Managing Your Portfolio During Economic Instability

A natural disaster can create market movements just as easily as a rocket launch, and the year 2020 has encouraged many people to invest, accumulate wealth, and protect their assets.

The effects of the global pandemic on national economies and personal finances will be felt for years. No industry was left unscathed. Layoffs and losses were everywhere.

While you might think the money in your savings account can survive anything, no economy is completely safe from external events.

That’s why it’s important to manage your money — now more than ever.

A Modern Definition of Money

Since the modern economy can directly impact individual finances, it’s critical to understand the future of money so you can protect your assets as best as possible from unexpected personal or economic crises.

In our early barter system at the dawn of civilization, for two parties to transact there had to be a “coincidence of wants.” If someone wanted to buy a goat for a few sacks of rice, they would need to find someone with goats willing to trade for rice. The inefficiencies of this system led to the creation of a medium of exchange – money.

Money not only dispensed with the coincidence of wants, but it broadened our concept of what was available for trade. As civilizations developed, money evolved from dried corn to pure gold. For a time, we used currency backed by gold reserves, but this soon became inefficient due to the mining requirements and supply rate of gold.

Today, most countries issue fiat currency, which is based on a system of mutual trust.

The word “fiat” is Latin for “let it be so,” meaning that fiat currency is usually not backed by actual value but will continue to have value as long as people believe it does.

And that’s where we run into the problem of money that cryptocurrency seeks to address.

What Is a Cryptocurrency?

Fiat currencies have been used since the 11th century, but that hasn’t stopped humans from trying to create better forms of money. Cryptocurrencies are humanity’s latest attempt, and in little over a decade, blockchain technology has made significant headway in solving a problem that is thousands of years old.

A cryptocurrency is a globally transferrable digital asset used to pay for goods and services, and can even be traded for real-world money. Rather than relying on a central issuing authority, cryptocurrencies tend to be decentralized – meaning no one entity or organization can control the network.

When someone makes a transaction, it is recorded on a public ledger called the blockchain. If your credentials match, the transaction is approved by a distributed group of ‘miners’. Once they validate an entire block of transactions, the network rewards these ‘miners’ a certain number of tokens depending on the blockchain.

This facilitates a supply and demand ecosystem with no central governing authority.

The first complete implementation of a cryptocurrency was Bitcoin, a project led by an anonymous user only known as Satoshi Nakamoto. Thousands of other cryptocurrencies or ‘altcoins’ followed in Bitcoin’s wake, creating the thriving crypto-economy we have today.

Investing in Today’s Crypto Economy

Digital assets are generally available for purchase on centralized and decentralized cryptocurrency exchanges. You can’t buy something if no one is willing to sell it to you, and cryptocurrency exchanges are platforms that bring traders together to facilitate the trade of assets.

Different exchanges cater to different kinds of traders, and not all cryptocurrencies are available on all exchanges. Make sure to check an exchange’s listings for the asset you want to purchase before creating an account and spending any money. Further, it’s important to note that not all exchanges are all they claim to be.

The blockchain industry is one that thrives on hype, and there are enough people trying to manipulate market sentiments with false claims, fear, uncertainty, and doubt. Do your own research before making any financial decisions, and make sure you understand the technology you’re buying into, and the risks associated with it.

Find out whether your region has any specific laws around the purchase, ownership, or sale of cryptocurrencies. While digital assets are transferable anywhere globally, not all governments are interested in regulating a currency that isn’t state-issued.

However, this is likely to change in the coming years. Regulators and policymakers have made steady progress over the last year, and as more nations start to see the different ways blockchain can help their economies, the easier it will become for everyone to buy in.

Economic Outlook for the 2020s

Economies can be destabilized in many different ways. From financial instability to variable supply rate, economists across history have analyzed mankind’s worst global monetary crises to learn how to mitigate them. However, even the largest, most stable economies can be toppled by unexpected events.

Economies comprise many groups of smaller financial systems and industries, and each of these groups can have profound effects on the others. When financial systems destabilize, it can lead to a cascade of failing markets that ultimately affects the economy as a whole.

An unstable economy can have extremely ill-effects on the people’s wellbeing and international relations. Such environments lead to asset depreciation, hindrance or halting of investments, unemployment, and even the complete collapse of a society.

