December 6, 2022

1businessguide

1businessguide

DeFi, altcoins and Structured Products: Effectively Diversifying the Crypto portfolio

The cryptocurrency market this year confirms its reputation as one of the most volatile. The price of bitcoin BTC in early October is trading at $ 48,000, although in mid-April the quote of the main cryptocurrency exceeded $ 63500, and in July it fell below $ 30,000. Ethereum ETH, which cost less than $400 a year ago, broke through the $4,000 mark in May and fell below $2,000 in July, and on October 4 it is trading at $3,400. Most other digital assets demonstrate similar dynamics, since the price of altcoins traditionally follows the quotes of leading cryptocurrencies.

The situation is complicated by the fact that the reason for the strong movements of the crypto market is often the decisions of regulatory authorities, which in principle are not predictable. Thus, the main reasons for the summer collapse of quotations were restrictions imposed by the Chinese authorities on the mining and sale of cryptocurrencies, as well as the decision of the Financial Regulation and Supervision Authority of the United Kingdom to ban the world’s largest cryptocurrency exchange Binance from conducting regulated activities in the country.

Nevertheless, most crypto enthusiasts are confident that sooner or later cryptocurrencies will return to growth and continue to crowd fiat money. First of all, because of the falling confidence in fiat currencies due to the policy of the leading central banks, which turned on printing presses at full capacity in order to combat the crisis. In the course of anti-crisis measures, the United States alone poured about 11 trillion unsecured dollars into the economy, and now they are going to add another $3.5 trillion to this amount as part of the so-called infrastructure package. Thus, the total volume of cash injections will amount to $14.5 trillion — more than 65% of the country’s GDP.

According to many experts, this threatens serious financial shocks, up to the loss of the dollar’s status as the world’s main reserve currency. On July 14, Jeffrey Gundlach, a well-known American investor and founder of Doubleline Capital, said in an interview with CNBC that the dollar is doomed. “I don’t want to be too pessimistic, but I think the dollar is doomed,” he said. “The size of our deficit — both the trade deficit, which increased sharply after the pandemic, and the budget deficit, which completely goes beyond forecasts — suggest that in the medium term, the dollar will fall quite a lot.”

It is not surprising that more and more investors are beginning to seriously consider the possibility of transferring funds from dollar assets to cryptocurrencies and gold. However, many experts, including JP Morgan, consider cryptocurrencies to be an alternative not to the dollar, but just to gold.

Promising currencies

Another subject of heated expert discussions is which cryptocurrency is more promising. Here, the main struggle is between fans of bitcoin and ether (Ethereum), the number of fans of which is constantly growing. So, one of the world’s largest investment banks, Goldman Sachs (NYSE:GS), released a report stating that the highest potential in the cryptocurrency market today is not bitcoin, but ether, which “currently looks like a cryptocurrency with the highest real potential for use, since Ethereum is the most popular platform for application development smart contracts”. In addition, bitcoin is inferior to its competitor in terms of transaction speed and some other parameters. Therefore, according to Goldman Sachs, eventually Ethereum will outpace bitcoin and become the most popular cryptocurrency.

At the same time, investment bank analysts are confident that due to the high volatility of cryptocurrency quotes, none of them will be able to become more attractive to investors than gold in the near future. And the competition between digital money will further cool the enthusiasm of investors regarding their purchase, Goldman Sachs emphasizes.

The conclusion suggests itself: in the current situation on world markets, an ideal investment portfolio should include three main components: dollar assets, gold (as an option — in the form of shares of gold mining companies) and cryptocurrencies (both Bitcoin and Ethereum, and preferably some other “balancing” cryptocurrency). The specific shares of each component, of course, should be determined taking into account the riskiness of investments in each type of asset. But this does not mean that cryptocurrencies should account for the minimum part of the portfolio.

 

The fact is that significant progress has recently been made in hedging and reducing the risks of investing in digital assets. Firstly, the emergence and development of decentralized finance (DeFi) projects led to the entry into the market of a large number of stablecoins, essentially risk-free. Secondly, risk hedging products have appeared on the crypto market, which are already widely used in traditional financial markets. In particular, we are talking about the so-called structural deposits.

Structural products

A structural investment product is a kind of constructor of several financial instruments. Some of them provide the buyer with a fixed yield (in traditional markets, deposits and bonds usually perform this role), and the other part provides additional income due to some risky strategy. If expectations are not met and the risky asset becomes cheaper, then the loss will be covered by income, which will bring the bulk of the funds invested in deposits or bonds.

The profitability of such products depends on the degree of capital protection. For products with full protection, it is small, but the seller of the structural product will return you all the money invested if the investment idea does not come true. The profitability of products with conditional capital protection is higher, but the investor will receive the full amount of money invested only if the value of the asset changes in a predetermined range. In general, structural products always provide more income than conservative instruments, while the risks for them are much less than with direct stock speculation.

Gekkoin company became a pioneer in the introduction of structural products to the cryptocurrency market, which offered structural deposits for crypto investors who want to receive high returns characteristic of the crypto market, but at the same time minimize losses from falling quotations. Gekkoin deposits are opened in a stable currency (EURG) with a fixed rate of 1 EURG = 1 euro. EURG can be exchanged for euros at any time, that is, it is a risk-free asset.

The user can place his EURG in structural deposits linked to cryptocurrencies Bitcoin (BTC), Ethereum (ETH) or Monero (XMR) (in the future, the company promises to add new currencies to this list), or receive 3% of income on them. In the first case, the income will depend on the dynamics of the quotes of the chosen cryptocurrency: if its rate rises, the income will be more, if it remains the same or falls, it will be less. But all the risks are known in advance and depend only on the strategy chosen by the user.

There are three of them in total: safe, balanced and dynamic. By choosing a safe strategy, the investor is guaranteed to keep his capital regardless of changes in the cryptocurrency exchange rate, and will also receive additional income, even if the exchange rate has fallen. A balanced strategy provides income of up to 25% of the growth of the cryptocurrency exchange rate and the preservation of up to 100% of funds in case of its decline. A dynamic strategy will bring the investor maximum income (up to 50% of the increase in the value of the cryptocurrency), but if the rate drops, losses may amount to 10-30% of the initial investment.

The ability to choose the level of risk and the amount of profitability makes Gekkoin structural deposits an ideal tool for working in the ultra-volatile cryptocurrency market. After all, among other things, they allow the investor to form combined portfolios, including both cryptocurrency assets and traditional ones.