The wavelike movement effecting the economic system, the recurrence of periods of boom which are followed by periods of depression is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. -Ludwig von Mises Global trade wars have escalated primarily between the US and China, but have spilled out to other economies as well. Tariffs placed on Turkey by the US is the catalyst for the recent volatility in the Lira, which has now declined 40% against the dollar in 2018. Though the Lira decline is recent, Turkey has experienced wider economic woes since 2013 when protestors claimed Erdogan’s regime was setting authoritarian policies while in the midst of a $100 billion scandal. Turkey in 2013 had a GDP of $950 billion which has since fallen to $850 billion, which still places Turkey is the 13th largest economy in the world in purchase price parity and the economic gateway between Europe, West Asia, and Africa. The vulnerabilities of Turkey’s currency volatility, inflation, and geopolitical risk are potentially of a much larger scale than the Thai Baht Crisis of 1997, which had complex ripple effects through a world highly interconnected at the time. Thai Baht Crisis of 1997 Thailand experienced an average year-over-year economic growth rate of 9% from 1985–1996, fueled in part by substantial foreign lending. Despite high growth, inflation remained low due to the Thai Baht peg to the U.S. dollar at 25 Baht. A result of this strong growth, and key to the Crisis, was continued significant foreign investment through the 1990’s made in the form of US Dollar-denominated debt, both into Thai local banks and companies. On May 14, 1997, the Baht experienced speculative currency shorting that crippled the federal reserve of Thailand. Unable to support the Baht peg, the Thai government began to float the price of the Baht. July 2, 1997, following the Baht free-float, not only did the currency collapse, the inevitable rapid increase in cost of borrowing critically weakened all such lenders and borrowers. High inflation ensued with the Baht falling to a low of 56 points per U.S. dollar in January of 1998. Instability in the finance, construction, and real estate sectors led to the end of economic growth in Thailand. The stock market fell 75% when the largest Thai finance company collapsed. Banks refused to issue bonds and loans to struggling companies, which subsequently began to fail. A critical piece to this story is that Thailand’s economy has never fully recovered. Asia Crisis Spreads Asia in general was suffering from the irrational binge of massive borrowing of U.S. dollars to reinvest into local markets during the 1990’s, which had accounted for GDP growth in the region. Large scale lending into emerging markets led to an inevitable burden of foreign debt. Due to the interconnected nature of trade economies, Thailand, at the time a tiny $180 billion GDP economy, caused a ripple effect across Asia and Russia. Foreign investors became hesitant to lend to other developing countries, inhibiting economic growth. Commodities such as oil faced sharp price declines, spreading contagion to oil exporting countries. Russia, whose federal reserves were severely diminished as a direct result of the declining demand for crude oil and metals, defaulted on domestic debt to workers, halted payments of foreign debt, and were also forced to float the ruble, being unable to maintain the peg of 5.3–7.1 rubles to the U.S. dollar. Within one month, the value of the ruble plummeted to 21 rubles to the U.S. dollar, leading to an economic collapse and inflation of over 80% in 1998. Argentina followed suit with sovereign defaults that were not settled until 2016. Likewise, US, Japanese and European banks who had made these loans, felt the contagion spread into the West. Most notably a US hedge fund, Long-Term Capital Management, LP, backed by no less than 16 market leading US investment banks, collapsed after losing $4.6 billion in 4 months. The Federal Reserve Bank of New York organized a $3.6 billion bailout amongst many other government level bailouts, including IMF intervention. Turkey Could Overshadow Thailand Turkey’s economy has been struggling now for five years, beginning in 2013 when Erogan quelled protests against his unconventional rule, religious persecution, authoritarian policies, and a $100 billion fraud scandal. Since 2013, Turkey’s GDP has dropped by $100 billion to $850 billion today. When the Thai Baht Crisis began in 1997, Thailand’s GDP was only $150 billion. Looking at the size of GDP alone, Turkey’s economic fallout has the potential to spread on a much larger scale. The Baht lost 40% in 1997, as has the Lira already lost 40% in 2018, half of the loss occurring in the last seven days. Contagion is already quickly occurring around Turkey, with a 10% drop in the South African Rand, and volatility in the Asian Forex markets. Fed rate hikes have already crippled many emerging markets, as higher interest rates are typically felt by less developed countries first, as their sovereign and corporate borrowing costs move higher. ( ) Couple higher rates with tariffs, which cause sudden inflation to already struggling economies, and a contagion quickly spreads across the global economy. Read more about rates causing next recession Digital Currencies The word cryptocurrency used broadly is a bit of a misnomer, which is why I prefer “digital assets”. What is commonly referred to as cryptocurrencies can represent anything from a decentralized or distributed digital currency, mainnet gas (the cost of using a blockchain or network), asset-backed tokens that represent securities or sovereign fiat, or even in-platform rewards or tokens such as gold bars in Candy Crush. Digital currencies such as Bitcoin, Bitcoin Cash, Litecoin, or Cardano are meant to be mediums of exchange. They are valuable in that emerging market economies can purchase and hold these currencies and use as a medium of exchange when their own localized fiat currencies are volatile and devalued, such as in a hyperinflationary environment, such as the Weimar Republic in 1920s, Zimbabwe in 1990, or recently in Turkey, Venezuela and Iran. Another use case of digital currencies is in countries where there is strict government control or totalitarianism, such as China or North Korea. In China, the RMB is kept to a strict peg, and Chinese nationals face many restrictions on how much RMB can leave the country or be exchanged for other currencies. Bitcoin and other digital currencies have become used as a store of value or transaction ability for other assets outside of China. network All of this is important historical context when discussing currency without borders. The efficacy of Bitcoin, for example, in countries experiencing hyperinflation due to lack of confidence in the underlying currency is enormous, and will play a role in the evolution of international economic