Crypto-Assets Stress Test: The Corona-Crisis Could Change the Rules of Portfolio Management
It’s not a new claim: Crypto-assets are uncorrelated and provide downturn protection during economic crises. But how true is this really? Crypto-assets will undergo a stress test in the coming months, and the outcome could change the rules of portfolio management.
During an emergency meeting on Sunday evening, the US Federal Reserve decided to cut interest rates by a full 1.25 percentage points to a range of 0.00 to 0.25 percentage points. This puts interest rates at the same level as during the financial crisis in 2008. Such an emergency interest rate cut is rarely good news, as it means central bankers expect the economic situation to worsen and are therefore taking drastic measures.
Investors should pay close attention to these developments because there are two key risks: Firstly, the economic downturn could accelerate and lead to further losses. Secondly, the monetary policy stimulus could prove ineffective, as interest rates have been at low levels since the financial crisis. In this case, central banks will continue to flood the markets with cheap money.
Could crypto-assets provide a way out of the crisis?
Crypto assets have suffered from the downturn in recent weeks just like any other asset class, but not for fundamental reasons. During a liquidity crisis, investors sell whatever asset they can at whatever price – hence the collapse in Bitcoin prices, as Bitcoin is a highly liquid asset. The same goes for gold.
Once this liquidity crisis is over, investors will reinvest. At that point, crypto assets will be an attractive choice because the real economic impact of the coronavirus will not affect them to the same extent as other assets. They are, for example, not dependent on supply chains, staff cuts, and monetary policy has no impact on their value either.
Crypto-assets could now find their way into professional portfolios
So far, crypto assets have not had the opportunity to prove their worth as a hedging tool in a financial and economic crisis, as they have only been around for about ten years. That’s why this crisis is an opportunity for the crypto-market and investors: If crypto-assets prove to be safe havens in the coming months, they will become a key component of professional investment portfolios – which will have a tremendous impact on crypto prices and liquidity.
Today, however, all this is still a theory without much evidence. That’s why investors should not throw their cash at the asset class at this point, but rather build up their crypto-portfolios slowly and with a sensible approach to risk management. Panic – as well as euphoria – have never been good advisors.