Democratizing data science.
“Bitcoin is backed by a kind of digital ‘gold standard.’”
The idea of Bitcoin and its function as a “safe haven” asset, one that remains steady in times of turmoil— like gold — are inextricably linked. 10 years later, however, Bitcoin tracked traditional assets in a market bloodbath, caused by coronavirus fears, oil shocks, US-Iran tensions, and PlusToken liquidation.
By all accounts, this wasn’t supposed to happen. After all, Bitcoin isn’t backed by fundamentals, and isn’t tied to our monetary system, so it shouldn’t have tracked normal assets.
But it did.
Yet, as of writing, Bitcoin is above $6,000 again.
The steep, frenzied sell-off was followed by an optimistic rally:
It simply goes to show that markets are cyclical, experiencing a pendulum swinging between optimism and pessimism, which is why crypto markets reacted so heavily to the coronavirus — crypto investors, too, are humans with emotions like paranoia and fear, but also hope.
Fundamentally, this is why crypto will bounce back.
A recession was inevitable, both in traditional and alternative markets. The question is not “if,” but “when.” Recessions are a normal part of an economy, and drawdowns are virtually guaranteed for every asset — from the Great Depression to the dot-com crash to the Great Recession.
The crypto crash was simply unexpected for many because this is the first pandemic occurring in the history of crypto. There was no historical data to look back on, and nothing to invalidate the “digital gold” hypothesis.
Some investors panicked, which was followed by other investors picking up Bitcoin at a “bargain price,” with a rallying effect.
Beyond a likely “reversion to the mean” after a panic sell-off, Bitcoin will experience what’s known as a “halving” in May 2020, whereby the amount of Bitcoin that gets created every 10 minutes gets cut in half.
This means the current “block reward” of 12.5 Bitcoin will become 6.25 Bitcoin, making it take longer for all (limited supply of) Bitcoin to enter circulation.
As basic economics teaches us, anything with demand and a limited supply has value, and scarcity increases value.
That being said, others have pointed out that BTC’s price increase after halving may take a while, so the full resulting gains will likely not be seen in 2020.
Even more importantly, the blockchain itself — which crypto is built on — is resilient. Blockchain is a technology, not a financial asset, and is absolutely unaffected by events like the COVID-19 pandemic.
This pandemic puts zero risk on the blockchain, which is already technically resilient (as in, it’s impossible to hack) and resilient in terms of the industry.
Projects will march on, continuing to focus on product innovation, regardless of what happens to crypto prices. Further, the blockchain industry creates the value for the thousands of “tokens” out there, typically built on the Ethereum network.
As blockchain startups operate digital platforms, and many have remote working policies already in place, few are likely to experience any impact from COVID-19 at all.
Most important are the people using blockchain in their everyday lives.
While some will lament that there aren’t strong enough blockchain use-cases, this claim is easily laid to rest with the example of Invictus Capital, an alternative investments group managing a number of tokenized funds.
Tokenization means digitally representing an asset on the blockchain, increasing the accessibility of investments — particularly useful for alternatives, which normally suffer from inaccessibility, high investment minimums, and low liquidity.
Tokens can be sent peer-to-peer, around the world, at virtually no cost. In a tokenized fund, an investor can receive returns by buying a single token.
Invictus Capital created the world’s first tokenized crypto index fund, and runs several others, including an Emerging Markets Solar fund, enabling anyone to contribute to global clean energy production by financing solar energy infrastructure projects.
Over 15,000 investors trust Invictus’ funds, which has product innovations such as a tokenized real estate fund in the pipeline.
Finally, it’s important to keep in mind that a “return to normal” for crypto still means extreme volatility.
Even the most die-hard crypto investor wouldn’t place all their bets on crypto, because of its inherently unpredictable nature.
In these times of particularly high volatility, most traditional investors are steering clear of crypto. However, there are ways to invest in crypto while limiting, or even severely minimizing, the risk of drawdowns.
One way is with dynamic cash hedging.
Cash is a remarkably stable asset. Even in a market crash, $1 is $1.
As a result, cash can be a useful part of your portfolio. In order to decrease risk (but also return potential), you can allocate more assets to cash. To possibly increase returns (but also risk), you can allocate more assets away from cash.
In short, if your portfolio is sinking, you can “hedge” by allocating more assets to cash.
An investment vehicle that does this for you is Invictus Capital’s CRYPTO10 Hedged fund. As written in the litepaper, the fund offers a “dynamic asset allocation strategy that dampens volatility and provides protection against losses.”
CRYPTO10 Hedged remained steady during the crash, proving that dynamic cash hedging can be a very useful tactic to limit your losses.
In conclusion, crypto will remain a strong investment opportunity in 2020.
Disclaimer: The author is a consultant at Invictus Capital. These opinions are his own. DYOR.