The 'Black Swan' event that could wipe out your wealth and how to hedge against it
Stock market corrections are not the only thing that investors should be concerned about, said hedge fund manager Roy Niederhoffer, president of R. G. Niederhoffer Capital Management.
In fact, another event, although more unlikely, would be far more catastrophic, Niederhoffer told Michelle Makori, editor-in-chief of Kitco News.
“I believe the edge case downside is [that] inflation is so powerful and the Fed can’t do anything about it, because they can’t [raise interest rates] above 3%, 4%, because the government can’t fund itself at those levels. The stock market crashes, whatever it is, something happens, and it causes money printing to be the only solution. Inflation is the only thing that can solve the funding problem the government has and in that situation, if you’ve got any sort of cash asset, it’s going to be devalued not 30% or 50% like a stock market crash but 90%, 95%, 99% or more,” he said.
Niederhoffer’s fund has beaten both of the last two stock market crashes: the Dot Com bust of 2001 and the Great Financial Crisis of 2008, with his fund having rallied double digits in both scenarios while the markets tanked.
Although unlikely to happen, this “edge case” is still something that investors need to be prepared for, Niederhoffer said, noting several assets that could hedge against this worst-case scenario.
“It’s so easy to prepare for it: fixed supply assets, things that are inflation hedges like real estate. I think gold is pretty interesting because in a negative real rate world, gold with a 0% return is a pretty interesting asset. And of course, as we’ve talked about cryptocurrencies have a strong positive yield and can represent equity-like investments because the value that’s created by the network effect of billions of people using them could bring up the value by 10, 100, or even 1,000 times [returns] in many cases of the smaller coins,” he said.
On cryptocurrencies, Niederhoffer noted that Layer 2 protocols like Lightning Network are making Bitcoin more usable as a form of payment.
“Lightning Network represents a solution [to slow transaction times] where you literally can do it in a millionth of a second, and that is transformative. And, instead of costing as it does now, a few dollars to do a Bitcoin transaction, you’re talking about a few hundredths of a cent,” he said.
Not just do innovations on the blockchain like Lightning Network make it easier and cheaper to transact with Bitcoin, they also open Bitcoin’s global reach and maximizes its potential as a currency.
“Now, you open up micropayments to people in countries that have no access to banking, that have no access to transfers from country to country, that have no access to investing. Suddenly, you can use various small quantities to transact and invest, and it opens up banking to literally billions of people. It opens up a relatively stable investing environment for people that have currencies that are all over the place and also highly regulated,” he said.
The public good of billions of people having access to banking through Bitcoin far outweighs the costs from its energy consumption, Niederhoffer added.
While Ethereum may reach $10,000 a coin should Bitcoin climb to $100,000, Niederhoffer said that the “flippening”, the scenario in which Ethereum’s market cap surpasses that of Bitcoin’s, may not happen.
His comments come as Ethereum is set to undergo one of the most significant upgrades in its history, this year.
Dubbed “The Merge,” Ethereum is set to transition from a proof-of-work to a proof-of-stake model, thereby decreasing energy usage by 99.5%.
Outside of the biggest two cryptocurrencies, Bitcoin and Ethereum, investors would do well to buy an index of the ten next largest coins, instead of picking individual coins, Niederhoffer said.
For more information on Solana and altcoins, watch the video above.
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