Hedging USD exposure

[DevilPlate]

That's because very few ppl hold a significant enough of their portfolio in gold, such that the few % points of forex fluctuation will actually hurt. But yes, fluctuations in USD/SGD rate will affect your gold investment, as the market makers will quote you a different price in SGD based on how the USD moves.

I hold like 15-20% of Gold (mainly physical) of my liquid networth but it is to hedge against SGD in case become banana republican lolol

 

[TiedInsurer]

I hold like 15-20% of Gold (mainly physical) of my liquid networth but it is to hedge against SGD in case become banana republican lolol

Then i guess you don't mind the exposure to USD as well, as that still achieves your goal of hedging against SGD becoming a banana republic.

 

[DevilPlate]

Then i guess you don't mind the exposure to USD as well, as that still achieves your goal of hedging against SGD becoming a banana republic.

Physical Gold has no counterparty risk…..

If USD collaspe, Gold price will skyrocket

 

[TiedInsurer]

Physical Gold has no counterparty risk…..

If USD collaspe, Gold price will skyrocket

Yes, but only because if that happens, market makers will abandon the USD as the primary pair.

 

[BBCWatcher]

Actually I thought whilst S&P500 is made up of us listed companies, but the nature of their business is quite globally diversified. Hence, it’s not intrinsically a “US Index” right?

The S&P 500 stocks collectively have some U.S. "skew." That skew is diminishing with time, and it's nowhere near the equivalent of holding U.S. dollars or close proxies to U.S. dollars. Even so, I don't think you should overweight or underweight a particular country's stock market(s). Mainly because it's possible some other place besides Wall Street could develop into a stronger stock market competitor (which has little or nothing to do with currencies). Let the global index figure that out for you. Don't try to second guess that possible future.

essentially, as long as the asset is denominated in USD, he is long US dollars too

It depends on what you mean by "denominated." If you mean "it's listed and quoted in U.S. dollars," no, that's arbitrary. Oil, wheat, gold, diamonds, Picasso paintings, shares of Sea Limited, and the Straits Times Index stock fund EWS (yes, really) all happen to be listed and quoted in U.S. dollars. So what? That doesn't make any of those things U.S. dollars.

Go look at the bid board in a video of an art auction at Sotheby's. The bid board will list several currencies as the bidders offer higher and higher prices on a painting or other work of art. The painting is never any of those currencies. It's a painting. You merely exchange a currency to buy the painting. And then you aren't holding that currency any more.

He can only sell and receive USD proceeds and will face the FX rate whatever it will be at that time

Only for immediate exchange purposes, for 5 minutes (or whatever). That doesn't matter, except as part of the transaction cost perhaps. Whatever you're holding you're holding. And if you're not holding U.S. dollars (or something well correlated with U.S. dollars, such as U.S. dollar denominated corporate bonds), then you're not exposed to U.S. dollars. You're exposed to how well Sea Limited does or doesn't do if you're holding that company's shares, for example.

I tend to disagree. The markets are affected by the liquidity available. In the case of ETH and BTC, market makers provide liquidity almost entirely in USD....

Do you really have to quibble about this? You're holding 80% of your investible net worth in USDC. I agree you're heavily tied to the U.S. dollar's fate. You don't have to factor your 20% (ETH and BTC) into that assessment. (Though I'd disagree with you to some extent. Pull up a BTC versus USD Index chart to see what I mean.)

Hmm the problem is that i don't want to change my portfolio risk exposure, other then the USD exposure portion.

OK, so if I can translate that, something like a global stock index fund is too "boring" because it isn't volatile enough for you. That the circa 55% peak to trough decline in stocks (as measured in U.S. dollar terms for the S&P 500 during the Global Financial Crisis) just isn't exciting enough for you.

Sure, no problem! Just pick a basket of more volatile stocks if you like, a subset of the total investible market. There are several such choices available. Then you're not holding U.S. dollars or U.S. dollar proxies, but you are holding higher expected volatility assets.

 

[BBCWatcher]

Physical Gold has no counterparty risk…..

That's not historically accurate. The counterparty for physical gold is the government (or governments). They can grab your gold if they like. Occasionally they have.

Another counterparty is a thief. Physical gold comes with that risk, although maybe you can insure against theft, to some degree anyway.

