With the “cash is trash” mantra finding its way into the mainstream media in 2022, investors have to make some tough choices. Hiding out in an all-cash position isn’t a viable option with the dollar deteriorating so quickly now, but with growth assets getting hammered, safe havens are few and far between.
At this point, the U.S. doesn’t get to choose between inflation and recession anymore. It will be a combination of both, and the only question is how much of each we’ll get and how long they will persist.
According to a recent Deutsche Bank survey of more than 560 investors, 69% of the respondents said they believed the only way to get surging inflation under control is via recession. Moreover, 61% said they believe the Federal Reserve will try to get inflation back to target even at the risk of an economic slowdown – and they’re probably right about that.
Since the Fed won’t provide a backstop for retail investors, so-called “alternative” investments are becoming increasingly mainstream. Among the most promising and reliable inflation-resistant assets are gold and silver, along with other minerals that will be in high demand over the coming years.
To diversify your portfolio even further, you might consider some mineral-focused holdings along with a carefully selected basket of cryptocurrencies. Be aware, though, that cryptocurrencies are volatile, so all position sizes should be small.
Adjacent to cryptocurrency and the blockchain is the world of non-fungible tokens or NFT’s, where virtual works of art can fetch high prices. The allure of quick gains never really goes away, and it might be tempting to jump into NFT’s as they’ve gained attention in the financial press lately.
As you can see in the chart above, however, the trading volume for art/collectible NFT’s is falling off a cliff. Even the marquee NFT collection known as Bored Ape Yacht Club has apparently lost their luster among the trading community.
And when trading volume declines sharply, this is often accompanied by severe price reductions. A recent report revealed that the Bored Ape Yacht Club NFT collection lost more than 60% of its value in just a month.
Some folks might blame the price crash in Ethereum, since most NFT’s are based on Ethereum and that token recently lost 38% of its value in a month. During that same time period, Bitcoin declined 25%, demonstrating its comparative resilience.
What this shows is that when the markets are in a decidedly risk-off mood, the riskiest assets can really get crushed. We’re witnessing a similar phenomenon in the stock market as the speculative high flyers of 2021’s “meme stock” rally are getting hammered in 2022.
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Let’s not miss another crucial lesson, though: over-leveraging yourself on what I call “fad assets” can be bad for your financial health in the long run. Jumping on the latest, hottest trend might feel exhilarating in the moment, but it’s not necessarily the most viable investment strategy.
The rapid decline in the value of the Bored Ape Yacht Club NFT collection can’t only be attributed to Ethereum’s price pullback. Sooner or later, the allure of any trendy virtual artwork/collectible is bound to wear off. This is much easier to see in hindsight than when the hype is at its peak.
Meanwhile, Bitcoin is only growing stronger against other cryptocurrencies. This chart shows that Bitcoin’s market cap is increasing in comparison to the combined market cap of all other cryptos, which suggests that big-money whales are rebalancing from altcoins into Bitcoin.
Thus, when inflation and recession loom and the markets are in defensive mode, relative safety becomes a priority. In the world of cryptocurrency, Bitcoin is perceived as the safest choice as it’s been around the longest, is the most established, and has the biggest market cap.
The collapse of the TerraUSD/LUNA stablecoin demonstrated that any cryptocurrency, including a seemingly “stable” one, can actually turn out to be utterly unstable. To hedge against dollar inflation and get some cryptocurrency exposure, investing in Bitcoin appears to be the most sensible choice right now, while Ethereum could also be a worthy investment.
NFT collections like Bored Ape Yacht Club are fun to watch from the sidelines, but it’s wise to think long and hard before jumping into the trade with your hard-earned capital. In the end, some investors will likely wish that they had never been lured into “fad assets” as sensible holdings tend to outperform eventually.
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