The World’s Two Best Assets
Disclaimer: This article is written for informational purposes only, and does not constitute investment advice or a solicitation to buy any Address Labs services or products.
Introduction
The world’s two best assets for maximizing optionality are the United States Dollar and Ether, in that order.
In the context of freedom, one of the main reasons for holding the latter is because it’s the most globally accessible way to obtain the former.
This might sound sacrilegious coming from crypto operators and investors.
But recent geopolitical events have exacerbated an inconvenient truth that contradicts the crypto community’s talking point that fiat currency is going to zero.
The United States Dollar (“USD” or the “dollar”) is the world’s most desirable asset and the current dollar system is its biggest cartel.
The rest of this article explores these claims in more detail, but the TLDR is:
Money printing aside, ensure you have some dollars because there’s a severe shortage, and accumulate Ether in case you’re ever prevented from obtaining dollars.
USD is the only fiat currency that matters.
We’re all familiar with the money printer go brrrr chart, which without context, would lead you to believe that the dollar is going to zero.
The key classifier missing from that statement is: relative to what?
Not the Euro, British Pound, Yen or Chinese Yuan.
The Dollar Currency Index, which measures the strength of the dollar relative to a basket of foreign currencies, has continually trended higher since the 2008 Financial Crisis.
If we temporarily ignore the market’s initial reaction to the Trump administration (which saw continued balance sheet expansion until late 2017, proving the point we’re about to make), the three largest declines in the dollar relative to other fiat currencies were self-inflicted by the Federal Reserve through quantitative easing programs.
The USD is already back trading at its pre-2020 levels, despite the rampant dollar supply expansion as a response to the COVID-19 pandemic.
Santiago Capital’s Brent Johnson explains this phenomenon as part of his Dollar Milkshake Theory, but in simplistic terms, it’s because many foreign governments and companies borrow in dollars.
Borrowing in dollars significantly expands an organization’s access to credit because the dollar network has by far the most adoption. (Sound familiar regarding NFTs on Ethereum?)
There is currently $13 trillion in dollar-denominated debt outside the United States, and given how much of this borrowing takes place through opaque channels, this figure could be north of $50 trillion.
Additionally, the dollar regime dominates the multi-trillion dollar oil market.
Oil is an input to everything, and the primary medium of exchange to buy oil is dollars.
The upshot is that the U.S. Dollar is the settlement currency in almost 90% of global transactions (Federal Reserve).
In other words, the dollar is a monopoly.
Crypto is a symptom of the dollar’s dominance.
Crypto valuations are heavily influenced by the chronic USD shortage, as evidenced by the top projects in the token economy.
Tether and USD Coin aim to be dollar representations, and Ethereum and BNB are the two primary networks to obtain Tether and USD Coin based on the number of protocols they enable.
Of course, Ethereum and BNB feature a host of non-dollar derivative projects, but a majority of their volumes involve dollar projects like Tether and USD Coin.
To buy Tether and USD Coin, users need Ether and BNB Coin to pay for transactions, which in turns, creates tremendous value for the Ethereum and BNB networks.
Bitcoin is a symptom of the inaccessibility of property.
Bitcoin has little to do with USD representations or a means to access them, but bitcoin’s value is a second derivative impact of the dollar’s dominance.
As the Federal Reserve creates more dollars to satiate demand, that money is recycled into asset prices such as real estate, which has continued to soar to record highs.
But real estate is only as valuable as the strength of its underlying property rights system, which varies by country.
How many countries in the world have the infrastructure and/or desire to accommodate widespread asset ownership as well as a credible legal system to defend that ownership?
And in the few countries that do, it’s not as if a meaningful portion of their renter populations can afford to get onto the property ladder.
The net result is demand for a secure, scarce asset that is widely accessible.
Bitcoin has been arguably the largest beneficiary of this secular trend.
The existing dollar system is all-powerful (for now).
The United States is the world’s most powerful nation because it not only manages the supply of dollars, but it also exerts enormous influence over dollar distribution.
Cross-border payments are a complex topic.
If we send you money and your account is in a different country, it’s not as if there’s a representative from our bank hopping onto a transatlantic flight with a suitcase full of bills.
Instead, the payment is funneled through a messaging system called SWIFT, which enables the crediting and debiting of account balances between financial institutions.
This process is costly and inefficient — it’s also the primary way to obtain access to USD from abroad.
Given the dollar is the de facto global medium of exchange for everything ranging from energy to food, if a country is shut off from SWIFT, it will starve.
Although SWIFT governance is composed of a group of independent directors, the United States is unequivocally the largest decision maker in the group given the vast majority of transactions are settled in dollars.
And if the independent directors don’t do as the United States wishes, the US can always fall back on the world’s largest military to influence policy.
Conclusion
If you have dollars, you can buy anything.
If you don’t have dollars, and can’t connect to SWIFT, the best way to access dollar derivatives is Ethereum.
It’s easy to discredit government officials and central bankers as inept bureaucrats, but it’s short-sided to dismiss their power in the current dollar system.
If for whatever reason, you are cut off from the current dollar network, Ether becomes your most valuable commodity.
