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Digital Assets: A Hedge Against Recession?

Digital Assets: A Hedge Against Recession?

News & Insights

03 Jul 2019

One of the most favored predictors of an economic recession is the US Treasury yield curve. Whenever it inverts, meaning a longer dated bond, say one that expires in 10 years, is predicting lower interest rates than one expiring in a shorter time frame, then it is usually seen - and has often proven to be - an accurate indicator of recession. The yield curve is inverting again. The US Federal Reserve has indicated it intends to cut rates. Stocks are sliding. In this scenario, it's worth asking how the price of digital assets may be affected, if at all. Often, the conundrum is that assets in a diversified portfolio move in unison. A financial crisis might see different asset prices moving at different rates or at a different pace, and there may be different rates of underperformance, but in a globalized, interdependent world, it is hard to find asset price movements that are completely independent. Digital assets, however, at least in theory, should move independently of centralized economic policies. They are in this regard uncorrelated. Their price is not determined by inflation, interest rates, or even socioeconomic factors, such as unemployment. This is potentially hugely attractive to investors of all types.

Bitcoin: Digital Gold

Let’s consider Bitcoin, the first cryptocurrency, ironically born in the wake of the 2008 global financial crisis. In addition to the fact that the coin dominates with a 60% share of the total digital assets market, Bitcoin is of interest due to its oft-cited reputation as ‘digital gold’. Bitcoin’s comparison to gold is based on the idea that both share properties such as scarcity, durability, and fungibility, and also that it could be a ‘safe haven’ for wealth preservation. This may be surprising, given the infamously volatile nature of Bitcoin. However, as an uncorrelated asset class, we believe it does indeed have that function. To support this perspective, we’ll draw on market data, provided by Grayscale's recent report, to see how Bitcoin performed in the context of a few major developments which caused markets to tumble.

Greece’s debt crisis

In the period between April to July 2015, the politico-economic situation in Greece was highly turbulent. With talk of a potential ‘Grexit’, banks closing, and strict capital controls in place, Bitcoin had become the only way to store and transact value in and out of Greece. On July 13, 2015, an agreement was reached. Grexit was avoided and sentiments somewhat settled. As we can see from the graph below, Bitcoin was a top performer during this decisive period.

Brexit

June 24, 2016, marked another shocking moment when the UK announced the outcome of the Brexit referendum. On the day itself, there was a massive selloff of GBP which closed at -8.1%. Bitcoin was the top performer with a return of 7.1% versus an average of -2.1%. Interestingly, it outperformed gold (4.7%), JPY (3.9%), and global bonds (0.6%). In the six months that followed up until the end of 2016, the pound sterling continued to struggle, falling from US$1.48 to $1.23, whereas Bitcoin rose from $624 to $961.

US-China trade tensions

Now, we once again face uncertain times. Already in 2017, tensions started to rise between the US and China over the US’ trade deficit, amongst other concerns. On May 5, 2019, the US announced a tariff increase of US$200 billion on Chinese imports. Retaliation soon followed with tariffs on US goods. Between May 5 and May 31, 2019, major markets, including the Nasdaq Composite (-8.7%), the S&P 500 Index (-6.4%), gold (1.5%) and bonds (0.9%), showed signs of anxiety. Against an average of -2%, during this period, Bitcoin yielded a cumulative return of 47%.

Altcoins for a Diversified Portfolio

While the data we’ve considered just provides snapshots, it does show there is a case to be made for Bitcoin. By extension, this also applies to altcoins which are likewise uncorrelated with conventional assets, and imperfectly correlated with one another. In this graph, taken from another report by Grayscale, we can see correlations of rolling one-month returns fall between a maximum of 0.31 and a minimum of -0.41, with an average of 0.06. The graph only covers historical data, and it cannot guarantee future results, but an average value so near to zero strongly indicates that digital assets are indeed suitable as diversifying components in multi-asset portfolios.

Trading Into Digital Assets at AAX

When it comes to investing in digital assets, it is important to understand how they come to be valued. Apart from serving as a store-of-value, digital assets also have high growth potential. Price discovery, then, is not just a matter of supply and demand, but part of appraising the quality of blockchain ventures, in terms of their utility and mainstream appeal. Gauging market sentiment requires mastering technical indicators such as Elliot Wave, Stochastic and CCI. That's how you can make sense of the charts and generate signals from reading the order books. To support this process, AAX provides a high performing, secure, and safe marketplace, that meets all the regulatory requirements to trade with confidence and engage in genuine price discovery. Powered by London Stock Exchange Technology, AAX serves as an important gateway to a world of uncorrelated assets that could provide a useful hedge against major macro events or downturns in classical financial markets.

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AAX Trends focuses on market trends and analyzes essential events and factors in the cryptocurrency space. From DeFi, NFTs to GameFi and the metaverse, AAX has the answer to everything in the digital assets industry.

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