In the past few years, the early adopters of cryptocurrency have ridden tremendous highs and sweeping lows in the value of their investments. Bitcoin (BTC) alone has experienced value swings from as low as $3,000 to a high of $17,000. It suffered a plunge through the crypto winter of 2018, only to regain strength and rise above $12,000 this past month only to tumble below $10,000 after a Congressional whipping of Facebook’s centralized power-grab, Libra.
While speculators in the crypto market may have the grit to take on the high risk associated with these coins, the rest of the public is not. In fact, these tremendous swings in value may be the largest barrier to mass adoption of digital coins and blockchain startups. For mainstream investors who do not have the capital to take on risky investments, cryptocurrencies, even the highly written about IEOs, as they stand today, are a high-risk proposition.
We all want to be the first investors in the next Ethereum
All investors like to benefit from early adopter upside but they are risk-averse, shying away from investments without traction. When starting a new revolutionary model, traction is not always possible without capital.
This is why downside protection is critical in the cryptocurrency market. Without some mechanism in place to protect the general public’s investment, digital coins will remain in a category of high-risk investments, which will limit the growth and adoption of cryptocurrency as a global, next-generation payment system.
One of the more effective ways of providing investors with downside protection is by creating a due date on the contract so the funds are automatically returned to the investor. (rather than the other way) This method creates trust as the investor knows they will get their money back on a certain date. Or, they can choose to cancel the contract and claim their investment, once they are confident in the project and the price. This creates confidence in being early adopters to the investment and allows the startup access to funds needed to scale and grow. Further, this protects against price dumps for users with protection would not give that up to sell for a discount.
How downside protection works in practice
For a good example of how this type of downside protection can work, let’s look at Jointer, an alternative to commercial real estate syndication. