Digital Assets: Which of Debt, Equity, or Digital is Best to Hold in a Recession?

April 28, 2020 | Digital Assets, Latest News, News

Digital assets are the most recession-proof, writes Jeff Dorman.

Whereas the value of stocks and bonds has declined due to the coronavirus pandemic, digital assets have not fundamentally lost value, says Jeff Dorman, chief investment officer at Arca. Further, investors are beginning to think more about the “return of capital” than “return on capital,”  writes Dorman in an article titled “Digital Assets Are More Recession-Proof Than You Might Think.” (CoinDesk)

How to avoid systemic risk

Dorman has many years of experience in trading and asset management. He has worked at Merrill Lynch (NYSE: BAC) and Citadel Securities.

Investors may have different motives for investing through a meltdown such as the pandemic. For example, they may choose equity (for long term returns) or bonds (for security and dependable cash flows). They might also hold gold (haven, inflation-proof), and cash (security and liquidity).

Why digital assets? Investors typically pick digital assets when they want to remove all kinds of systemic risks from their portfolio.

How digital assets insulate from the effects of the pandemic

Dorman points out that when investors buy digital assets such as tokens, they effectively buy a share in a service stream or product, or earn a discount, or in other ways have a claim on future revenue.

“The difficult conditions caused by global quarantine are simultaneously creating both demand shocks (lack of customers, job losses) and supply shocks (lack of production),” observes Dorman. “This is having disastrous effects on revenue and profits (destroying equity value), and asset coverage (destroying debt recovery), but to date has had little to no effect on customer loyalty (gift cards/airline miles) or future service claims (tokens).”

Contrast with traditional assets

Valuations of traditional assets such as stocks and bonds have to contend with a new normal. “The best combination for multiples has been strong growth and low inflation, but we are now entering a world of below-average growth and above-average inflation.”

“Equity value is declining as profits decline. Debt value is declining as asset value declines. Fiat currency value is being devalued by money printing. Commodity value is being harmed by a reduction in economic activity.”

Digital assets may be the only asset whose true value is unchanged in today’s troubled times.

Related Story:   Digital Assets: CZ Says QE Will Impact BTC Few Months Down the Line

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