This week, the Brownstone team has dug deep into some big stories, with absolutely massive investment implications. If you missed any issues this week, we’d highly recommend catching up on your latest content:
At the heart, stablecoins are poised to ensure that the dollar remains the most widely used currency in the world. That’s going to lend strength to our economy for years to come.
So let’s look at some questions this has inspired…
Explain why anyone would prefer to purchase a stablecoin backed by the U.S. Treasury instead of just a plain Treasury bond.
– Don R.
Hey, Don – thanks for reaching out. We don’t see this as a dynamic where people will choose between stablecoins and Treasury bonds… because each serves different purposes.
Stablecoins are digital representations of the U.S. dollar that convey the benefit of being blockchain-based. The stablecoins themselves are not investments; they are digital cash.
On the other hand, Treasury bonds (and bills and notes) are fixed-income investments. They provide investors with a rate of return, but holders must sacrifice liquidity for the duration of the security.
The reason stablecoins must be fully backed by U.S. Treasurys (and other liquid assets) is to maintain their one-to-one peg to the U.S. dollar. That backing is how users can be confident that a given stablecoin will always equal one dollar.
I was reading the other day about companies establishing their own digital asset treasuries. Can you explain what DATs are? Why wouldn’t companies just invest in the assets themselves? How can companies use them? What do they do with them?
– Lindsey H.
These are great questions, and they really get into one of the catalysts behind the market’s strong price action of late. DATs stand for digital asset treasuries.
The short explanation is that these are investment vehicles that equitize cryptocurrencies for traditional markets.
This creates a product that is easier for investors, companies, or institutions to buy. It’s also a product with some intriguing dynamics that make it a compelling stock to hold. But to get into that, we need a bit of background on how these tend to form.
MicroStrategy is a company formed in 1989, specializing in business intelligence. Its customers were other businesses looking to improve their margins.
In 2020, the founder, Michael Saylor, began to diversify the company’s balance sheet by acquiring Bitcoin. He cited reasons such as declining returns on cash, a weakening dollar, and various macroeconomic factors.
It was a bold move at the time, since most public companies didn’t even know how to account for this asset on their balance sheets.
This garnered attention for MicroStrategy’s stock since it gave proxy exposure to Bitcoin at a time when there was no ETF available in the market. Saylor capitalized on this and began to accumulate Bitcoin en masse.
By the end of September 2022, MicroStrategy held 130,000 Bitcoin worth nearly $5 billion, which was slightly higher than the company’s market cap.
This meant that in terms of the company’s market cap versus the assets on its balance sheet, it was trading at a slight premium.
Ever since 2022, MicroStrategy has retained this premium and even commanded a nearly 4x premium relative to the assets on its balance sheet. We can call this the NAV (net asset value), or the market cap of the company relative to its assets.
This premium confused many investors. Why would a company acting as a treasury command such a premium? The reason was twofold.
First, exposure to the treasury asset for traditional companies is not an easy thing to do. There was no Bitcoin ETF at the time, and taking custody of Bitcoin itself required a lot of infrastructure and expertise that most companies lack to this day.
It was far easier to simply buy stock in a Nasdaq company, as the rules of the road were already written.
The second reason was what we term beta. It’s essentially higher returns relative to an asset.
In this case, holders of MicroStrategy got higher returns than if they held Bitcoin directly. That’s because MicroStrategy tends to trade at a premium, has a robust options market, and can sell stock at any time to acquire more Bitcoin when favorable conditions surface.
This means MicroStrategy is working to acquire more assets on a per-share basis. You don’t get that by simply holding Bitcoin itself.
For these reasons, a DAT can be more attractive to certain entities.
It’s why we now see a race for DATs unfolding for Ethereum. To date, no publicly traded company has occupied this role.
We now have multiple companies, with more popping up each week. It’s sparked a frenzy for buying the asset.
And it’s unfolding just as legislation is turning the digital asset into a fully legitimate asset class. That’s a top priority for the current administration, which means this trend is likely to last for some time.
Now, there are some concerns when it comes to these DATs, as not all are created equal.
Each one has its unique way of operating, certain backers, and funding mechanisms.
We are even seeing DATs pop up for assets beyond Bitcoin and Ethereum. We’ve read about companies now creating treasuries with Solana, Litecoin, and Bittensor, among others.
It’s a trend that is not showing signs of slowing down.
But at some point, the trend will slow down. These companies will fall below their NAV and begin to sell assets in order to buy back more shares. This mechanism helps bring the traded shares back above NAV and make the stock more attractive.
This will likely serve as a sign of caution in the market. But it is not looking to happen any month soon. That’s why, when it comes to price action, we can view this trend as positive. It’ll spark a lot of interest in the digital asset space and bring in billions in capital.
