Cryptocurrencies — Protection from Global Market Conditions

Published in

Automata

3 min readJul 30, 2019

Much has been written about the inherent volatility of cryptocurrencies. Even the ‘majors’ (BTC, ETH, XRP etc) can lose or gain over 20% in a day. This instability has drawn condemnation from almost all G20 members, with warnings from the Bank of England’s deputy governor declaring:

‘In their short history, crypto-assets have exhibited high price volatility and relative illiquidity. Crypto-assets also raise concerns related to misconduct and market integrity — many appear vulnerable to fraud and manipulation, as well as money-laundering and terrorist financing risks.’ [source]

Despite this, we believe that the adoption of cryptocurrency technology could actually provide consumers with essential access to essential investment diversification, and provide critical protection from growing global systemic market risk.

The Problem

Many financial pundits, economists and organisations are sounding out the very real risks of a major global economic downturn occurring in the near future. Traditional methods of investments, via funds, are often focused on interconnected stock markets, making them particularly susceptible to significant political and financial events.

Lack of easy access to flexible investment tools often leaves investor’s capital vulnerable to the effects of modern recessions. What solutions could cryptocurrency technology offer in order to mitigate global market risk and help protect an individual’s portfolio from a global recession?

The Solution

The first, and most impactful solution that blockchain technology can offer, is asset tokenisation.

By digitally representing a diverse array of assets through tokenisation, retail investors are given easier and more varied access to a wider selection of commodities and markets. An investment vehicle that utilizes blockchain tokenisation is the financial equivalent of dining at a multi-cuisine buffet; one location (blockchain), limitless choice (assets).

The above example can quickly give rise to a plethora of low entry, multi-asset portfolios, all contained within one account. Whilst it is currently possible to have traditional investment exposure to commodities like gold, through Physical gold ETCs, these portfolios can suffer from inflexibility.

Then there’s micro-asset ownership — or subdivision of whole assets (like 1 AAPL share) — which brings yet greater choice and access to diversification via tokenisation. Can’t afford 1 Apple share? Buy 1/100th, benefiting from the upside of the underlying stock whilst protecting your portfolio from large market moves.

Tokenisation of expensive or impractical assets is certainly a plus, but is there any inherent financial opportunity and hedging potential from investing directly in cryptocurrencies?

Cryptocurrencies to the Rescue

Against the theoretical backdrop of complete economic collapse, scarce, entirely independent digital assets such as Bitcoin could prove to be wildly popular. Free from Central Bank quantitative easing, and other potentially damaging fiscal decisions, Bitcoin’s current ‘volatility’ could quickly seem insignificant.

Scarcity, immutability and peer-to-peer settlements are extraordinarily powerful valuation narratives. Hedging through diversification of cryptocurrencies such as Bitcoin, amongst other tokenised assets, could prove to be an incredibly effective strategy to protect (and even increase) one’s account balance against a global downturn negatively affecting traditional holdings.

A complete economic collapse may never happen. However, the advantages of being able to invest into a multiplicity of different stocks, bonds and commodities (alongside purely digital currencies) will certainly have a net positive effect on retail portfolios weathering global market conditions.