Gold and cryptocurrencies during financial turmoil
2022 has been another year of financial turmoil and volatile markets. It’s been attractive for investors as they had to manage the additional risk while trying to make a return. Traditionally, investors run to gold as it is a safe haven during financial market volatility. However, a few have added cryptocurrencies such as Bitcoin and Ethereum to their portfolios, to hedge market risk. Was that a wise choice? Let’s find out.
Gold (XAU) is a precious metal that is used in economics to back a country’s currency and trade due to its unique traits. It can be purchased in several ways, such as buying gold bars, buying shares in a mining company and buying a gold ETF (Exchange-Traded Fund). Gold has unique economic properties, such as a dollar and inflation hedge. This means that gold retains is purchasing power, and it’s returns are negatively correlated to the dollar. Another great property is that it is liquid, which means that it can be sold very quickly in the form of jewellery, investments and industrial products. In traditional economics, it acts as a safe haven, which means it has a positive return during market uncertainty.
A cryptocurrency is a digital asset that can be used as a medium of exchange to make payments, send money to different individuals and as an investment. Examples of other virtual coins include Bitcoin, Ethereum and Dogecoin. A virtual token is derived from a virtual coin. An example would be the Shiba Inu token which is an Ethereum-based altcoin. The most significant property of cryptocurrencies that makes them unique from other asset classes is that it is decentralized. This means that any entity does not control it. It works on a peer-to-peer network called the blockchain. Each coin listed on the blockchain has unique and different traits regarding transaction speed, network fees and utilities. You can invest in other cryptocurrencies via platforms such as Luno and Binance.
Read about The Financial Hustler’s article on the Metaverse.
Many economists are still struggling to place cryptos. They aren’t sure if it’s an asset, commodity or currency. It has shown greater returns in financial instability due to its decentralization, which means it has very little to 0 correlation with other markets. This is great for investors that can add cryptos to their portfolio to earn positive returns, albeit the market is bearish (negative). Although, they are very volatile due to their infancy and unregulated market. Due to the different methods that one can invest in cryptos (trading pools, staking and trading) portfolio managers can reduce their overall risk.
It is found through thorough research that cryptocurrencies should be used more as a portfolio diversifier rather than a hedge or safe haven against market risk. Gold still retains its title as a safe haven and has helped portfolio managers keep their funds safe during these difficult times. What are your thoughts on Cryptocurrencies?
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