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Hedging Your Bets in a Modern Investment Market – Nasdaq


Diversity is the key to success for every investor, says Greg Forst, Director of Marketing at Factom Protocol

The importance of diverse investing is literally proverbial: How old were you when you first heard, “Don’t put all your eggs in one basket”? Correct diversification is relatively simple when it’s a question of eggs and baskets, but in the global financial world diversification is exponentially more complex. What types of currencies, bonds, stocks, commodities, and other instruments should a savvy investor hold in a time of political, economic, and environmental uncertainty? And how can a single investor or entity hold an appropriately diverse portfolio without vanishing under a sea of paperwork or disappearing beneath a pile of tax documents? Creating a personal hedge has long been the domain of the well-connected few. It’s now an option for anyone.

A European investor seeking to invest in American dollars or the British pound might find that portfolio diversity enacts a high price in time and effort: holding and trading involves connecting with another party or with an exchange, smaller trades may incur overlarge commission fees that make the investment a losing proposition, etc. The net result? Larger traders can operate at scale, while smaller traders look on in envy and frustration. 

The internet has made the world smaller and the value of diversified investments more immediately apparent; now, it has also made diversification simple. In cryptocurrency, there has been a rush to create “stablecoins” that reflect the moment-by-moment values of traditional assets without themselves being those assets. The most famous stablecoin is Facebook’s Libra, which has been under the spotlight since it was first announced in June 2019. Other major stablecoins that have established footholds in the market include Dai (DAI), Tether (USDT), and Paxos (PAX). However, the concept of a proof-of-work mined stablecoin network represents a true paradigm shift for the stablecoin space. 

One such program is PegNet, a decentralized, non-custodial, and fully auditable network of tokens tied to different markets, which lets investors hold tokens pegged to 32 different assets. (Disclaimer: Factom Protocol launched PegNet). A suite of traditional pegged currency stablecoins are available such as the U.S. dollar, the Euro, the Swiss franc, the Japanese yen, the Indian Rupee, the Singapore dollar, the Philippine Peso, and the Brazilian real. Additionally, the flexibility of the peg model means that any number of commodities or financial instruments can be replicated. Currently, commodities such as gold and silver are also pegged to their real-world price. Over a dozen cryptocurrencies including bitcoin, Ethereum, Cardano, and Dash have established pegs; more could be added if there was sufficient demand. 

If all pegged currencies, cryptocurrencies, instruments, and commodities run on a single distributed ledger network, many of the frustrations attendant in the traditional financial world vanish. For example, an investor’s holdings are held in a single wallet, so there is no need for a diversified investor to manage multiple brokerage accounts. Traders may look to leave a blockchain’s ecosystem; some chains may stand alone, while others interact with larger and exceedingly liquid chains like Ethereum.

Holding investments is one thing; acquiring or exchanging them is often another. One major benefit of the stablecoin model is that transaction costs are so low as to be negligible. Each transaction, no matter how large or small it may be, costs roughly a tenth of a cent, which means that microtransactions and frequent trading are real possibilities. The middlemen and fees that blight so much of traditional finance are put to an end. 

Wise diversification of assets remains a challenge: traders must analyze data, consider prospects and probabilities, and understand phenomenally complicated aspects of international economics. These difficulties remain, but networks such as PegNet are lowering the barriers of access. High fees, multiple brokerage accounts, and lack of access to specific investment instruments are a thing of the past.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



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