proceedings in the years to come. With other cross-border digital currency options, there exist safety nets for potential local currency volatility, which could effectively mitigate events like Turkey Lira volatility or the Thai Baht Crisis. Although many of the underlying problems that led to these financial crises cannot be solved by the introduction of a borderless digital currency, the economic fallout that followed may have been dampened, if such a digital currency existed. Greek Debt Crisis Similar to countries facing crisis due to their own currency, a country may also face economic depression by relying on a stronger shared currency. Early in my career I was a sovereign debt and emerging market credit analyst. One of the first things I learned about investing in smaller countries is the risk of less diversified economies. They may specialize in only a few economic sectors, such as oil, fishing, farming, or tourism, which can lead to shorter economic cycles and higher occurrence and likelihood of recessions and inflation. One of the hairiest sovereign creditors I have looked at was Greece in 2009. Greece was a member of the EU, arguably a EU political move for a country not meeting many of the admission criteria that were waived by the EU, and had relinquished its Drachmas in exchange for Euros with the promise of being part of a stronger economic union and shared currency. The larger more industrial economies in the EU such as Germany, France, Italy, and Belgium have more predictable GDP growth due to steady year-round production of exportable goods. Greece, however, is highly tied to tourism, which peaks in the summers but simmers the rest of the year. Prior to joining the EU, Greece could control its own currency by inflating rates during tourist season, then deflating the rest of the year. Upon adopting the Euro, they were now subject to German “stability”. For the last 8 years Greece has been on the verge of default with a suffering economy. From 2009 until now, when the rest of the world was experiencing the biggest bull market in a generation, Greece GDP has lost over 40%, falling from $350 billion to $200 billion. Compare Greece to Croatia, another Balkan country with a similar economic makeup. Croatia is in the EU, but still uses its own currency, the Kuna. Croatia’s GDP only dropped from $63 billion to $55 billion over the same period due to its ability to float the Kuna. , with further negative consequences to Greece. The ECB is likely to raise rates to battle potential inflation in Europe Does a Global Currency Work? Many proponents of Bitcoin or other digital currencies have expressed the need for a single digital currency that is globally adopted and out of control of the governments to solve central currency problems, often stating that issues arise out of free floating currencies. Undoubtedly a country trying to break free of the collective problems of Forex pegged investment and intra-governmental organization imposed austerity and other control, which while admirable at a global level can be devastating on a country basis, might legitimately turn to a cryptocurrency. However, there are several flaws in this argument. The first is demonstrated by the above example of Greece. Multiple economies operating on a single currency can be dangerous for smaller economies that cannot control their own fiscal policy. As demonstrated by the Thai Baht, free floating currencies are not the issue either; rather, a currency that has been pegged too long that begins to immediately free float becomes volatile. Finally, an issue many people have with existing digital currencies is transferring control out of the hands of the governments but into a small group of early adopters who hold the majority of Bitcoin or one of the altcoins like Zcash or Cordano. It is like taking the power away from the tzars and giving it to the Bolsheviks, our new “benevolent” dictators ruling the global economy from Puerto Rico, Malta, and China (specifically Bitmain). Of course, everyone who has created a cryptocurrency along with their early adopters want the world to adopt their Blockchain, subsequently creating wealth for themselves and their constituents. I prefer democracy and liberty over Bolshevik rule; therefore, I am a proponent of continued work to create multiple digital currencies with multiple use, function, and decentralized (or distributed) control. I would like to extend a special thanks to Emma Channing of Satis Group for her contributions to this piece. Satis Research Team has committed extensive work on how borderless digital currencies may function. Disclosure: This commentary is provided as general information only and is in no way intended as investment advice, investment research, a research report or a recommendation. Any decision to invest or take any other action with respect to the securities discussed in this commentary may involve risks not discussed herein and such decisions should not be based solely on the information contained in this document. Statements in this communication may include forward-looking information and/or may be based on various assumptions. The forward-looking statements and other views or opinions expressed herein are made as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated and there is no guarantee that any particular outcome will come to pass. The statements made herein are subject to change at any time. Theseus Capital disclaims any obligation to update or revise any statements or views expressed herein. In considering any performance information included in this commentary, it should be noted that past performance is not a guarantee of future results and there can be no assurance that future results will be realized. Some or all of the information provided herein may be or be based on statements of opinion. In addition, certain information provided herein may be based on third-party sources, which information, although believed to be accurate, has not been independently verified. Theseus Capital and/or certain of its affiliates and/or clients hold and may, in the future, hold a financial interest in securities that are the same as or substantially similar to the securities discussed in this commentary. No claims are made as to the profitability of such financial interests, now, in the past or in the future and Theseus Capital and/or its clients may sell such financial interests at any time. The information provided herein is not intended to be, nor should it be construed as an offer to sell or a solicitation of any offer to buy any securities. This commentary has not been reviewed or approved by any regulatory authority and has been prepared without regard to the individual financial circumstances or objectives of persons who may receive it. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.

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