The world is seeing an economic slowdown due to US-China trade war and also a shortage of funds or cash in the hands of the people.
Back in September 2019 the Federal reserve shot up the repo rate of banks from the usual 2% to 10% and injected USD 75 billion into the economy. This was done to boost the shortage of cash in the economy by literally printing more cash.
This has devalued the value of the currency over time since the 2008 crisis. This, in turn, kills the savings of the ordinary man over a long term period.
The Bitcoin supply is hard coded
Unlike central banks which can manipulate their currency by reducing or increasing the money supply, Bitcoin is hardcoded digitally and is limited to just 21 million coins. Their value changes as demand for its changes. Bitcoin supply can never be manipulated. This helps in making its monetary policy predictable.
A Yale study suggests – cryptocurrencies should be a part of one’s portfolio
- The opposers should also have at least 1 per cent of their investments in BTC(Bitcoins) for better diversification in today’s time.
- If you are a crypto-currency sceptic then even maintaining a 4 % BTC in the portfolio is a must.
- The optimal level is said to be 6% according to a study by Yale economist Aleh Tsyvinski and reported on by Bitcoinist.
The problem regarding Bitcoin
There is no regulation on bitcoins(only banned in certain countries) and also one has zero control over its price. This makes it a risky investment and also highly volatile.
Economic and non-economic events have heavily influenced the stock market indexes to overreact and they tend to hurt the majority of the small retail investors. The smart investor is one who believes in the financial system and is patient.
Example – The S&P 500 index in the US fell by more than 4% after the Pearl Harbor attack by the Japanese. This was followed by further reactions by the market and the index fell a further 14 % in the following months.
But the stock market gained all of it back and even more when the war ended in 1945. The market saw an average YoY(Year on Year) growth of 25%.
Learning from the past one needs to realise that events will come and go and the market will never stop to overreact. If one can hold on to their horses and be patient, they can reap the benefits. They can buy the assets or securities when the market reaches rock bottom, post such events.
By recognizing the fact that markets tend to overreact, a smart investor can purchase stocks and other assets at bargain prices.
Bet on a bear market
Betting on the hope that the markets will go bearish or see a downfall could be also a way out of a potential economic crisis.
Short Selling stocks, securities and index futures. In simple terms, this is borrowing one’s share to sell now and buy back later when the person expects the stock prices to fall.
Investing in options – buying a put option or selling a call option for an underlying asset or index. This is betting on a particular benchmark price which has an expiry date. One may gain if the price remains below or falls below that benchmark on the expiry date. It may otherwise lose only a comparatively smaller amount i.e. the price of the options.
The recent news on unemployment rates in the US, federal reserve rate cuts and economic reforms in countries like India has turned the tables for the stock market in the short run with the indexes reaching their all-time highs. But the actual GDP growth rate is low and consumption is down due to deflation in the world economy so the gains are more likely a short term view of the market.
Having a well-diversified portfolio, being patient and not overreacting like others who are invested in the stock market can help one survive an economic slowdown.
Disclaimer: Investing in cryptocurrencies and Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by WealthUp.co or the writer to invest in cryptocurrencies or ICOs. Since each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions. WealthUp.co makes no representations or warranties as to the accuracy or timeliness of the information contained herein.
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