Fractional Redistribution

Why non-asset back cryptos are just like FIAT currencies and potentially much worse... And what the alternatives are going forward.

I'm sure you've heard about the calamities involving Terra and the crypto market this past week. This is a front signal for much stormier times ahead.

In short, this is what really happened. Notice who the two bad actors are mentioned atop this message, and how much of the world's known financial assets they control.

Here are three postulates we can take away by observing current financial market dynamics overall:

1. Dollar-denominated debt, whether in form of notes, credit or bonds, has nowhere else to go, just as inflation has nowhere else to go, but into new asset classes; crypto, in a broad context yet with narrowing examples, is that new asset class.

2. All cryptos are inextricably tied to dollar denominations, namely Tether, whose supposed "stable" peg is short by anywhere from $25B to $65B... and this is probably a conservative estimate. If there is no real stability or "safe haven" currencies, then the only play right now is to continue to arbitrage the relative value between baskets of currencies.

3. While alarming for unsuspecting investors, none of this is all that surprising, especially when big investors ("whales") need a place to go to given the massive capital flight out of equities and many other traditional asset classes, to include real estate. This will temporarily translate into an increasing value in cash (USD), albeit with less and less purchasing power, until the dollar is devalued in favor of national currency stacks, and alternative asset-backed cryptocurrencies.

The big caveat here is: What kind of cryptos, or encrypted digital assets?

The short answer: NFTs that represent real assets with real value in the world, and other digital assets whose data are used as a real utility, in the form of software stacks, monetizable business networks, project DAOs and the like.

Keep in mind, that as of right now, there aren't all that many legitimate forms of these encrypted instruments to choose from.

Which brings us to the theme and title of this post - fractional redistribution.

What this means in the simplest of terms is that money or assets at interest are fractioned at a profit until no yield can be gleaned, due to rate adjustments (imposed inflation) and/or compound interest (price and asset inflation).

Interestingly, this happens both in the traditional financial markets (ex: who is actually buying bonds these days?), and in the crypto/DeFi markets, where provably scarce supplies of coins or tokens are then split to create speculatively manageable volatility and yield.

The only real difference between them is that the former addresses an endless monetary supply, where the latter involves deterministic algorithms to solve self-imposed math problems that have very little to do with what happens in the real world. Just like equities don't really reflect what companies actually do in the real world.

You see the parity, yes?

My recent post on monetary viscosity covers off on this concept in terms of perceived value and addresses the ultimate alternative, which is a sound currency (in development).

For now, the best recourse is for investors to wait for the markets to shake out, sit on their cash, observe the assets that can sustain themselves, and then make appropriate moves.