Financial Crisis? Opportunity for Crypto
Tags: Recession, Cryptocurrency Investment, Editorial, Financial Crisis, Bitcoin

Common wisdom holds that what goes up must come down.

But what about the economy? Currently, the US economy is on its longest bull run in history, but there are signs this may be coming to an end.

While the US Federal Reserve is tightening, there is no guarantee that such measures are going to be sufficient. Furthermore, across regions, we can see emerging market economies struggling with inflation — or even hyper-inflation — and while such problems may at present be largely contained within those economies, we cannot assume that cross-regional contagion will not take place.

The point here is not to spread fear — rather, it’s about staying on top of things and managing risk, both as individuals and as communities. And we believe cryptocurrency can help with that.

Bitcoin as a hedge against risk

We all know the story of Bitcoin goes back a number of decades, as different programmers experimented with cryptography and digital cash. But there is no denying the link between the birth of the illustrious mother or coins and the 2008 Financial Crisis.

The crisis, spurred on by a culture of excess, over-the-counter derivatives that became ever more complex and opaque, and an outright betrayal on the part of banks who have proven to be unworthy of our trust, saw to the creation of Bitcoin.

What’s special about Bitcoin is not just that it is the first real public currency that does not derive legitimacy from the government. But also that it makes it possible to transfer value on a peer-to-peer basis in a way that allows for privacy, while being publicly auditable, and that it is arguably the first digital asset that cannot be ‘copied’ or spent-twice.

Due to its fungibility, divisibility, scarcity, and portability, it is often compared to gold.

But it is not just because of these qualities that its comparison to gold is justified. More importantly, in different situations, we have seen Bitcoin act as a ‘safe haven’ on account of it being an uncorrelated asset. We’ve seen this during the Greek debt crisis, when Brexit was announced, and in the context of Venezuela’s hyperinflation. What effectively happens is that — often to circumvent capital controls — people put part or all of their wealth into Bitcoin to escape their own vulnerable or failing currencies.

Bitcoin, however, is volatile. And while this may at times still be better than people’s local currencies (e.g. the Venezuelan Bolivar), ideally we want to use cryptocurrency to protect our wealth and come to a point of stability amidst global economic turmoil. For this, we need to further diversify our portfolio and maintain the highest degree of flexibility.

These days, advanced traders can take recourse to crypto derivatives to further hedge against the volatility of Bitcoin and other crypto assets and reach stability by going short when price movements on the spot market are unfavourable, but not everyone is equally comfortable with this complex financial product. Fortunately, there are other ways to further mitigate risk. This is where stablecoins come in.

Stablecoins as a way to further mitigate risk

Stablecoins belong to a family of cryptocurrencies that are pegged to the value of another asset. For example, Tether is a USD backed stablecoin, where for each dollar deposited, one Tether is issued. Libra, Facebook’s proposed currency, would also be a kind of stablecoin, backed by a reserve of different currencies, including the US dollar, Japanese Yen, the Great British Pound, and the Euro.

But stablecoins do not always need to be backed by reserves.

Crypto collateralised stablecoins, for example, are stablecoins pegged to the value of a local currency, but then backed by another cryptocurrency held in a smart contract.

The technicalities, however, are not important for our discussion (you can learn about them here). What’s important now is that stablecoins exist on the blockchain, can be obtained with cash, and can easily be traded against other cryptocurrencies on crypto exchanges. Furthermore, as their value is pegged to other currencies or commodities, holding them is effectively the same as holding the assets they represent.

What this means, in practice, is that if a financial crisis does come, it is possible to protect your funds by buying into crypto — part of your assets could be stored in Bitcoin, while you can spread the rest across different tokenised currencies such as BitUSD, BitEUR, BitGBP, BitCNY, Sparkdex.HKD, Sparkdex.AUD, or even BitGold, if you wish.

If for any reason all these tokenised currencies tumble, by already being in a digital environment such as the one provided by Sparkdex — our decentralised exchange where all these coins are listed — it’s easy to buy into other assets such as Bitcoin, which has shown to rise in value when conventional markets are caught in a downward trend.