What ultimately determines whether a currency has value? When it comes to fiat, it’s a couple things. Mainly it’s confidence in the currency issuer and demand for the currency based on transaction volume. Currently, Bitcoin has been gaining ground in the former. It needs to make up a lot more during this bear market in the latter.
Dollar Denominated Debt is King
The world runs on the U.S. dollar. Apart from Europe, where the euro dominates, the majority of global trade is invoiced in dollars. The Fed estimates that foreign investors held nearly $1 trillion in cash at the end of the first quarter of 2021, roughly half of all U.S. notes in circulation. Central banks around the world hold about 59 percent of their foreign currency reserves in dollars. Much of these reserves are held as dollar-denominated debt — that is, U.S. Treasuries — rather than currency. About a third of all U.S. debt was held abroad as of 2021, and a little over 60 percent of debt issued by non-U.S. companies in a foreign currency was denominated in dollars.
The above statistics basically means that almost 60% of the debt in the world is paid via dollars. If you transact in a foreign currency on a daily basis, you need to convert into dollars to pay your loans, notes, mortgages, etc. This keeps the dollar in constant demand and generates a relative level of support for the dollar smoothing out its’ valuation changes and lessening its’ potential for collapse.
What is Defi?
Defi or decentralized finance is:
Decentralized finance (often stylized as DeFi) offers financial instruments without relying on intermediaries such as brokerages, exchanges, or banks by using smart contracts on a blockchain. DeFi platforms allow people to lend or borrow funds from others, speculate on price movements on assets using derivatives, trade cryptocurrencies, insure against risks, and earn interest in savings-like accounts.[1]
https://en.wikipedia.org/wiki/Decentralized_finance
These financial transactions and instruments are typically denominated in the native coin or token to the ledger being used. Sometimes they are denominated in higher layer coins/tokens but ultimately the layer 1 coin is what creates the foundational value.
Defi currently relies a lot on staking coins/tokens. It’s analogous to the deposits at a bank being leveraged against to create loans and mortgages. The staked coins receive an interest rate and typically have very strict rules in terms of how long they need to remain staked. There is a huge risk in staking as the staked coin’s value continues to change. This might mean that a very attractive percentage return still can’t make up for the drop in the value of the coin itself. This makes staking very risky still. It has also been plagued by rug pull operations and ponzi schemes during this last bull cycle.
Statista places the current estimate of staked coins at around $50 billion. This is down from a record of about $250 billion at the end of 2021.
Rising interest rates are also creating a more competitive market for cash. Treasuries yielding 3-5% annually with favorable tax treatment on returns means all risk assets are under pressure. US Treasuries and money market funds have been a black hole sucking in billions from other areas in the investment ecosystem. Add in the scams and exchange collapses in the last couples years and you get a huge drain on the overall Defi system.
Is Defi Dying?
Absolutely not. Fortunes are made during Bear Markets. This is true in the Casino on Wall Street as well as other markets like crypto. Defi platforms will need to focus greatly on how user friendly they are while also making certain that they are transparent in their operations and financial health. Potential coins to stake will be harder to acquire in the near future based on the recent crisis in confidence. Market volatility will also need to calm down first before Defi can begin expanding again.
But ultimately the answer is to build for the future that is needed. One that is decentralized, user controlled, and distanced from governmental manipulation.
How to Get Involved
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