The coronavirus pandemic has put another nail in the coffin of centralized financial systems. Over the past few years, you have seen several countries, such as Venezuela, Argentina, and Brazil, go through a long period of unprecedented hyperinflation. This begs the question: can cryptocurrencies like Bitcoin and DeFi products actually provide a safe haven from these wild economic swings? Whether they can do it or not, one thing that is absolutely indisputable is that the current financial system is completely broken.
Lesson from Greece
Financial turmoil in Greece has made headlines for most of the decade. After all, how is it possible that a country known as one of the strongest and richest kingdoms in the ancient world has somehow become so devastated? Well, it all started back in 1981, when Greece joined the European Union (EU). Two decades later, in 2001, the country adopted the Euro currency.
In 2008, during the housing crisis, Greece plunged into a deep recession and accumulated huge amounts of debt. Over the next few years, the country was forced to repeatedly receive assistance from the European Central Bank.
So, how did this affect the average person?
During the crisis, Greece was forced to close banks for a whole week. As you can imagine, this caused a massive panic among people as they couldn’t withdraw money.
In general, in times of extreme economic instability, countries impose strict restrictions on their citizens. This is why some people have turned to bitcoin and Defi as a possible hedge against the recession.
First of all, let’s look at what gives a currency its value – faith and belief. If people lose faith in a currency, they will simply choose some other currency. Usually, people tend to accept the most stable currency. This is why people tend to accept the US dollar, which is much less volatile than your Venezuelan Bolivar. However, as you have already seen, during the 2008 crisis and the 2020 pandemic, the us dollar is far from reliable.
can Bitcoin really replace the US dollar? Well, some definitely think so, for
the following reasons:Bitcoin is a decentralized entity, as such, it is not
managed by a centralized organization.
Remember that Satoshi Nakamoto created bitcoin during the 2008 crisis, when public trust in banks and financial institutions was at an all-time low. Bitcoin introduced an alternative method of transferring value where you don’t need to go through a centralized organization like a Bank.
Bitcoins can be easily obtained through various online exchanges. Anyone can simply scan the QR code to exchange money.
The Bitcoin Protocol is unsupervised and transparent, making it much more open than traditional financial systems.
Some merchants and retailers have already started accepting bitcoin for payments.
Bitcoin’s credibility as a currency during the crisis has been pretty well confirmed recently.
According to research, during a financial crisis, people tend to choose bitcoin over fiat. As the” Greek tragedy” unfolded, many noticed a positive jump in trading volume. A significant portion of these new clients were from Greece.
Despite this, bitcoin has a history of positive correlation with financial crises around the world. Let’s take a few examples to illustrate this best:In April 2013, cryptocurrencies reached record highs at the height of the Cyprus banking crisis.
During the Argentine financial crisis, the government banned its citizens from buying US dollars for fear of further devaluation. Undeterred, the Argentines turned to bitcoin. Argentina reportedly soon became a hotspot for bitcoin activity. The London school of Economics has published a report called the bitcoin market potential Index (BMPI). In this report, Argentina emerged as the clear leader, showing that they have the economy where bitcoin will get the highest traction.
According to statistics, LocalBitcoins Venezuela is enjoying record highs in weekly bitcoin trading volume.
So, this means that bitcoin is a safe haven, right?
The pandemic is the first true global recession that bitcoin has ever had to deal with. During this period, its performance was somewhat mixed. When it comes to true valuation, nothing can rival bitcoin. From a 5-year perspective, bitcoin’s return dwarfs all other dominant asset classes in the world.
to research, from June 26, 2015 to June 26, 2020, bitcoin enjoyed a return on
investment that was 70 times higher than the Financial Times Stock Exchange
100, NASDAQ, Nikkei, S&P 500 and Dow Jones markets. During this
period:Bitcoin rose from $257.06 to $ 9143.58.
This is 3,456. 98% more than the return on investment.
The average return on investment for all indices was 49.27%.
However, the increase in value is only one aspect of safe-haven assets. Along with all this, the asset should be less volatile, more liquid and easier to handle. Bitcoin clearly doesn’t tick these boxes. However, it should be noted that Bitcoin is still a very young asset. With more use cases and friendlier rules, Bitcoin will inevitably become a much more Mature and powerful asset. So you should definitely make “buying bitcoin” your top priority.
What about Defi as a hedge?
So, you’ve looked at how bitcoin could potentially be a hedge against the financial crisis. So, what is DeFi or decentralized Finance? It is an idea and thought process that creates decentralized versions of traditional financial instruments. For example, Compound is a Defi version of a money market Fund that allows users to earn interest.
So, why is DeFi considered a valid hedge? This is because of its design and the philosophy that governs it. DeFi is decentralized, global, and ideally should be frictionless. In a decentralized credit platform, you don’t need to have a good credit score or credit history to apply for loans. The risks can be covered by collateral. If you already have a good supply of Ethereum, it makes sense to grow them by locking them in DeFi apps.
