides us with an excellent example of such behavior.
As the South Sea Bubble was inflating to epic proportions in 1720, Newton took the opportunity to sell off some of his holdings, and made a fortune in doing so. However, as the bubble kept growing larger, Newton got swept up in the market euphoria and went back into the market to buy more shares.
Unfortunately for him, prices turned down soon after (turns out he bought the high), then proceeded to plummet.
Instead of selling his now heavily loss-making position, he held on to them, and even bought more shares as prices fell (although not for himself, but for an estate of which he was an executor). As a result, Newton ended up losing a lot of money – the fortune he had made on South Sea stock previously, plus more.
From this anecdote, we can see that when Newton first sold his South Sea position, he was doing so too early, i.e. not letting his winners run. And, when the bubble began to burst, he held on to his losses for too long, instead of cutting them short.
In other words, one of the world’s greatest minds succumbed to the disposition effect, and it cost him dearly.
Intelligence clearly isn’t all that is needed to succeed in the field of trading and investing. Understanding oneself, and the nature of asymmetric returns are just as important.
To be continued…
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