MVA's: A New Asset Class
June 26, 2020, 5:49 p.m.
We are now seeing the emergence of a brand new asset class: MVA's. MVA's are Multi-Variable Assets, a set of assets that hold new promise and potential as the technology world advances. MVA's have multiple variables that are allowed to move freely, as opposed to all current assets which hold only one variable that can move.
Until now, assets have exclusively been SVA's - Single Variable Assets -and they contain only one variable that can move up and down freely. As a result it has been possible to evaluate off of one variable and gain an accurate picture. That variable has been price. However, price is a shortcut to total value, an inadequate stand in when considering Multi-Variable Assets (MVA's). This is because the asset world which included stocks, bonds, Bitcoin and Ethereum was simple - and price was the sole element which moved and changed value calculations. As price was the only variable that could change both up and down, evaluating off of price alone worked when looking at an asset, and one could safely assume the asset they were evaluating was an SVA. This is no longer the case.
Compare this to MVA's: With an MVA price continues to move freely, but the quantity (supply) moves freely as well. This means price can only reveal a part of the story in an MVA. A potential solution? Look at Market Cap. Market Cap takes into account the actual total value of an asset. Market Cap uses price along with supply and provides a full picture, whereas looking at price alone will have issues from data deficiencies and result in inaccurate conclusions and calculations.
Those interested in portfolio construction may find MVA's a welcome addition to their holdings as MVA's have greater potential to behave differently from the broader market. This comes as a result of the movement occurring across two variables, price and quantity, as opposed to just one variable, price.
Although DeFi (Decentralized Finance) is a subset of the cryptocurrency and broader world, it provides an interesting playground for MVA's. So far, the DeFi space has relied exclusively on SVA's - Single Variable Assets - as the primary inputs into this cutting edge, experimental world of finance. One of the most prevalent SVA's is a group called stablecoins. To date stablecoins have all been an iteration of digitized US Dollars (fiat), an extemporary solution achieved by encasing USD in a digital wrapper. This has led to much discussion around the perils of recreating the traditional finance system in DeFi. This threat can be mitigated in part by MVA's because MVA's have unlocked a cutting edge family of assets for DeFi to utilize as inputs. New assets provide the potential for unique performance and unlocked attributes which can better serve the DeFi ecosystem. DeFi is an innovative financial system and finally due to MVA's the assets can meet the potential that DeFi provides.
MVA'S may play a big role in the future. Not just in DeFi, or portfolio construction but for a much broader spectrum of applications and uses as well. Those additional uses I will introduce and discuss in later posts- this is an introductory post proposing an important lense for interpreting assets: MVA's and SVA's and introducing some of the key differences, behaviors and critical considerations of both.
To dig deeper into the potential for MVA's to move in an uncorrelated fashion, check out this segment on the potential for a distinct movement pattern of a current MVA