Shaky economies have crippled financial systems across time, and preparing for instability is crucial when considering long term wealth accumulation.

How Do I Protect Myself From Economic Instability?

In 2013, Cyprus became the fifth country to turn to the eurozone for financial aid during the debt crisis. The Bank of Cyprus had to shave almost 10% from uninsured bank accounts of citizens holding more than €100,000, and 6.75% from uninsured accounts holding less, for a €10 billion bailout.

The most obvious way to protect your holdings from succumbing to a failing economy is diversifying your assets. Spreading your capital out across multiple investments ensures no single asset’s price can significantly affect your portfolio.

No matter how many investments, centralized systems always have a central point of failure. Incidents like what happened in Cyprus are only possible because of the centralized framework that holds up the financial system. Cryptocurrencies may not be ready to replace the global financial system quite yet, but its decentralized nature is perfect for protecting your assets.

Cryptocurrencies are by no means risk-free. Most institutional investors still only advise allocating a small portion of your investment portfolio to cryptocurrencies. This is primarily due to how volatile crypto markets can be, with asset prices quadrupling and completely devaluating every few weeks.

It’s probably not where you’d want to put your entire life’s savings (yet!), but there are some pretty effective ways to mitigate the risks posed by volatile digital asset markets.

A diversified portfolio of cryptocurrencies from different product categories is a sensible approach. This may include crypto’s used for gaming (such as Enjin), money transfers (such as XRP), or coins like Cosmos that connect blockchains together.

How Can Crypto Protect My Wealth?

Market Volatility

The cryptocurrency market is far more volatile than the traditional stock market, and while this makes it an excellent opportunity to grow your assets, it can also lead to huge losses if not managed properly.

Crypto and Derivatives

It’s also possible to profit from the blockchain industry’s growth without direct exposure to the crypto asset class. Derivatives contracts are assets that derive their value from an underlying stock, bond, commodity, or currency. They can also derive their value from metrics like interest rates and market indexes.

Derivatives contracts allow traders to bet on the market’s performance without actually owning the underlying asset (such as shares, or bitcoin). Between futures contracts and perpetual swaps, there are a plethora of options (no pun intended) to generate massive upside with minimal risk.

Though derivatives do allow for large profits using a small amount of capital, they’re mostly used as a hedge on spot market investments. By owning an asset and betting on its failure, price movements in either direction generate profit, further protecting you from broader instability.

Digital Asset Storage

Besides protecting your assets from economic events, it’s also important to store your digital assets securely. Exchanges usually insure losses incurred from hacks, but it’s still safer to transfer your tokens to an offline ‘cold storage’ wallet that can’t be accessed from the network.

This stops anyone from handling the assets without your private key. For substantial investments, a hardware wallet with multi-sig capabilities is an absolute necessity to protect your wealth.

Can I Put My Crypto in a Savings Account?

Though cryptocurrency offers gains much higher than usually seen with regular stock prices, there are ways to further put your digital assets to work. Cryptocurrency savings accounts allow you to earn interest on deposits locked into these platforms.

It’s important to understand that these savings accounts are basically investments, and any returns offered are likely not 100% guaranteed. Crypto-based savings accounts are still subject to market volatility, and if market losses outweigh the gains from interest, you can still lose a significant chunk of your investment.

Some savings accounts offer interest on stablecoins – altcoins with a fixed value, usually pegged to a fiat currency. This allows investors to access the high interest rates of the blockchain industry without its market volatility.

Other ways to generate interest include loaning out your crypto on decentralized exchanges. Most DEXs offer high interest rates, and with the use of collateral tokens rewarded to liquidity providers, ‘yield farming’ lets traders squeeze as much profit as they can out of an investment.

Crypto Finances For the 2020s

While the word ‘economy’ is usually used in the context of finance, economies are about much more than money. Economic agents use natural resources, labor, and capital to spur economic activity, creating an economy. The field of economics is closely intertwined with the social domain, and events in either one can have substantial effects on the other.

There’s not much we can do as individuals to prevent catastrophic events from disrupting our economies, but we can take steps to mitigate how badly it affects our finances.

This gives you the upper hand in a seller’s market and helps stabilize the financial system.

Understanding the true value of cryptocurrency is easier when you get involved, build a portfolio, and learn about new crypto projects as the industry evolves.