Many an expert claimed that crypto is a great hedge against bad governments and recessions. However, now that a threat of global recession is truly upon us, cryptocurrency is crashing. This fact clearly proves that hedging isn’t something you can use it for. And if it’s the case, then what exactly is the value of cryptocurrency, especially at this difficult time?
Has Crypto Failed as a Hedge Already?
The COVID-19 pandemic is wreaking havoc all over the world affecting businesses and stocks and cryptocurrency as well. In fact, it was this particular trial for the global economy that proved utter inefficiency of using crypto as a hedge. Only about a week ago bitcoin, which is still the most popular crypto in the world, crashed from $7,000 to about $5,000. It’s rising again now, but the trend can’t be trusted.
Despite this seemingly positive change, one thing is for sure, crypto has already failed as a hedge. It might pick up in value, but its failure is dictated not by the current value of coins. It has failed because of its high level of volatility. All things considered, you are still better off relying on traditional ways to hedge. That’s because even if they are volatile to an extent, like FX hedging, the overall level of risk is much lower.
However, with cryptocurrency, you might lose it all in a single night. Moreover, even if its value doesn’t crash drastically, there’s very little you can actually do with it.
Why Crypto Is Failing to Provide a Safe Haven in Economic Turmoil
Cryptocurrency should have been a safe hedge. It’s basically written into the very structure of it. The number of coins is limited and the release of new tokens is a painstakingly complicated process. Therefore, investors never have to worry that the market will be flooded with new crypto tokens overnight. That’s the kind of thing that governments might do to manipulate fiat currencies.
In this light, it seems that crypto should have been a safe bet as a hedge. But its current position clearly shows that not a single one of cryptocurrencies lived up to these expectations.
The reason for that is complicated, just like everything else related to cryptocurrency is.
This, in itself, is the main cause why crypto is failing as a hedge. It’s too complicated to effectively serve a single purpose. Investors use cryptocurrency for a variety of purposes. In essence, this means that it doesn’t have a single role that it can fully perform. The majority of people holding crypto focus on speculation, so they create volatility. And as long as it stays so highly volatile, cryptocurrency won’t be able to become a good hedge.
In addition to this, one shouldn’t forget the Ponzi scheme that lost investors over $2 billion. And according to some sources, those same scammers might now be manipulating the value of bitcoin. This scheme broke what little trust there was for crypto.
Also, there have been multiple cases of crypto hacks. Some of those also caused billions in losses. And due to crypto’s lack of legal status, nothing can be really done about those cases. Therefore, investors are distrustful and this latest crash might be the thing that will bury cryptocurrency as a whole.
How to Hedge During the Upcoming Market Collapse
Some experts still say that the next recession won’t happen soon, but stocks are already crashing in many industries. With the COVID-19 pandemic going strong, they will continue to do som. Multiple small businesses are on the verge of collapse and they aren’t likely to survive this ordeal.
All in all, there might not be a global recession yet, but it will happen soon. Therefore, you must do everything possible to protect yourself, which means the return to traditional hedging.
Not a single hedge is superior to all others in these circumstances. Therefore, your best bet is diversification. Mixing stock and bond funds with a dash of FX hedging on top. That’s what you should be trying to achieve now.
Your focus should be not on equity funds, but on fixed income instead. This way, you should be able to weather down the losses that are unavoidable during the recession. It’s also very important to keep up a balance of bond and stock funds in your portfolio. Timing the market to switch from one to the other will be a mistake now. That’s because changes might occur too fast for you to follow.
Having a diverse portfolio with all possible options, you’ll be protected from every angle.
As to equity funds, consider stocks that pay dividends. In particular, focus on consumer staples that are sure to remain in high demand during a crisis. Large-cap stocks are the safest option among these.
Also, consider investing in fully-digital companies. They shouldn’t be very affected by the quarantine, which closed millions of offices worldwide. Therefore, these companies are less likely to break down under the pressure of this particular crisis.