If USD collaspe, Gold price will skyrocket

That's not unique to gold. It's just basic math. If the value (in real goods and services) of the U.S. dollar falls dramatically then the prices of those real goods and services expressed in U.S. dollars skyrockets. More simply, if the U.S. dollar falls, the U.S. dollar falls.

....Although TIPS (U.S. Treasury Inflation-Protected Securities) would do well in that scenario too, as long as the U.S. government continues to exist as a functioning entity. As I keep pointing out to anyone who will listen.

 

[DevilPlate]

That's not historically accurate. The counterparty for physical gold is the government (or governments). They can grab your gold if they like. Occasionally they have.

Another counterparty is a thief. Physical gold comes with that risk, although maybe you can insure against theft, to some degree anyway.

That's not unique to gold. It's just basic math. If the value (in real goods and services) of the U.S. dollar falls dramatically then the prices of those real goods and services expressed in U.S. dollars skyrockets. More simply, if the U.S. dollar falls, the U.S. dollar falls.

....Although TIPS (U.S. Treasury Inflation-Protected Securities) would do well in that scenario too, as long as the U.S. government continues to exist as a functioning entity. As I keep pointing out to anyone who will listen.

Everything including your life and freedom has counterparty risk lolol

 

[TiedInsurer]

Do you really have to quibble about this? You're holding 80% of your investible net worth in USDC. I agree you're heavily tied to the U.S. dollar's fate. You don't have to factor your 20% (ETH and BTC) into that assessment. (Though I'd disagree with you to some extent. Pull up a BTC versus USD Index chart to see what I mean.)

Fine. I'm not the one who started quibbling about this first and trying to change your mind. It's mainly you trying to change mine by quibbling with me on this point. Let's agree to disagree. I just think i have a lot of USD exposure, and i want to hedge it. End story. What i hold is not important. You can just assume i hold 100% in USD cash in a bank account if you wish. Everything else isn't relevant.

OK, so if I can translate that, something like a global stock index fund is too "boring" because it isn't volatile enough for you. That the circa 55% peak to trough decline in stocks (as measured in U.S. dollar terms for the S&P 500 during the Global Financial Crisis) just isn't exciting enough for you.

Sure, no problem! Just pick a basket of more volatile stocks if you like, a subset of the total investible market. There are several such choices available. Then you're not holding U.S. dollars or U.S. dollar proxies, but you are holding higher expected volatility assets.

...You suck at translating. I'm literally holding 80% of my portfolio in USDC. Which has zero upwards price volatility because it's never redeemable for more then USD1. The only direction it can go is down, in the event the company commits fraud and steals the US dollar backing, but it stays at exactly $1 otherwise. If that's not boring, i don't know what is. You're coming up with a lot of ideas about what i am or am not, and trying to impose your ideals on me.

 

[BBCWatcher]

Everything including your life and freedom has counterparty risk lolol

Yes, agreed! There are merely various counterparties and varying counterparty risks.

….Let's agree to disagree. I just think i have a lot of USD exposure….

I agree, you have a lot of USD exposure.

….and i want to hedge it.

OK, so you could dive into the options/futures market (a legitimate one — the CBOE offers this, I think) and engage in USD currency hedging. Via Interactive Brokers for example. But I don’t think this will solve all your problems, or even your biggest problem, for a reason you actually highlight. (See below.)

End story. What i hold is not important.

Actually, what you hold is very important. As you explain below.

You can just assume i hold 100% in USD cash in a bank account if you wish.

Yeah, but you don’t, and that’s rather the point. (Assuming fully FDIC insured deposits in this counter example.)

...I'm literally holding 80% of my portfolio in USDC. Which has zero upwards price volatility because it's never redeemable for more then USD1. The only direction it can go is down, in the event the company commits fraud and steals the US dollar backing, but it stays at exactly $1 otherwise. If that's not boring, i don't know what is.

It’s quite exciting, actually.

So you’ve got exposures, plural. If the U.S. dollar falls fairly dramatically or more than that, relative to some other measure of value you care more about, USDC falls right along with it, 1 for 1. Moreover, if Circle (I think it’s Circle, right?) screws up then you could lose 80% of your liquid investible net worth in an instant. Even more if you think BTC and ETH would be impacted negatively.

I’d still call that exciting.

