How NASDEX can help with reducing portfolio volatility?
Tags: Nasdex, Tokenization, Blockchain, Stocks, Crypto

The solution to crypto drawdowns and liquidations is diversification

The number 1 rule of investing is to “never lose money”. And the number 2 rule is to simply “remember number 1”. But of course, to never lose money in the market is much easier said than done. However, a more realistic approach is to ensure that your portfolio can survive volatility long enough to realize your long term investment goals. We all share the thesis that crypto is the future and it will produce handsome returns in years to come. However, none of that really matters if your bag gets liquidated along the way, and you have to start over again from zero.

Just this week, there were multi billion dollars worth of assets liquidated due to the sharp sell off on Sep 7th. There was no warning at all; no Elon tweet nor China FUD. Market was healthy one minute, and then the next minute margins were called and accounts were liquidated. These accounts were punished due to poor risk management choices with over concentration and leverage. But it is avoidable. The solution to this is diversification and NASDEX can help. NASDEX’s ability to tokenize non-crypto native assets offer increased investment options for our investors to diversify from crypto’s inherent volatility. We want to ensure that our investors have the holding power to ride the crypto mega trend without being whipsawed by the market and shaken off the train mid way.

Crypto draw-downs are fast and furious

Crypto’s volatility is legendary. It’s an inherent feature for such a fast moving asset class. This year alone, there were multiple periods of significant draw downs. Off the top of our head, we’ve been through Elon tweets, China ban, USDT audit, and the latest SEC vs Coinbase news. While in hindsight, these FUDs were never going to impede crypto’s progress, but they did create terrible volatility and liquidations. It is truly unfortunate because the tragedy could be avoided with better risk management.

Just take a look at the chart below to appreciate the frequency and the degree of violent draw-downs in crypto that can occur on an annual basis. Now imagine someone with his life savings in crypto wakes up one day to find out that he’s down 50%. Or even worse, he used leverage on some bags and woke up to liquidated positions. That’s not a situation any of us want to find ourselves in. Crypto has a long road ahead, and we are just starting. But you have to survive to benefit from the future returns. Remember, if you lose 50%, then it takes a 100% gain to make back your losses. And if you lose everything, then sometimes it’s game over. Crypto draw-downs have always been vicious. Now more than ever, individuals have savings in crypto as well as work a full time career in crypto. This makes market drawdowns that much more wrenching.

“Can’t buy the dip if you are all in”

One solution to these sleepless nights is diversification. By diversification, we don’t mean buying 10 different types of animal coins. To truly diversify, one must be invested in assets with low correlation. imagine if one has diversified part of their crypto portfolio into an uncorrelated but also attractive asset class such as equity. Since equities and crypto have very low correlation, a major draw-down in your crypto positions won’t negatively affect your equity positions. And when the time is right, you can sell the unaffected equity position and buy the dip in the fallen cryptos to play for the eventual rebound. Not only will you not be liquidated, but you also have the firepower to buy the dip.

It is also possible to reduce volatility and still be invested in crypto themes. One way is to simply buy crypto driven stocks. Here is a stock idea that crypto enthusiasts and technologists could hold as a great diversification to their portfolio.

Presenting TSMC — The largest chip-maker in the world

TSMC (2330 TT) is a Taiwan domiciled semiconductor maker. The market cap is USD630bn. And it trades a couple hundred million USD per day.

TSMC is the world’s largest semiconductor foundry. Semiconductors are obviously an integral component of every single tech enabled device like computers, cars, and of course blockchain mining rigs.

Despite the fact that crypto-related business for TSMC is a small part of their business, it has grown massively from almost nothing to the current couple hundred million dollars of revenue. So TSMC is certainly benefiting from crypto growth

And aside from crypto, TSMC benefits from all technological progress. As long as we believe technology will continue to progress in the future, then a long term investment in TSMC is a very safe bet on the future.

Best of all, TSMC stock price is hardly correlated to crypto which makes it a perfect diversification play. The chart below shows that correlation between BTC and TSMC swings between negative and positive, which means no clear correlation. And that the biggest draw-down of TSMC YTD is only 19%, versus BTC’s 53%. So by rebalancing a portion of your crypto profits into an equity like TSMC, it would reduce overall portfolio volatility and drastically reduce draw-downs. Let’s say you rebalanced 20% of your crypto portfolio into equities after a strong crypto rally, now you are well positioned to weather the next crypto draw-down and buy crypto dips by selling equity. To that end, NASDEX is the perfect vehicle for our users to rebalance from crypto to equity and vice versa. Given that all security will exist as tokens on-chain, there is no friction in the traditional sense of moving money between equity and crypto. There will be many exciting equities names on NASDEX which are great investment targets and as well as great diversification for a balanced crypto portfolio holder with diamond hands.

DISCLAIMER: This is not financial advice. Any tokenized asset involves a high degree of risk, and there is always the possibility of loss, including the loss of all digital assets. We advise you to do your due diligence before getting involved in a project.