It’s no secret that cryptocurrency markets are volatile. Anyone who has had skin in the game for the last year has seen the waves of highs and lows come and go, even as prices have risen exponentially.
The last run up of Bitcoin to just over $5,000 and then the subsequent downturn of nearly 20% to $4200 should give an indication of the level of volatility within the marketplace. Likewise, the sudden plunge of altcoins with the announcement by the Chinese government regarding ICOs is not an uncommon occurrence.
Cryptocurrency investors are, by and large, used to the volatility. However, many are seeking improved ways to leverage their cryptocurrency assets in order to limit exposure to the wild fluctuations of crypto markets. As with all investment portfolios, the best way to hedge against volatility is through diversification.
The difficulty, though, is that diversification within the cryptosphere doesn’t always give a real hedge against substantial price fluctuations. Most altcoins more or less follow the trend set by Bitcoin, and so diversification into other coins provides little market hedge.
Diversification options
The best way to diversify a portfolio is by investing in something that is wholly different from the bulk of what an investor holds. For example, an investor with a portfolio full of stocks should consider hedging against a market collapse by purchasing precious metals. When the stock market retreats, precious metals increase as a store of value, and so the net portfolio loss is minimized.
Cryptocurrency investors should seek out similar diversification hedges in real world assets such as art or real estate in order to mitigate losses from market volatility in the cryptosphere. There are several options that allow just such diversification to happen.
Tokenization economy
Blockchain technology itself offers a vehicle for diversification. Because of the ability of distributed ledgers to connect users with asset owners, Blockchain technology is making it possible to create new ways to offer real assets for investment, and to invest in those assets.
Tokenizing a real asset simply means allowing the inherent value of the asset to be sold in parts, through tokens. The concept of tokenization has been around long before Blockchain technology. Tokenization is essentially the same thing as share ownership in a corporation. It grants the investor partial ownership of an expensive asset.
However, with Blockchain technology, tokenized assets can be bought and sold without a third-party centralized hub charging substantial fees for service. This creates a way for cryptocurrency holders to diversify their holdings into any number of real world assets without having to convert into fiat currencies.
Companies like LAToken, ATLANT, and others are seeking to move the tokenized economy into the mainstream, allowing for this level of diversification.
Tokenizing the world
The beauty is that nearly anything can be tokenized, from cars, boats, and stocks, to works of art and real estate. Companies like Orebits are even seeking tokenization of assets like precious metals. There is no limit to what can be tokenized and sold within a Blockchain platform to create hedge for crypto investors.
For example, a strip mall owned by a single investor could be tokenized through the Blockchain, allowing investors to buy tokens that represent “shares” of the mall. The seller receives the full value of the mall in tokens and the buyers hold the real property together via the Blockchain. This would allow an investor to participate regardless of stake or geographical location.
Traditional investments in real world assets like real estate would have required substantial capital, international connections, and extensive fees with closing costs, broker fees, and travel expense. However, tokenized markets eliminate all these and provide a method for diversification of cryptocurrency holdings. Julian Svirsky, CEO at ATLANT, a Blockchain real estate company, said:
“…an investor in the China can invest in a fractional portion of, say, a shopping mall in France, without having to travel there, or having connections in that country. Thus, real estate investment is open to smaller investors, yield seeking investors, speculators that are interested in a short duration holding and most importantly it erases national borders, transaction costs, and rids the real estate business of bureaucracy and red tape.”
Hedging your bets
Investors are already seeking out hedges for their crypto holdings. With prices soaring to new highs, and formerly small portfolios now extremely valuable, cryptocurrency investors need ways to diversify into real world assets without the complexity of foreign travel or the costs of traditional stock investments.
Bitcoin pro and editor at Adamant Research, Tuur Demeester recently tweeted:
https://twitter.com/TuurDemeester/status/904182002290700290
Whether selling Bitcoin now is best or not remains to be seen. However, the need for diversification is clear. Blockchain technology provides a unique way for investors to do just that by tokenizing assets and offering them to cryptocurrency holders without the need for conversion to fiat currencies.