HBD Proving The Milkshake Theory

Have you heard of the Milkshake Theory? This is an interesting concept that is now coming to fruition as the Federal Reserve keeps raising interest rates. It is also something we can see emerging as the use of the Hive Backed Dollar (HBD) increases.

We discussed how this currency is already having an impact in countries such as Cuba and Venezuela. These are countries that are negatively affected by moves in the US dollar. For this reason, HBD is a lifeline to the populations who are suffering as their local currency depreciated.

Being a USD denominated asset, HBD acts as a medium of exchange along with a store of value against the currencies of those nations. This is something that affected the entire world.

It is also the basis of the Milkshake Theory. For that reason, we will investigate what this is and how HBD is only adding to this.

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The Milkshake Theory

This was first mentioned, to the best of my knowledge, by Brent Johnson. He took a look at the global situation and concluded that the USD was going to suck value from other fiat currencies. It is all tied to the sovereign debt that exists.

Countries all over the world are spending past their means. That resulted in large amounts of debt (we will only deal with sovereign in this article). The challenge is that the local currency's strength or weakness has no bearing.

As the United States raises interest rates, it sucks liquidity out of these countries. It is as if a straw was placed in those nation's milkshakes and the contents being sucked out.

When a country has a weak currency, relative to the US dollar, as interest rates go up, their costs go up because they have to borrow in USD. Nobody will give them loans denominated in their currency.

While a strong currency nation doesn't have this issue, it does face capital flow. Increasing interest rates mean USD debt is paying better, causing people to flee the local currency, weakening it in the process.

In each case, the US dollar is pulling value away from the other currencies.

HBD Acting As A Straw

The situation in Sucre is a prime example of how this can happen. Due to the weakness of the Bolivar, any more upward in the USD is mirrored by at least the same move down in that currency. This is a problem when it comes to goods, especially those that are imported.

It quickly becomes obvious why HBD is a better alternative for the citizens of a place like Sucre. Since it can act as amedium of exchange, the preference is to get tied to the USD. This means accepting payment in digital form. It is what makes this an appealing instrument.

Of course, an increase in transactions is pulling value out of the Bolivar. If this was on a large scale, it could have an impact as more commercial (and potentially financial) transactions occur outside the Bolivar. This is happening already so the introduction of HBD only offers another "straw" into the equation.

How Does This Affect Cryptocurrency?

A strengthening dollar will bring about a sovereign debt crisis that will be catastrophic. In this scenario, we would see massive defaults as countries failed to pay. This would cause them to monetize the debt along with seeing non-US markets crash.

The impact upon cryptocurrency is hard to predict. However, we have to bear in mind it is still a speculative asset based upon risk assessment. Under such a condition, investors are likely to run for safety. This means both Bitcoin and Ethereum would be under pressure. Bitcoin as much as the maxis want it not to be, is still a speculative risk-on asset.

Ethereum could be in a different position if there was wide-scale adoption of stablecoins on that network. The utility of these, denominated in USD, would have great appeal. Tether and USDC already make their living primarily as parking spots for risk-off moves. This would be exponential during a sovereign debt crisis.

This would help Ethereum because the activity would remain. The network would be fed value as people started to move in that direction. A key factor would be whether there was real world adoption of the stablecoins.

At this point, we see little form the leaders. Both mentioned are still residing in the digital realm exclusively. This could change in the future, especially as defaults start to rise.

Here is where HBD is establishing a good foundation. When people start using it to pay for real world goods and services, then the reach is much greater. It also provides resiliency since we are dealing with more than investment money.

Like Ethereum, this could help to push value to a blockchain like Hive as more activity is occurring. Even within cryptocurrency, we can see the degrees of risk that could form. Those ecosystems that are strong, enjoying the network effect, could be more resilient than those which are speculation based.

The Time To Build Is Now

According to Johnson, this is likely to play out over a period of about 5 years. It is not going to be an overnight event nor will it happen simultaneously. There are different parts of the world which will be affected first.

In the end, the USD is going to be the last currency to fail. However, as I maintain, the USD is more than a currency, it is a unit of account. That means it took on the role of a measurement or language. Most of the transactions that are denominated in USD have no currency involved.

HBD is another example of this. The currency has nothing to do with the USD other than the unit of account. There are no dollars tied to the currency. It is not backed by Treasuries or any other form of the USD. It is backed by HIVE.

Basically, the USD, in this situation, is nothing more than an accounting metric. It is consistent with the majority of financial statements around the world. Balance sheets all over the world are denominated in USD. The same is true for invoices and funding. Even if currency is not involved, the unit of account is.

This means the foundation laid today is going to have a greater impact down the road. We are going to see seismic shifts over the next half decade as the debt situation deteriorates.

Building a foundation for HBD is putting it in position to excel as this theory starts to prove itself.

After all, the people in Cuba and Venezuela already are living it.

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