Don’t fear the growl: Here’s how to invest in a bear market

Cryptocurrency incumbents, bitcoin and ethereum, and their smaller risk-on counterparts are swinging up and down regularly and wildly too. However, they have recently experienced a decline driven by a broader market sell-off. This is happening as investors react to rampant inflation worsened by a global supply-chain crisis. 

Fears of a recession loom and expectations of aggressive rate hikes from global central banks sit firm on the horizon. Last week, the US Fed raised its main interest rate by 75 basis points, the largest increase since 1994. Many respected analysts have ramped up their bearish bets on global growth. 

Bear markets can present a challenge to the most seasoned investors. Whether you have $1,000 in the market or $1m, losing money hurts. You may consider abandoning your investment plan as the declining market tests your patience.

Fear may also have you in a frenzy because investments designed for stability — like cryptocurrency protocols Terra USD, (UST) and more recently USDD — can go bankrupt. Terra Luna’s UST and TRON’s USDD may have seemed unstoppable but only projects that have real utility will weather the storm. Those with cracks will waterboard and may never recover. As was apparent when UST crashed and may yet become apparent if USDD follows in its footsteps. 

Ovex CEO Jon Ovadia says the following considerations should be front of mind in tumultuous times:

• When in doubt, “zoom out”. The average stock bear market lasts two years compared with cryptocurrencies’ 10 months (so far). Bull markets generally persist for three times longer. This is why it is important not to panic sell at a loss.
• Investors may be pulling money out of every market, but this could be a sign of true market capitulation. Sentiment is now so negative that we might be near the bottom of the market — something you might be tempted to capitalise on. As the Oracle of Omaha once said: “Be fearful when others are greedy, and greedy when others are fearful.”
• When things go pear-shaped, lessons are learnt and people build back harder. Bear markets are times when projects with little utility fail and those that can make a difference begin to shine.

Ovadia also recommends finding safety in stablecoins as a hedge against broader market capitulation and fiat wealth deterioration. 

If your fiat wealth is deteriorating, it is due to unprecedented quantitative easing as a result of reckless monetary policy which has resulted in rampant inflation that shows no signs of abating. Furthermore, the global economy is in disarray after a pandemic and now the Russia-Ukraine conflict. This means the average savings account rate of 4.88% in SA can barely keep up with inflation, which is over 5.8%.

Ovex was the first to offer a stablecoin savings account in SA, which has proven popular among the exchange’s investors looking for a low-risk/high-yield solution even in the uncertain environment. 

Are stablecoins a hedge against the current market rout?

Stablecoins are a type of cryptocurrency whose value is tied to an outside asset, such as the US dollar or gold, to stabilise the price.

During bearish markets, stablecoins offer investors a safer means to earn yield on their digital assets through lending or liquidity mining in decentralised finance, while mitigating the impact of the speculative price volatility inherent in the cryptocurrency.

This, coupled with the possibility for yields unheard of in traditional finance, has led to the stratospheric rise of stablecoins, with their circulation increasing by more than 1,000% in just under a year. 

Ovex offers US dollar stablecoin interest accounts, where depositors can earn 8.5% yield and hedge against not only a depressed rand, but also rampant inflation. This is made apparent in the following graphic that compares Ovex cryptocurrency interest account yields for its USD stablecoin holders when compared with other forms of traditional saving.

Stablecoin interest is paid out daily, whereas traditional finance’s repayments are monthly. The annual percentage rate of 8.5% can go as high as 14% in some cases and is dependent on the user’s deposit size. 

However, not all stablecoins are created equal. Some have proven not so stable and have upended the entire crypto market when they eventually crashed. These “not-so stablecoins” maintain their peg by using smart contracts that increase or decrease their supply based on their current market value. They are known as algorithmic stablecoins and are infamous for both their meteoric rise and subsequent fall from grace. 

The UST and USDD are two examples of algorithmic stablecoins; one which recently went to zero and the other which had its first real test recently. The catastrophic collapse of UST and its native token LUNA, saw over $40bn wiped from its ecosystem within two days. UST de-pegged from the US dollar and life savings were lost.

Ovadia says Ovex had no exposure to UST or LUNA, though it did offer clients the opportunity to purchase LUNA by listing it on the Ovex exchange as a speculative crypto asset.

“Ovex strives to list assets that have real promise and takes due diligence before deciding which projects to list. Picking the top is the job of traders — the users. Ovex is a platform builder. And as a builder, it always puts users first. This is one of the reasons Ovex charges zero trading fees and boasts the tightest spreads.” 

“A lot of people assume all stablecoins are at risk, which they aren’t.” 

Ovex-listed stablecoins are different in that they are fully fiat collateralised. Fiat-collateralised stablecoins are backed by sovereign currency such as the pound or the US dollar. This means that equivalent fiat money is held in reserves as collateral for every digital coin issued to you.

These stablecoins are responsible for the biggest flows in the cryptosphere and have bridged the gap between activities in the world of traditional finance and the world of crypto.

The role they play in this space is becoming increasingly prevalent and, in a recent report by JPMorgan, the share of market cap that stablecoins hold in the cryptosphere reached a new historical high. 

Ovadia says some hard lessons are being learnt in the cryptosphere as the aggressive sell-off weeds out weak players. “The first lesson is that not all stablecoins are the same. Ovex never offered clients exposure to UST because it didn’t like what it saw.

“Clients are offered exposure to other stablecoins that are reliably backed by hard assets, such as Tether, Binance USD, True USD and USD Coin. Clients can purchase these stablecoins and earn annual percentage yields of 8.5% to 14% and even higher in some cases, but these are not algorithmic stablecoins. These are stablecoins that are fully collateralised and audited.”

“The collapse of Terra/LUNA has had a negative effect on cryptos, but some good is coming out of it. Many of the less viable crypto projects are going to get weeded out, which is a good thing. More diligence will be undertaken by clients, particularly institutional clients, and stablecoins are already under a ferocious amount of scrutiny.

“The reason you invest in a stablecoin such as USDT or TUSD is because they offer sanctuary from the volatility of more speculative coins such as BTC and ETH. If a coin professes to be a stablecoin, then you want to make sure it is backed by collateral and not some fancy algorithm.”

“We are going to see a lot of good come out of this situation. Regulators are going to find themselves under pressure to provide ground rules for this new asset class and that is a good thing. Clients must demand greater accountability and transparency from cryptocurrency firms. Regulators must step in and lay down ground rules. These are all necessary obstacles that need to be cleared to securely transition to what will become the new normal.”

^{This article is for informational purposes only. Ovex doesn't give any trading, market, investment or financial advice in connection with the services, through any channel or means. Ovex is a juristic representative of Ovex FSP (Pty) Ltd, FSP number 50776. Ovex provides limited financial services on behalf of Ovex FSP (Pty) Ltd.} 

This article was paid for by Ovex.