Central banks and key leaders are sounding more and more alarms about rising inflation, causing spirals of doubt around the world. Most recently, U.S. Treasury Secretary Janet Yellen called on Congress to raise or suspend the U.S. debt ceiling, saying the government will have no more money to pay its bills by October. .
What seems more like a horror movie from the future is just the news in global financial publications right now. Yellen said the overwhelming consensus among economists and Treasury officials on both sides is that failure to raise the debt limit would produce widespread economic catastrophe, “potentially precipitating historic financial crises, massive sales of stocks and a recession, creating severe market volatility “.
The value of the US dollar will continue to decline in the future, and individuals need simple rather than complex tools more than ever to protect themselves from financial risk and diversify their portfolios.
Risky events have also become more common in global finance, with margin calls and liquidation issues now impacting both traditional finance and decentralized finance (DeFi) as they become more and more interconnected. . The ongoing Evergrande real estate crisis is further evidence that poor decision-making from a wide variety of markets will impact markets we thought were not connected, such as crypto.
Overall confidence in global finance has declined and understanding of how money works has deteriorated over time. Historically, bad decisions by policymakers have left more than 31% of the world’s adult population without a bank.
However, more and more countries are starting to explore different currencies as decentralized finance becomes more widely adopted. Crypto, which is inherently complex, is finally moving to the next iteration, seeing the rise in the development of tools and infrastructure that help newcomers navigate the risks and uncertainties of the booming but nascent financial movement. . It is up to the leaders of this space to help newcomers reduce their portfolio risks.
Related: Massive adoption of blockchain technology is possible, and education is key
Democratizing finance means lowering barriers to entry into risk management
Unfortunately, cryptocurrencies are inherently volatile. Hundred billion dollar market write-offs are still not unusual, with market capitalization recently hitting a $ 2,000 billion hit. Speculation, announcements and other events can easily sway investor confidence or a lack of confidence, as evidenced by recent events with the SEC and El Salvador crackdown in recent weeks. The SEC has been forced to tell investors to beware of cryptocurrency volatility and fraud as regulators step up crypto scrutiny.
Even Bitcoin (BTC), although relatively established as a cryptocurrency, remains at the mercy of tweets from celebrities like Elon Musk, whose actions with Tesla and tweets have driven prices down.
The market is relatively new to widespread adoption, and cryptocurrency assets tend to be concentrated among an abundance of whales. The actions of the big players strongly influence the price movements of cryptocurrencies, and new investors with less holding power are more likely to be caught off guard due to the complex nature of the DeFi and cryptocurrency market. .
Related: Institutional investors won’t embrace mainstream Bitcoin – you will
In this phase of vulnerability to whale actions, it is essential to understand how to control risk levels to encourage mass adoption, especially for new investors with less capital.
Cryptocurrencies have brought a democratization of access to wealth: 24 hours a day, anyone can access financial assets at the click of a button, with assets that pay a higher return than any fiat asset. held by a traditional bank. The removal of bureaucracies and middlemen has allowed greater opportunities for wealth creation, providing the assets and tools that can be understood.
But, for now, crypto simply reflects the wealth gap in mainstream finance, as those fluent in crypto languages ââunderstand how to be strategic. Ultra-rich crypto holders can afford to pay investment funds and brokers who have access to traditional back-to-back investment tools such as providing trading, custody and funding services to ensure their investments are properly balanced against the market at all times.
What is portfolio rebalancing?
Portfolio rebalancing is the process of realigning the weighting of an asset portfolio, involving the buying or selling of assets periodically to maintain a targeted level of asset allocation and risk. It can help investors manage downside risk while participating in most of the upside.
This process is essential during times of financial instability to help individuals mitigate the risk of loss and depreciation of their digital assets. Many investors, especially those under 40, don’t know how, nor have the time, to pay attention and manage risk in their portfolios or understand why rebalancing is essential for stability and generation. of wealth.