Let’s take a look at some DeFi apps that can be used during a financial crisis to make the most of a bad situation.
Set Protocol is a DeFi Protocol built on top of Ethereum that allows users to create, manage, and trade Set – ERC20 tokens, which are a portfolio or basket of tokens. The Set Protocol captures complex trading strategies for working and balancing these portfolios. These trading strategies include indicators such as moving averages, etc.
So why is this so important? Tokensets regularly offer a large number of assets that systematically outperform the market each week. In other words, traders are allowed to make the most of their investment. For example, before the coronavirus crisis, the sets were rebalanced to stable Dai and USDC coins to minimize losses.
An Ethereum-based token trading platform that allows users to tokenize real assets such as stocks and shares. Users can briefly use multiple Ethereum-based assets in tandem with Protocol tokens such as Tezos (XTZ) and Binance Coin (BNB). This can be very useful in a bear market.
in Los Angeles in 2017 by Antonio Juliano, dYdX is a hybrid platform that
offers an innovative approach to margin trading. dYdX has to offer margin
trading with the help of the following tools:Isolated margin: isolate a certain
amount of funds with a certain leverage.
Investors can decide how they need to lock in a Deposit based on leverage.
Cross-margin: use all assets in your dYdX balance as collateral to earn higher interest rates.
DYdX users can open short positions with up to 5 times leverage, which can be tracked along the chain.
The chart can be viewed as a decentralized exchange (DEX) that allows the exchange of stable coins due to low fees and low slippage. The chart uses liquidity pools in which users provide their own liquidity.
How the chart works:
It aggregates stablecoin pools to ensure minimal slippage when trading between different stablecoins.
This gives you easy access to assets, especially when they are in high demand.
The use of automated portfolios
Another interesting method you can use to hedge your risk and thrive during a recession is automated portfolios. EToro currently has an impressive range of premium portfolio offerings called ” CopyPortfolios.”CopyPortfolio acts as multiple traders who work for you at the same time. The minimum amount required to invest in CopyPortfolios is $ 5,000.
Before you go any further, you should know that each person or market under CopyPortfolio counts as one trade, and each trade opens for you with the same proportional amount.
now let’s look at three types of CopyPortfolios that you can choose from:Top
Trader CopyPortfolio: a trader-only portfolio in which each of the traders
copied as part of the portfolio is selected based on the CopyPortfolio
Market CopyPortfolio: these portfolios are a combination of CFDs of stocks, commodities, or ETFs that are combined together according to a predefined theme.
CopyPortfolio partner: eToro partners created this portfolio-Tipranks (a software company for stock analysts), WeSave (a French robo-adviser), and Meitav Dash (a multibillion-dollar Investment house).
How does CopyPortfolio rebalancing work?
Your CopyPortfolio will automatically restore your balance to help traders optimally diversify their portfolio while minimizing long-term risk. This periodic rebalancing allows users to get the most out of various trading strategies. The weight of each of them in Coppertree proportional to the size of its market capitalization.
Example of eToro Copyportfolio-tie
The TIE and eToro have teamed up to launch the first ever CopyPortfolio.
Tie was built with a mission to bring reliable and transparent data and technology solutions developed for the next wave of cryptocurrency trading.
TIE’s core offering is the most advanced data analysis platform in cryptocurrency, combining proprietary sentiment, market, fundamental, technical, and chain data.
KryptoStorage tie was designed in order to use the knowledge of the crowd (sentiment). They analyze 850,000,000 tweets every day using proprietary machine learning and natural language processing technology to get an opinion on cryptocurrencies.
The eToro and Delta
Etoro also acquired Delta, a crypto portfolio tracking app. The Delta app helps investors make better decisions about their crypto investments by providing tools such as portfolio tracking and price data. It supports more than 6,000 crypto assets from more than 180 exchanges and provides investors with a wide range of tools to track and analyze their crypto portfolios.
Conclusion how to hedge bitcoin and what should you do?
This begs the question. What can you do next when you face a major recession?
If you are a novice investor, the safest thing to do is just invest in Bitcoin. Bitcoin has proven to be a great investment and a brilliant hedge (as mentioned above).
If you are well-versed in the art of investing and cryptocurrencies, you can experiment a little with the DeFi protocols. While it may seem intimidating at the beginning, it can be quite simple once you get used to it.
Finally, regardless of your experience, you can always use automated crypto portfolios and enjoy a huge return on investment.
Ready to get started? eToro is one of the easiest-to-use crypto exchanges available in the US, and at the same time, it is also one of the most feature-rich. Easily and quickly buy, sell and trade the most popular coins in the world. You can also connect with millions of other crypto traders and automatically copy their moves using CopyTrader™. If you are feeling timid, use a virtual portfolio that works exactly like the real market, except that you can trade with $100k in “game” money. Don’t wait, sign up for eToro today.