So what to do? Well, you can hedge against the first risk. There’s a market for that, a legitimate and reputable one. Shiny Things knows more about U.S. dollar hedging via the forex options/futures markets than I do, so I’d ask him.

It’s the second part, the risk that Circle screws up, that you can’t hedge against. The only way you can reduce that risk is to reduce the percentage of your portfolio you’re holding as USDC. I can’t think of any other way. Sorry about that.

 

[d5dude]

Actually crypto is kinda like Gold.

I never heard anyone buy Gold (which is priced in USD) and need to hedge fx risk whahahaha

If u own a shitload of US treasuries, then yes must hedge!

The problem is it hasnt worked that way so far. Crypto has tanked even as the dollar fell recently, its obviously not gold, nor is it a dollar hedge.

 

[BBCWatcher]

It’s the second part, the risk that Circle screws up, that you can’t hedge against. The only way you can reduce that risk is to reduce the percentage of your portfolio you’re holding as USDC. I can’t think of any other way. Sorry about that.

Elaborating on this point, to hedge well against the risk that Circle screws up you'd have to find a high quality counterparty willing to take the opposite side of that bet. Who would do that? Nobody I can think of.

Technically there are other U.S. dollar "stablecoins," so hypothetically you could hold a variety of them. But that doesn't really work either. Most of them are small, none are even close to systemically important (no government will come to the rescue), and a significant run on one stablecoin is likely to trigger a run on all.

Of course you could hold real U.S. dollars in various forms (such as U.S. dollar T-bills), then hedge those real U.S. dollars (with high quality counterparties) if you wish. But many people don't like to do that because it looks more like money laundering (or actually is in some cases), and financial institutions frequently close such accounts.

Shiny Things probably would have much more to say. I assume I'm barely scratching the surface.

 

[TiedInsurer]

OK, so you could dive into the options/futures market (a legitimate one — the CBOE offers this, I think) and engage in USD currency hedging. Via Interactive Brokers for example. But I don’t think this will solve all your problems, or even your biggest problem, for a reason you actually highlight. (See below.)

Thanks. I'll explore this one.

Moreover, if Circle (I think it’s Circle, right?) screws up then you could lose 80% of your liquid investible net worth in an instant.

USDC is 101% backed by US dollar reserves. 70% of the reserves backing the USDC, is held in cash, short-dated US Treasuries and overnight US Treasury repurchase agreements with leading global banks. These are managed by Blackrock. The remaining 30% is held in multiple US bank accounts as dollar deposits to meet liquidity needs in case a large institutional investor needs to redeem a large sum. All the above is subjected to weekly attestations by a Big 4 auditor, and audited annually by Deliotte.

Barring outright fraud, or the collapse of one or more of the banks and financial institutions holding the assets, the money is pretty safe. And even if any of the above does happen, it's not going to go to zero. It simply goes down to whatever percentage of asset backing is leftover. I doubt that they'd be able to avoid detection by the auditors if fraudulent activity grows too significant. Deliotte or one of the other Big 4 auditors would have noticed something is amiss in one of their weekly attestations, or audit, before it goes to literally zero. You can't hide a $30+ billion dollar hole, especially if you need to hand 70% of it to BlackRock to manage.

I'm not saying the risk of a USDC implosion is zero btw. I just reject the idea that it will go down to literally zero. Anything less then 70% is pushing it, and signals that the US government itself is defaulting on the treasury bills.

@Shiny Things I'm told you're the expert. What are the common tools you use for hedging USD exposure?

 

[BBCWatcher]

USDC is 101% backed by US dollar reserves....

OK.

Barring outright fraud, or the collapse of one or more of the banks and financial institutions holding the assets, the money is pretty safe.

Well, those are actual risks. The way you mitigate those risks (if you wish to do so) is through genuine portfolio diversification. Which still circles back to not holding 80% of your liquid investible net worth in a single vehicle. (Pun intended.)

And even if any of the above does happen, it's not going to go to zero.

Oh, I wouldn't go that far. Hypothetically a government could swoop in, declare USDC a criminal enterprise, and seize it all. For example. Or seize yours. For example.

I doubt that they'd be able to avoid detection by the auditors if fraudulent activity grows too significant.

Ever read about Arthur Andersen and Enron? There's a reason the "Big Four" accounting firms are four in number now. How about CDOs and the Global Financial Crisis?