Rebalancing not only prevents overexposure, but helps instill good trading habits by strengthening client discipline to stick to a long-term financial plan that allows investors – young, old, new and experienced – to watch. regularly potential market movements that could cause losses.
Related: Diversification of crypto assets against all eggs in one basket
Most rebalancing strategies are period-based (i.e. annually, quarterly, monthly, etc.) but can also be reactionary i.e. based on permitted percentage compositions of assets, which is more expensive. For example, if the initial target asset allocation was 50/50 between assets A and B and asset A performed well, this could have increased the portfolio weight to 70%.
This means that an investor can sell part of A to buy more of B in order to get back to the initial target allocation of 50/50. Although the allocation does not need to be even between assets, rebalancing is more effective with a good mix of volatile and non-volatile stocks in the portfolio., because it protects investors from overexposure to unwanted risks.
In traditional finance, rebalancing is either done manually by the investor by following spreadsheets and buying / selling through exchanges / brokers or by investing in funds managed by portfolio managers. This process is inconvenient and out of the budget for retail investors, and should not be limited to those who have the time and money to afford it. There are certainly new technological advancements in TradFi through the use of apps to automatically track, analyze and rebalance portfolios used by apps like Sigfig, Personal Capital or Motley Fool Advisor.
Rebalancing in DeFi may be more beneficial for the investor as the process can be automated and does not require you to monitor your portfolio and constantly cross-check the value of your assets against the stock markets. People can go to work, sleep, vacation, as automated smart contracts spread their gains over their assets while allowing the portfolio to maintain a positive net gain.
Gone are the days of waiting for your middleman to do it for you when he starts his nine-to-five job.
We have the ability to bring better rebalancing tools to the masses via DeFi
As the value of our dollar continues to decline, people need simple rather than complex tools more than ever to protect themselves from financial risk and diversify their portfolios. Now is the perfect opportunity to bring decentralized rebalancing tools to the masses by allowing clients and investors to access democratized wealth in DeFi that is not at the mercy of a centralized bank or bank. a government in the throes of a recession, and facilitating their financial gains and security. for the future.
Decentralized finance has great potential for wealth. Millennials Using Crypto To Buy Nearly $ 1 Million Homes, Saying Crypto Is The Secret To Homeownership As Confidence In Traditional Savings Fades, Finance World Without Bureaucracy provides opportunities for anyone with the internet to build wealth or help accelerate financial inclusion, especially for the unbanked.
Related: Adoption of Stablecoin and the future of financial inclusion
But, it’s usually the pundits, coders, trading experts, and pros who survive the volatility of the secondary market. It is normal users, newcomers and those not privileged to understand the deep complexities of this space who end up losing the most money in these times of financial instability.
Twelve years after the generation of the first Bitcoin, you would think we would have simplified the user experience of blockchain-based finance. We’re getting there, but we still have time. DeFi is still too complex for newcomers, slowing the adoption of the space. People shouldn’t have to take classes to figure out how to develop decentralized trading strategies or be forced to manually rebalance a portfolio of multiple tokens in seemingly endless stages, as well as trade them separately on a decentralized exchange, or DEX. .
Users should be able to decide how to rebalance their portfolio with just a few clicks. Ideally, these settings can be freely customized by users to suit their risk profiles. The DeFi industry is growing rapidly and it is time for portfolio risk management to follow suit.
This article does not contain any investment advice or recommendations. Every investment and trading move involves risk, and readers should do their own research before making a decision.
The views, thoughts and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Hisham Khan is the founder and CEO of Aldrin. Khan comes from a decade of experience in managing and building robust and innovative financial and enterprise technologies. With a long career at Bloomberg, Hisham has worked as a project manager with some of the best engineers in the world. It was here that he discovered the transformative impact of cryptocurrencies and has since left Bloomberg to create comprehensive trading tools through Aldrin. Designed to be a trader’s all-inclusive digital trading companion, its mission is to make advanced crypto trading and strategy development accessible to everyone.