Lots of smaller-cap tokens will benefit in the wake. It’s one of the things we focus on at Permissionless Investor. And as various pieces of legislation get passed in Congress, it’ll create a wave of opportunities in the months to come.
It’s a very exciting time to be involved in cryptocurrencies as this trend gets started.
We all know that the USA currently has a serious debt problem. As a result of that problem, most advisers have recommended gold, gold stocks, gold miners, etc.
My question: As the stablecoin solution unfolds as Jeff presented, what will be the impact on all the gold purchases?
– Morris K.
Hi, Morris, great question. We’ve received a few questions similar to this. As stablecoins go mainstream, it’s natural to wonder how they’ll affect traditional stores of value like gold.
The short answer: We don’t believe stablecoins will have a material impact on gold demand.
Here’s why… For thousands of years, gold has been the ultimate hedge against fiat currency debasement. Investors buy it not for yield or performance but for protection. Gold sits outside the system.
Stablecoins, by contrast, are still tied to fiat – 99% of stablecoins are tied to the U.S. dollar (USD). Even though they use blockchain rails, their value is still pegged 1-to-1 to a currency that’s slowly inflating. So while stablecoins offer speed, access, and programmability, they don’t offer diversification.
Holding stablecoins is just another way to hold dollars.
That’s why gold’s role as a long-term store of value remains intact.
That being said, there is one stablecoin that is not backed by the dollar but by gold – the PAX Gold (PAXG) coin.
Unlike dollar-backed stablecoins, PAXG is backed by physical gold held in custody. It offers users digital access to real, allocated gold. And it does all this while retaining the portability of a crypto asset.
If gold-backed stablecoins like PAXG ever gained broader adoption, we could see a scenario where they contribute to incremental demand for physical gold.
But so far, that hasn’t happened. While U.S. dollar–backed stablecoins have grown to over $260 billion in market cap, PAXG remains under $1 billion. It’s a promising idea, but it hasn’t yet caught fire.
Bottom line: Stablecoins and gold solve different problems. One offers utility. The other offers protection.
And in today’s environment of rising debt, persistent inflation, and geopolitical uncertainty, gold still has a place as part of a diversified strategy.
Very nice article on risk management, thank you…
In the last section, Using Volatility-Adjusted Stops for Position Sizing, I have two clarifying questions.
Where do you find the stop loss risk? For example, is the risk of a 30-40% stop loss the same for all large growth companies, or is it per company’s volatility? I assume it’s per company. I’ve been using the 50- or 200-day MA, depending on the company’s volatility.
Also, do you believe that gold still has upside potential?
Regards,
– Reza M.
Hi, Reza. Thanks for the thoughtful question. I’m glad to hear you’re diving into our risk management framework.
This is one of the most important things any investor can learn. In fact, I’d argue that over the long run, the difference between consistently profitable investors and everyone else often comes down to position sizing and disciplined exits.
Let’s start with your first question…
At Brownstone Research, we use volatility-adjusted stop losses calculated using an algorithm developed by our partners at TradeSmith.
These aren’t one-size-fits-all numbers. The system evaluates each stock individually. And based on its historical price volatility, it sets a trailing stop that reflects when something fundamental may have changed in the investment thesis.
For large-cap stocks – especially well-established growth companies – the typical stop loss range falls somewhere between 30% and 40%. These names tend to be more stable, so the algorithm gives them less room to fluctuate.
Smaller-cap stocks are a different story. They naturally come with higher volatility, which is why we often allow more room – sometimes over 50% – before the system signals a potential exit.
That said, your method of using the 50-day or 200-day moving average is perfectly reasonable. These are widely followed technical levels that help identify trend reversals. When a stock breaks its long-term moving average, it often signals that the primary uptrend has been broken and that it might be time to reevaluate the position.
The key is having a consistent system and sticking with it.
Now, on to your question about gold.
As mentioned in the previous section, gold still deserves a place in every well-diversified portfolio. It offers protection against inflation, fiat debasement, and geopolitical instability – all of which remain very real risks in today’s world.
Personally, I continue to hold exposure through physical gold, as well as mining stocks and royalty companies. These provide leveraged upside when gold prices rise. And they’ve historically performed well in inflationary or late-cycle environments.
In yesterday’s Bleeding Edge, I talked about how it was likely that USD-backed stablecoins will displace the currencies of weaker economies. If that happens, it would be natural for citizens of those countries to look for ways to preserve purchasing power.
For many, that will mean holding stablecoins AND gold. These aren’t competing assets; in many ways, they’re complementary.
Stablecoins offer liquidity and access.
Gold offers permanence and independence.
Used together, they can help people navigate a volatile financial system with greater confidence.
Have a great weekend!
– The Brownstone Research Team
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
