Recession Hedging — Why Cryptos Should Be Part of Your Portfolio
Gold, cash and real estate are traditional vehicles to hedge against recession risk. Cryptocurrencies have not been around during past recessions, but due to their decentralized nature, they could turn out to be an excellent tool for recession hedging.
10 years ago, on 15th September 2008, the collapse of the American Investment Bank Lehman Brothers triggered the financial crisis and the global recession followed. Today, the economy looks very different compared to ten years ago. US equity markets have experienced the longest bull run in history, unemployment in the US and Europe are low and consumer confidence is up.
But what comes up must come down, they say, and in modern capital markets that’s mostly true. Financial history is destined to repeat itself, and markets are ripe for a major correction about once every ten years. That said, it won’t be a disaster, that’s just the way how things are, and experienced investors know how to deal with it.
Signs of a new crisis are already piling up — political uncertainty and overpriced markets are worrying investors
The question is not IF a financial crisis is on the horizon — because it always is — the question is, WHEN are markets going to plummet? The OECD warns that global growth has peaked and downgraded its economic outlook for most developed nations, pointing at the global trade war and protectionist tendencies as the largest threats to global growth.
Nouriel Roubini from NYU’s Stern School of Business says markets are due for the next recession, with US price-to-earnings ratios being 50% above their historic averages, excessive private equity valuations and overpriced government bonds.
JP Morgan analysts say financial markets indicators do currently not look rosy and the next crisis will be determined by the pace of central bank normalization, business cycle dynamics, and various idiosyncratic events such as escalation of trade wars waged by the current US administration.
Whether we are up for the next full-blown crisis, or just a bearish market, there is nothing we can do to change the course of the economy. However, what we can do, is re-arranging our portfolios so our investments will be protected when the chips are down.
Gold, cash and real estate are traditional, recession-proof hedging instruments
Historically, gold has been the number one asset people buy when they fear a recession. During both, the dotcom crash in 2000 and the financial crisis in 2008, gold staged an impressive 25%+ rally while the S&P 500 was down more than 20%. Gold, or precious metals in general, should therefore be part of every portfolio.
If what the OECD says is true and the global economy has peaked, it might be worth considering selling equity and keeping some cash. However, too much cash is not a good idea either. Bull markets last longer than most people think and it might be too early yet to be overly prudent and forgo the upside potential.
Real estate investments are another typical recession-hedge. Even if there is a crisis, people will still need a roof over their heads. However, global real estate markets have become pricey, some speak of bubble territory. There certainly are good real estate investments out there, but one will have to consider very carefully where to invest and what kind of property to buy.
Cryptocurrencies were not around during past recessions; they could turn out to be the star during a global recession, even better than gold
The next recession will be the first recession in history during which investors have a vast variety of cryptocurrencies at their disposal, which come with several advantages during a financial crisis.
Firstly, as indicated by the OECD, the current political climate is the biggest concern for global growth. Being decentralized, and functioning independently from any central bank or government, cryptos do not bear the same political risks as fiat currencies. They are safe from government-made hyperinflation, just like gold.
Secondly, cryptocurrencies are borderless and outside of any national agency’s control. They can therefore be used for international transactions which would not be possible (or very expensive) using fiat currency. One of the reasons why Bitcoin rallied in 2017 was that Chinese investors used it as a vehicle to escape the crashing domestic market. Chinese capital market restrictions make it almost impossible to legally shift funds abroad via fiat currencies.
Cryptocurrencies also offer protection from government confiscation — yes, this would be a drastic scenario, but look at what happened in Greece during the last recession.
Due to its decentralized features, cryptos could emerge as a fine instrument for recession-hedging and should be included in a conservative portfolio. The INVAO token includes a wide variety of carefully selected cryptocurrencies and other blockchain assets. This makes it easy for any investor to include cryptocurrencies as an asset class into their portfolio, with just one single token, safe and secure, and without much effort.
