Originally posted by Nasdaq on Jun 24, 2022.
By Alexander Tkachenko, Founder and CEO of VNX
Russia’s invasion of Ukraine and President Biden’s crypto regulation-focused executive order sent digital asset and stock prices into a nosedive. In the traditional market, the upheaval prompted a mass exodus of capital into various safe haven assets, such as gold and bonds.
Crypto holders, on the other hand, have fewer protections against global-market shockwaves. They also carry the added weight of enduring the cryptosphere’s long-running and notorious volatility. Typically crypto lovers thrive on the volatility, preferring the potential for insanely high returns over the security of gradual, modest gains. Nevertheless, desperate times prove such a safety net might be necessary, and frankly an infrastructure for one already exists. Those looking to protect their digital-asset holdings against the ongoing turmoil can take advantage of tokenized traditional assets to finally find the stability and certainty that is otherwise missing in the DeFi world.
Crypto’s changing tides
Until recently, investors viewed crypto as an asset class fluctuating independently from the stock market. That changed last year, when Bitcoin's moves began echoing those of Nasdaq, which might signal a change of tides in the crypto lands considering altcoins usually follow their leader.
The volatility of digital assets back when they ebbed and flowed independently from traditional stocks may have seemed problematic to traditional market analysts accustomed to traditional safety nets at the time. But crypto’s growing correlation with the stock market could potentially result in greater exposure to larger macroeconomic shocks compiled upon the digital market's own volatility.
As these market changes occur, experts suggest sticking to long-term investment strategies and avoiding knee-jerk reactions, like panic-selling as the market takes a tumble. These recommendations only further highlight the fact that crypto investors don’t have much to rely on for hedging against such shake-ups. Instead, they are advised to simply remain calm and hope their 50-percent loss recovers over the next months or years—or, in the case of some riskier cryptocurrencies, ever.
In crypto terms, the bigger “legacy” cryptocurrencies, such as bitcoin and ether, might seem stable compared to most altcoins. It’s important to zoom out, however, and remember that even bitcoin is super volatile, meaning some altcoins when weighed against more traditional assets take volatility to an entirely new level, really comparable to gambling. To lock in their gains, investors these days rely on stablecoins rather than bitcoin, offering some level of stability irrespective of market changes. But if assets like gold tend to perform well in times of turbulence, resulting in gains for their holders, the “stable” in “stablecoin” means its price won’t be on the rise either. No gains there, unless the investor wants to delve into staking or use them to buy the dip down the line.
A much-needed safety net
Tokenization of assets and commodities gives crypto holders the option to diversify their portfolios with a variety of more predictable assets, like a traditional investor would, and gain more confidence in their holdings. Something like tokenized silver, for example, could be good to have in your wallet if Bitcoin continues to mirror stocks, as silver is widely seen as a hedge against market slumps.
This also expands the possibilities for traditionally illiquid or non-fractionable assets, like real estate, that have been previously reserved for institutional investors. Splitting ownership of an asset into multiple digital tokens removes the costly barrier to entry. Someone who has dreamt of owning Manhattan real estate might not have the means to do so when they first arrive in the city. But with the ability to purchase a token representing partial ownership, their dreams can actually come true, with no barrier to entry. It’s a way for crypto investors to diversify their portfolio with more stable assets, while still doing so on the blockchain.
The options for tokenization do not stop with the physical assets that are commonly thought of as inflation hedges. Santander recently announced loans backed by tokenized soy and corn, with each token corresponding to a ton of grain that has been grown and verified by a proof of grain reserve (PoGR). This indicates there is still a vast array of unexplored possibilities for tokenized goods, in both the decentralized and traditional-finance worlds.
Tokenized protected assets can also be used for yield farming, enabling holders to earn a yield on the tokens themselves, beyond profiting from simply holding the asset itself. Tokenized assets are also a more reliable collateral for lending and stablecoin minting, with the potential to attract more conservative, long-term traditional investors to DeFi. These practical uses of tokenized assets greatly enrich DeFi and open up scenarios for those who might otherwise be repelled by the volatility of the industry.
As global markets shift and crypto falls in lockstep with stocks, it has never been a better time for digital asset holders to explore how to best protect their gains. Tokenizing real-world assets means investments are backed by something tangible, offering much-needed stability for investors who might be growing weary of crypto’s volatility.