5 Blockchain-Based Diversification Options for Cryptocurrency Portfolios
Cryptocurrencies are exploding. Bitcoin has recently reached the $7,000 mark and the global cryptocurrency market capitalization has reached $200 Bln. In such a bull market, it’s hard to think about financial security and FOMO (Fear of Missing Out) may sometimes take the wheel and drive you towards rash decisions.
Regardless of how much cryptos have grown and how much you would have made if you bought Bitcoin five years ago, investment should never be as straightforward as “buy and hold.” You need a strategy and that’s where hedging comes in. Hedging is usually done through derivatives but for crypto, we’ll need to diversify our portfolio. Investopedia explains:
Strategically diversifying a portfolio to reduce certain risks can also be considered a – rather crude – hedge. For example, Rachel might invest in a luxury goods company with rising margins. She might worry, though, that a recession could wipe out the market for conspicuous consumption. One way to combat that would be to buy tobacco stocks or utilities, which tend to weather recessions well and pay hefty dividends.
Choosing how you want to hedge your cryptocurrency investments is not an exact science. It will very much depend on your outlook on our current financial and social system. What may seem like a perfect strategy to you may seem ludicrous to others. That’s because we all have a different idea of what the future may hold and that’s exactly what strategy is: preparing for the future.
Today, we want to give you some ideas on how you can hedge your cryptocurrency portfolio without actually needing to leave the blockchain space.
Precious metals have a lot in common with Bitcoin and other cryptocurrencies. Both cryptos and metals are “issued” through a mining process that is not dependent on a centralized authority. They are both finite and, as so, deflationary. And most importantly, both precious metals and cryptocurrencies are looked at as safe-haven assets that can protect citizens’ holdings in times of crisis, be it political or economical.
Metals like gold and silver can make a perfect hedge against crypto. However, it’s also important to note that both precious metals and cryptocurrencies are likely to do well in the same kinds of situations which usually involve economical, social or political turmoil. In a situation like this, crypto can be a much more viable alternative than gold, given that it’s easier to move and hide. It is also “easier” for cryptos to reach unprecedented heights in a hypothetical crisis situation.
Nevertheless, keeping a portion of your portfolio in gold and/or silver is a good idea given that it will allow you to hedge against the inherent risks of the cryptocurrency movement without the need to trust the traditional financial system. These risks are technical or security problems, government bans, and large hacks.
There are a lot of ways you can buy gold without having to go through fiat. Vaultoro, for example, allows you to buy and sell Bitcoin directly for gold and can even ship said gold bars to you directly. Users can also resort to metal backed cryptos like BitGold or Digix Gold Tokens (DGX).
Buying Real Estate as an investment vehicle is an extremely popular practice that has been growing in the last 50 years. Investing, renting, and selling property it is not an easy task, so most people prefer to invest in Real Estate Investment Trusts (REIT) and Real Estate Investment Groups that act as mutual funds for rental properties.
Using crypto to invest in property isn’t exactly easy. However, as blockchain technology continues to gain popularity, new options are popping up. The Caviar cryptocurrency project is the successor to Caviar Capital LP, a real estate debt fund that has been active since 2013. The team behind the project is building a platform that will invest both in private real estate lending and on cryptocurrencies.
The goal of the project is to help investors be exposed both to the volatility of cryptocurrencies through a “proprietary, data-driven, dual-purpose investment model” and to the stable income acquired from private real estate loans. Users can be part of the Caviar platform by holding the CAV token, an ERC20 profit sharing token.
Tokenized property is also a concept that is gaining traction in the cryptosphere. The Atlant Platform allows users to participate in IPO (Initial Property Offerings) and to trade property tokens that are equal to one square foot of said property. Token holders are exposed to rental income generated by the property whose tokens they hold.
Stocks and Bonds
Investing in stocks is becoming easier every day thanks to platforms like eToro. Nevertheless, blockchain technology can still bring countless advantages to the mix such as lower trading fees and a trustless trading environment.
Tokenization of stocks can also facilitate the process for cryptocurrency users and for regular investors alike, lowering entry barriers, providing liquidity and allowing for seamless trades and transfers. The LAToken Platform, for example, allows the majority of global asset classes to be tradable, including stocks, bonds, and commodities.
CryptoPay, a popular cryptocurrency infrastructure company best known for its Bitcoin debit cards is planning to build a new cryptocurrency-linked stock exchange, making it possible for cryptocurrency holders to leverage their holdings up to four times, and participate in other financial markets.
Consumers can trade stocks and bonds, invest in equities, and reduce exposure on cryptocurrencies, all while staying within the cryptosphere. Platforms like CryptoPay allow holders to reduce their risk through diversification while also protecting investors’ privacy, given that they are not required to link their personal bank accounts in any way.
Stocks can be a great hedge for your cryptocurrency portfolio, depending on your strategy. Buying shares in payment related companies like PayPal can be a good “doomsday” plan for crypto holders. On the other hand, If you want to bet in the cryptocurrency ecosystem without actually buying more coins, you can always buy stocks from companies like AMD and nVidia, whose prices have become correlated with the cryptocurrency mining landscape.
Peer-to-peer (P2P) Loans are somewhat similar to bonds in the sense that investing in either one will require you to put up a certain sum of money which will then be recovered via interest-based payments made at regular intervals. Since P2P loans are considered somewhat riskier, the interest will typically be higher.
There are several P2P Platforms that accept Bitcoin, including BitBond and BTCJam. These platforms allow the lender to evaluate the borrowers through their previous loan history on the website, social media accounts, business plan and more. While there is a trust component involved when investing in P2P loans, debts can always be sold in case of a loan gone wrong.
Although these platforms provide opportunities for lenders and borrowers alike, much can be improved through the use of blockchain technology, a fact that has come to the attention of Lendoit, an upcoming P2P lending platform that will remove intermediaries from the mix, providing lower fees and higher privacy for lenders.
By creating an ecosystem where borrowers, lenders, and collectors are all connected, Lendoit is able to build a more secure environment. The use of smart contracts also allows the platform to run autonomously, removing middleman fees and dangers while also allowing the lenders to stay anonymous.
Other websites like Poloniex also allow users to loan Bitcoin and other cryptocurrencies. Although they provide a much lower interest rate, these loans are secured by the exchange system that does not allow the borrower to run out of funds before returning the ones borrowed. It’s worth noting, however, that exchanges are highly prone to hacks, so risk is still involved.
Do note that there are several “investment” plans out there that use P2P lending as a cover for their ponzi schemes, including the popular cryptocurrency, Bitconnect.
If you’re in crypto, then the last thing you want to buy is fiat but if you really think about it, fiat is the complete opposite of crypto, so it is likely that when one does poorly, the other will do fairly well.
It’s worth noting, however, that if Bitcoin goes to $0, it probably won’t have a big impact on the USD or EUR but you can always count on your fiat holdings to protect you from a complete loss. If the situation is inversed, however, and your fiat holdings start to crumble in value, you can be sure that your crypto portfolio will sky rocket. Cryptocurrencies like Bitcoin thrive on economical turmoil, including inflation, demonetization and other fiat-related problems.
If you want to get into fiat without leaving crypto, there are multiple options available, including proxy tokens like USDT, wUSD and BitUSD. Fiat tokens are pegged to the value of their underlying asset, which means that each USD token you have will be fully backed by actual dollars that are stored by the token issuer or gateway operator.
What is your preferred method of diversification for your cryptocurrency portfolio? Let us know in the comments below.
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