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Digital Assets Could Become A Safe Haven Against An Economic Downturn

Digital Assets Could Become A Safe Haven Against An Economic Downturn

Beginner
2022-12-22 | 5m

Digital assets might become an asset class that could prove resistant to a recession. This is an article that sheds light on how digital assets could be viewed.

One of the most subjective topics in investing is finding the best place to park or invest money. Whether you are an individual or a firm, the goal is the same. Every investor seeks a return on their investment (ROI). Most of the time, it depends on the risk appetite an investor has, as well as the time horizon within which they seek that anticipated ROI.

During economic drawdowns, most investors remain invested in stocks, confident that in the long term, the average return will outperform the day-to-day or even year-to-ye ar price fluctuations. Some prefer to move to bonds to keep their portfolio stable, while others prefer to move into cash or precious metals.

As you might have noticed, this all relates to well-established and more traditional markets. What about digital assets? Let's take a look at how digital assets could be perceived and why they could be a recession-proof asset class.

Defining Value Creation

The constellation of the world has changed significantly since the COVID-19 pandemic, with a large part of it still unclear. It is time to take a good look at how we can see a new capital structure arise, where value is created in three different ways.

  • Debt: Simply put, a claim on the asset that it draws value from.

  • Equity: Derives its value from a claim on assets minus liabilities or a claim on profits/cash flows

  • Digital Assets: Seen as a stake in upcoming services and consumer expansion

The way that projects in the digital asset world fund themselves, is mostly done through the creation and sale of a token. In doing so, the companies behind the tokens are effectively creating a liability as customers might want to redeem the token in the future. Tokens can be used in many ways, such as for the product itself or for discounts on services, for example.

What companies actually do by selling a token to an investor, is make a promise to deliver a service or product in the future, rather than generate profits or revenue. It is at this point where this approach is radically different from the average mindset of stock investors.

While investors in stocks often believe in a company and their vision, the ultimate goal is to extract profits if the company is profitable or has a solid cash flow. With digital assets, by issuing and holding a token instead, it creates an opportunity to use something in the future, and if that usability attracts more users, the value of the service and therefore, its token, will increase.

When defining a digital asset in this way, one could argue that these services don`t disappear during economic turmoil and do not lose value. Therefore, fundamentally, this asset class could be seen as recession-proof.

Rethinking Fundamentals

The preceding ten years may not have given much importance to fundamentals. In essence, all assets inflated as the economic bubble continued to come out of its 2008 crisis. However, there is a good chance they might matter much more in the future. During the COVID-19 pandemic, the world learned the hard way that the majority of companies with debt and equity rely on physical customers and locations, and thus on physical supply chains. As we are coming out of this pandemic and with a recession looming, revenue is starting to stagnate, and debts are becoming increasingly expensive, chipping away at cash flow and revenue. We are painfully reminded that equity and debt valuations rely on actual cash flows, rather than just agreements.

However, cryptocurrency businesses lack real stores, clients, and supply networks. The transition from physical to digital is about to advance to a new level—from exchanges to video games and decentralized finance—and will only quicken as the COVID-19 fallout plays out. The intrinsic worth of digital assets doesn't diminish or disappear during a recession, just like your AirMiles and gift cards don't.

These "tokens" are not claims on revenue, profit, or assets, but rather claims on future services. Because of this, we could someday be able to assert that "digital assets are recession-proof."

Of course, this does not mean that there will not be any price fluctuations. Regardless of the form of investment, all investments carry risk. Risk is risk, after all. However, digital assets are not fundamentally depreciating. When profits fall, equity value drops as well. As asse t prices decrease, so do debt values. Money printing lowers the value of fiat currency. The value of commodities decreases when economic participation levels fall. When seen from this angle, it is challenging to defend a decrease in value brought about by the service.

Conclusion

Digital assets are still in their infancy, and there are still many aspects that need consideration, such as trust, liability, and tokenomics. Even so, in a fundamental way, digital assets derive their value from something entirely different than traditional asset classes, and they might just revolutionize the way investors think about the creation of value. a way that is not necessarily dependent on how the global economy performs.

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Disclaimer: The opinions expressed in this article are for informational purposes only. This article does not constitute an endorsement of any of the products and services discussed or investment, financial, or trading advice. Qualified professionals should be consulted prior to making financial decisions.