Diversify Your Digital Assets Today For a Better Tomorrow

The Future

In an ideal future, which is bound to happen in some way or the other, cryptocurrencies form a major part of the market and are widely used as means of beating day to day inflation as well as exchange for goods and services. These cryptocurrencies have different uses and functions, not all perform the same task or serve as the same unit. These tokens will each have unique value based on the service or function they provide. In a potential ecosystem filled with tokens with various use cases, it’s quite important to understand which ones you might need or which ones will prove to truly serve their purpose. The biggest task of today is segregation of the truly worthy coins with dedicated development teams and the hyped up “shit-coins” that exist as a way to just make a quick buck by selling a far fetched reality. 

Current Scenario

As of today, correlation is rampant in the cryptocurrency market. There are over 2000 coins to date, excluding the already failed projects, and almost all of them mimic the price movement of Bitcoin. I have personally tested this out by analysing and charting Bitcoin, but entering a position on Ethereum and Ripple future contracts. At the 180 day matrix, Ethereum to Bitcoin correlation is .84, meaning they have almost the exact same price action, barring some noise in between the main trends.  The correlation today is much less compared to what we saw in 2017, but it’s still nowhere close to healthy.   

What we see in other financial markets today is completely different. Bonds have correlation between them based on fundamental factors like the entity issuing them, the type of projects they aim to finance, the yield, and the credit worthiness of the issuer and the bond itself, amongst many other factors. In stocks you see diversification based on sector, size, financials, market cap, potential, and other factors. It is quite easy to diversify across these traditional asset classes considering they have been around for centuries. But cryptocurrency is hardly 10 years old and in the early stages of development. It is essential to understand we are at least 5 years away from true mainstream adoption. This can be majorly attributed to human unwillingness to change. This same doubt and fear being cast over Blockchain today resembles that of the Telephone or Internet when they were first pioneered. But psychologically, cryptocurrency as a class is gaining popularity, with Bitcoin at its helm. Individual projects are not receiving widespread media coverage and hence, their value attributed to them by investors (or HODL-ers) is directly linked to the price sentiment seen in Bitcoin .  

There are predominantly 3 types of digital assets that can be backed by a Blockchain; native currency tokens, security tokens, and utility tokens. There is another kind of crypto called a 'hybrid token' which is pretty self explanatory (a combination of 2 or more types of cryptocurrencies on a network). All of these tokens are enabled by cryptographic protocols and are considered cryptocurrencies.  Native currency tokens or a cryptographically enabled payment mechanism is used as a means of exchange and a store of value, basically the digital equivalent of fiat currencies. While even the so called stable coins in existence are incredibly volatile, mainstream adoption due to the ease of access and use will reduce all of that. Security tokens are self explanatory, they are similar to shares and represent units of ownership in a project or company. They can have different features like payment of dividends, issuing of voting rights, or interest payments. Utility tokens are probably the most important form of digital assets. In my opinion, these tokens will have the most associated value when mainstream adoption shows up. Even today, they provide the most value of any digital asset barring a few cryptocurrencies. They enable you to use the issued token to redeem or power a service. While Stellar Lumens and Ripple are payment mechanisms and used to exchange value, they are native currency tokens. Bankera and Blockchain Cap are security tokens, where a user buys their token and is granted a form of ownership. Monthly dividends are paid out based on the profit of the company. The dividends (in Ethereum) from investing in Bankera has covered 70% of my investment in less than a year. Golem Network Token is a utility token where in you use the token to pay a counter party in order to buy computing power from then. Each type of digital assets have their own use cases but within each of these categories there are lot of incredible projects with great potential and even more scams looking to make a quick buck off the hype 

 What Will Happen to the Volatility?

The volatility today can be attributed to the tiny size of the market. With a market cap of $200-400 billion and a daily volume of over $1-2 billion, Bitcoin can be manipulated by institutions and large players in an instant. The real potential of cryptocurrencies will be unleashed when people stop seeing it as a method of doubling your money in 2 months. As of today, more than a method of seamlessly sending money across the globe, Bitcoin is a speculators paradise and worst nightmare all at the same time. When the real adopters, people who use it as a real financial tool as well as invest and trade in it for organic market movements, the volume, market cap, and usage will increase, defaulting it into a scenario where manipulations aren’t as easy. Volatility will automatically take a toll for the better and over the long run, the crypto market will grow to rival traditional financial markets. The volatility obviously cannot be completely eroded and it will most likely never be less volatile than fiat currencies. But one day the market will be worth trillions of dollars, and the volatility of today will look absurd. Now let’s be honest, it’s not like traditional markets see no volatility. The Russian Ruble gaining almost 100% when MH-370 was shot down in Ukraine, Turkey raising interest rates and their currency depreciating by 100%, and a 70% correction in stock markets during the Great Recession of 08 are all recent examples of intense volatility. Traditional systems have their own set of flaws and setbacks, as do digital markets. The difference is, who reigns supreme, you or the global elite?  

Diversification across the various types of cryptocurrencies can be extremely daunting at this point of time. You have to really understand use cases and the project in depth, not just that, but you have to have a strong opinion. You need to be able to analyse a project and think about whether this will take off in the future. This is connected to a number of factors like seeing if the development team are truly dedicated towards the outcome of the project, how fast progress is being made, and support from the community. Moreover, with the market being in a bearish leg for the past 10 months now, it is psychologically distressing for people to buy and watch the monetary value of their assets fall. This holds true especially for the newbies in the market as they are not used to the volatility this space has to offer. To quote the words of world famous value investor Warren Buffet; “I never invest in something I don’t understand”, it is fundamental you gain a working knowledge of the projects you are investing in and understanding the impact it has or is going to have. 

 Why Start Now

Diversification is one of the most essential portfolio techniques in existence. It has helped innumerable portfolios avoid being completely wrecked. Without diversification, the risk of a portfolio is much higher than each individual asset in it. For example, if you were to have a portfolio of 3 different sized Pharmaceutical stocks, you’re overall portfolio risk would be higher than the risk for each individual stock. But if you were to add 1 year treasury bills, stocks from other sectors like technology, consumer staples, industrials, and automobiles, portfolio risk significantly decreases.   Overall diversification can be covered later, for now the focus will return back to cryptocurrencies. Understanding what kind of asset you’re investing is crucial and cannot be stressed on enough. The current bear market is a special opportunity for people to diversify across cryptographically enabled assets. And while today, Bitcoin correlation is at astounding levels, the same cannot be said for 10 years down the line. So while you consider diversification today, you might think it doesn’t matter since it all moves with Bitcoin anyway. But the diversification of today reaps it’s benefits tomorrow (not literally). When adoption hits, each token or crypto will be seen for their individual value rather than just as 'cryptocurrency'. Once you have your portfolio set to your needs and diversified across the three types of digital assets, just let it sit still for a while. When value starts to unlock, price start to take off with stability, and development really picks up, you can turn back to your portfolio and tweak it according to your requirements. That being said, it’s is much better to actively monitor your portfolio than constantly playing around with it as per the then current market conditions. Learn to be disciplined and keep faith in your investments, because after all, you’ve invested because you digital assets and payments as the future of the world’s economy.      

- AB