USDC is, what, circa US$35 billion? Nobody who matters enough would miss it. Just sayin'.

 

[TiedInsurer]

Oh, I wouldn't go that far. Hypothetically a government could swoop in, declare USDC a criminal enterprise, and seize it all. For example. Or seize yours. For example.

Hypothetically, a government could also declare Blackrock a criminal enterprise and seize it all.

In all seriousness, only the US government can seize the funds since it's all held in the USA. Could a US government that is particularly hostile to crypto do it? Perhaps. That would require major changes to the political climate though. They are not just seizing funds of one company, but the funds of ordinary people everywhere, including Americans. Something big would have to happen before they take such a drastic step. Take note that 40% of Americans hold crypto, and every last one of them are going to be affected and angry with the US government.

Ever read about Arthur Andersen and Enron? There's a reason the "Big Four" accounting firms are four in number now. How about CDOs and the Global Financial Crisis?

Enron's financials were complex. The USDC reserve funds are not. They don't require significant professional judgements, or allow leeway for accounting estimates in estimating true liquidatable value. They are held in cash, and treasury bills. You either have the money, or you don't. The auditor can't claim plausible deniability because of estimations turning out wrong. These are also not complex financial instruments like a credit default swap with a lot of different counterparties. Recoverability doesn't require complex estimates. It's cash, and treasury bills after all. And all 4 accounting firms are looking, not just one, so they'd have to convince all 4 to cover for them.

 

[BBCWatcher]

I have a suspicion Shiny just like BBC are not locals they maybe working in Spore and not retire in Spore so it make no sense for them to change USD back to SGD if they intend to move on later. Nationality matters in this issue of USD change to SGD. Of cuz if in real life Shiny is SC or SPR then worth to hear his suggestion.

OK, I'll take the bait this time. As it happens, I think I'm/we're holding substantially more Singapore dollars than U.S. dollars. At least in cash and quasi-cash terms that's undoubtedly true. And I'm currently trying to reduce U.S. dollar holdings and increase Singapore dollar holdings.

Your hypotheses are very occasionally entertaining.

Hypothetically, a government could also declare Blackrock a criminal enterprise and seize it all.

Yes, that's possible. Which is why I don't have all or most of my wealth held with a single custodian or riding on a single vehicle — something we don't currently have in common. However, Blackrock has US$9 trillion under management. USDC is about US$35 billion. It would be reasonable and rational to draw risk-related conclusions accordingly.

In all seriousness, only the US government can seize the funds since it's all held in the USA.

And that's possible, of course.

Could a US government that is particularly hostile to crypto do it? Perhaps. That would require major changes to the political climate though. They are not just seizing funds of one company, but the funds of ordinary people everywhere, including Americans.

"Ordinary people everywhere?" What percentage of the U.S. population do you think holds any USDC? One estimate I can find from last year was 1.8 million people worldwide hold USDC. That would mean an average holding below US$20,000 per person, and of course the mean is skewed (the median has to be a lot lower). Most of those 1.8 million hold far less than US$20,000. The U.S. population is roughly 340 million for reference. If you think half the 1.8 million USDC holders are U.S. residents then that's about 0.3% of the U.S. population.

"Safety in numbers" there just ain't.

Something big would have to happen before they take such a drastic step. Take note that 40% of Americans hold crypto, and every last one of them are going to be affected and angry with the US government.

Well, I hold cryptocurrency as it happens. If it all vaporized tomorrow exactly nothing would happen to me except I might have another story I could laugh about. I wouldn't even be bothered to complain. Seriously. Most of that 40% are exactly like me. It's "sofa cushion coins" for most. Most of us aren't holding anywhere even remotely near 100% of our liquid investible net worth in cryptocurrencies — or 80% in one of them.

But all we're talking about here is USDC, not all cryptocurrencies.

 

[TiedInsurer]

Yes, that's possible. Which is why I don't have all or most of my wealth held with a single custodian or riding on a single vehicle — something we don't currently have in common. However, Blackrock has US$9 trillion under management. USDC is about US$35 billion. It would be reasonable and rational to draw risk-related conclusions accordingly.

Yes we certainly don't have this in common. I can't imagine a world where the US government would take such a drastic step, but i guess anything's possible. Anyway, if such a black swan event really does happen, i'll take some serious damage, but it's nothing i can't recover from given my savings, CPF, and day job.

