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#227: How Stable is Stable in a Volatile World?

#227: How Stable is Stable in a Volatile World?

micksonmatch
February 06, 2025

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S2N Spotlight

Throughout my university days and through most of my career in finance, I have envied the big end of town, making billions. Some of the big names reported the following net incomes in 2024:

JP Morgan $58.5 billion, Bank of America $25.5 billion, Wells Fargo $19.7 billion, and BlackRock $6.4 billion.

The company Tether, the provider of a stable coin, was not on my envy list. However, Tether made $13 billion in profit last year with 100 employees. If you haven’t followed Tether over the years, you have missed out on fascinating drama that could and should become a Hollywood best seller.

They are the providers of one of the most important parts of the crypto ecosystem, a stable coin that is meant to be equal to the US dollar. It is meant to be pegged at exactly 1:1. However, there have been many stories over the years that their were fraudulent holes in the assets backing the dollar. It is not for me to pass judgement. This could be one of those rare cases where the fraud is corrected by the fortune that favoured the crooked in a massive bull market. I don’t know.

I mentioned a few weeks ago that the company is relocating to El Salvador because of the crypto-friendly community, but you have to wonder. In fact, El Salvador just abandoned its crypto experiment of accepting Bitcoin as legal tender. A wildly volatile currency would do that to the best of us.

A quick side story. I bought my first Bitcoin’s (note the plural for flex status) in 2012 for $100. Getting those coins was friggin hard. There was no tether onramp to convert your fiat for Bitcoin. I did my first transaction like a drug dealer, exchanging cash with a hacker who provided me with a digital wallet on the side of the road in Bellvue Hill, Sydney. Sadly, I cash in my coins for computer hardware a year or two later, in those days you couldn’t cash out back into fiat like today. I exchanged about 6 bitcoins for an iPad and some accessories. My wife always reminds me that my iPad is the most expensive in the world, and it doesn’t even work anymore.

For the sh*ts and giggles, I took a look at how stable the stable coin is these days. I will let you be the judge; remember, it is meant to be a proxy 1:1. I am using 1 minute data here. If I went back years, you would see much bigger swings. Note to self. Get busy and trade this stochastic price action.

Trump hasn’t missed a beat, so I wasn’t surprised to read his crypto czar say, “Stablecoins have the potential to ensure American dollar dominance internationally to increase the usage of the US dollar digitally as the world’s reserve currency, and in the process create potentially trillions of dollars of demand for US Treasuries, which could lower long-term interest rates,” said Mr. Sacks.

S2N Observations

We spoke a few days ago about the spike in volatility. I am not sure if many of you know that there is a term structure for volatility. The VIX is the implied volatility over the next 30 days. I made it red on the chart. There is a 1-day VIX, 9-day, 30-day, 90-day, 180-day, and 365-day.

What looks juicy to me is buying 1-year volatility at under 20%. I think that is cheap.

Let me share something I have shared in the past. The VVIX, no, I don’t have a stutter. The VVIX measures the volatility of the volatility, i.e., second derivative volatility. Pretty damn cheap if you asked me. Should we be backing up the truck?

On Monday I introduced the SKEW, which was implying that the market was anticipating some “shock treatment.” The higher the “skew,” means that out-of-the-money options are getting expensive. The SKEW on Monday was at all-time highs and has subsequently pulled back. I have added a ratio of SKEW to VIX to provide further support for anyone keen to jump on the volatility bus.

If I asked you which S&P 500 sector would be the best performer over the last year. How many would have answered ‘Utilities’? The utilities sector includes companies such as electric, gas, or water utilities or those that operate as producers or distributors of power.

Forgive me for bringing up MicroStrategy again. Actually Strategy as of today.

Strategy just reported a loss for the 4th quarter and were bragging that they have spent $20 billion of their $42 billion planned purchase of Bitcoin. I don’t know about you, but I would have thought that they would have a systematic strategy of investing an equal, steady amount over a period of time. The money raised was for spending over a 3-year period. At the rate he is going, he will have spent the whole lot within a year. Yeah, if it continues going up, he is a hero, but if it has a 30% drawdown, they will be bleeding out their eyeballs. Saylor is desperately pumping Bitcoin to build enough momentum to carry the strategy. Don’t get me wrong I am not saying that I don’t think Bitcoin will eventually go higher; it might, but their are no certainties. Remember how long gold was in drawdown—nearly 30 years—and there is a finite supply of gold.

Maybe I am just an old-fashioned guy who likes to see balanced risk and return; Saylor is not that guy.