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At its zenith in early January 2018, the total market cap for all cryptocurrencies stood at over $800 billion, according to data gathered by CoinMarketCap. This was certainly quite the feat, as the total market cap stood at around $18 billion just a year earlier. Though cryptocurrencies are well off their year to date highs, the aggregate market cap has yet to fall below the $200 billion mark. While hundreds of billions may seem impressive for crypto markets, compared to traditional financial markets, 800 billion is chump change.
A January 2018 Barron’s report noted that the U.S. stock market alone is worth $30 trillion. Throw in the $100 trillion plus global bond market and the rest of the world’s stocks, and the global stock-bond universe is over 200 times larger than the crypto universe. On the one hand, this is to be expected. Crypto markets are much newer than stocks and bonds, and have come an incredibly long way since bitcoin’s inception in 2009. On the other hand, these statistics are a humbling reminder that crypto markets have quite a ways to go.
Are Cryptocurrencies Even that Popular?
In America, for example, only 8 percent of the population owns any cryptocurrencies at all. According to one study, one of the biggest reasons that American investors avoided crypto was because it was perceived as “too high risk”. A whopping 35 percent of survey respondents believe that cryptocurrencies are too volatile and risky to stomach, and are therefore placing their money elsewhere. At the height of the December 2017 crypto mania, Business Insider published an article with some scathing remarks from a Japanese bank. Vishnu Varathan, head of Economics and Strategy at Mizuho, bluntly stated “Compelling returns of Bitcoin are distinctly less so once the returns are risk-adjusted.” Long story short, there is an increasing need for other, more conservative crypto options, ones that can provide returns worth the (hopefully lower) risk. If the crypto industry can offer low volatile investment vehicles, it’s possible that it could gain some ground on traditional finance assets.
What are the Conservative Crypto Investment Options?
Truth be told, there aren’t a lot of conservative crypto options out there. Part of this is because cryptocurrencies are inherently a risk asset, much like stocks or high yield bonds. Oftentimes, they aren’t tied to a company’s earnings or cash flows, making them even more difficult to valuate. One novel solution is being offered by the Elephant platform, which will tokenize private equity markets. In essence, their platform creates a marketplace and tokenization protocol whereby private company employees can tokenize and then sell their equity shares in a secondary market. Thus if an employee is leaving his or her job or the company is in the pre-IPO stage, they can sell their shares in the form of an equity-backed digital asset instead of liquidating them or following the IPO pricing.
For private company employees, the Elephant platform gives them access to the liquidity they need to divest any holdings. It can also increase their market value by anywhere from 10-40 percent. For crypto investors, the platform creates an equity-backed digital token that is tied directly to private company P&Ls and balance sheets. As such, equity-backed tokens are less volatile than traditional cryptocurrencies and can provide investment security. The platform won’t be the final arbiter of conservative crypto investing, but it is certainly a welcome step in the right direction.
Another conservative crypto investment option is mining (in the case of Proof-of-Work protocols) or minting (in the case of Proof-of-Stake protocols). Rather than actively trade cryptocurrencies, a mining / minting strategy involves using a network’s coin-creation protocol to generate new coins. These coins are either held or sold immediately in the open market. In this case, miner profits are calculated by determining the difference between the value of the coins they created and the cost for the mining setup. Mining is a conservative investment option in that it doesn’t rely on market timing, and any coins that are generated can be immediately sold to avoid a rapid drop in price. Note however than not all major coins are profitable to mine, according to some estimates.
Finally, conservative crypto investors can turn to derivatives like options and futures to hedge their portfolio holdings. When used properly–and it takes some expertise–volatility can be minimized by properly protecting a portfolio with other financial instruments. Deribit offers bitcoin options and futures, while traditionally-minded investors can trade futures through the CME Group. This option, though potentially more conservative than typical day trading, requires a lot of expertise–caution is required.