"Ordinary people everywhere?" What percentage of the U.S. population do you think holds any USDC? One estimate I can find from last year was 1.8 million people worldwide hold USDC. That would mean an average holding below US$20,000 per person, and of course the mean is skewed (the median has to be a lot lower). Most of those 1.8 million hold far less than US$20,000. The U.S. population is roughly 340 million for reference. If you think half the 1.8 million USDC holders are U.S. residents then that's about 0.3% of the U.S. population.

"Safety in numbers" there just ain't.

A few things: the estimate you are talking about, is 1.8million addresses. Not 1.8 million people. There's a key difference here. The funds in one address can be owned by multiple different people. In fact, most people aren't going to let their USDC sit idle in their own address. The address for a crypto firm like coinbase, for example, would likely contain the USDC holdings of millions of different people.

But all we're talking about here is USDC, not all cryptocurrencies.

Oh but we are. USDC is to crypto, what the money markets are to tradfi. When the US government freezes the money markets for Russia, it's not just the Russians who hold the US dollar who gets affected. There will be knock on effects. Loans will be defaulted (forcefully forgiven rather, since it's denominated in USDC which is now worthless). Perpetuals and other financial instruments will be liquidated or be rendered worthless. Crypto organisations will collapse. Almost every single crypto other then bitcoin will probably see a massive drawdown, as a lot of this is denominated in USDC in varying degrees, and now it's all suddenly free on automated market makers as a price of USDC 100 is now a price of $0. It's going to create a lot of sell pressure as all of these free crypto gets bought for free and sold for USDT and other currencies by arbitrage bots.

It remains to be seen how many of the 40% will be like you. Most people won't look too kindly on losing a few hundreds or even thousands of dollars, because the government basically robbed them and wouldn't give them back the money.

 

[BBCWatcher]

USDC's market capitalization is circa US$35 billion. U.S. stock markets have a total market capitalization over US$50 trillion as one comparison. (Total cryptocurrency value is roughly US$2T, but roughly half that is Bitcoin alone. Stablecoins are a small fraction still.)

If USDC were a stock it'd be the 265th largest stock in the U.S. S&P 500 index, specifically equivalent to Corning (GLW) which now has a market cap of about US$35B. If Corning were to declare bankruptcy tomorrow, and its stock were to fall to zero, literally nothing of any financial system significance would happen.

Are there any regulators who share your belief that USDC is even slightly systemically important at present? Have any regulators said/written so? I'd be interested to listen to/read their arguments.

 

[TiedInsurer]

USDC's market capitalization is circa US$35 billion. U.S. stock markets have a total market capitalization over US$50 trillion as one comparison. (Total cryptocurrency value is roughly US$2T, but roughly half that is Bitcoin alone. Stablecoins are a small fraction still.)

If USDC were a stock it'd be the 265th largest stock in the U.S. S&P 500 index, specifically equivalent to Corning (GLW) which now has a market cap of about US$35B. If Corning were to declare bankruptcy tomorrow, and its stock were to fall to zero, literally nothing of any financial system significance would happen.

Are there any regulators who share your belief that USDC is even slightly systemically important at present? Have any regulators said/written so? I'd be interested to listen to/read their arguments.

It's not systematically important. I don't believe it is myself. But the optics of robbing a good chunk of your own people is still terrible regardless.

 

[BBCWatcher]

But the optics of robbing a good chunk of your own people is still terrible regardless.

What optics, and what robbing? There are plenty of perfectly legitimate reasons why a supermajority of Americans would be upset if their government did NOT shut down a particular stablecoin, using its lawful power. And many more scenarios when Americans would be indifferent. These scenarios aren’t hard to imagine. Great optics, and it’s not robbing if it’s lawful (although that part isn’t necessarily controlling).

 

[TiedInsurer]

What optics, and what robbing? There are plenty of perfectly legitimate reasons why a supermajority of Americans would be upset if their government did NOT shut down a particular stablecoin, using its lawful power. And many more scenarios when Americans would be indifferent. These scenarios aren’t hard to imagine. Great optics, and it’s not robbing if it’s lawful (although that part isn’t necessarily controlling).

Then those reasons will need to be sufficient enough to convince the people that their personal loss of funds is worth it to deliver justice to the evil coinbase. There aren't a lot of reasons that fit the bill.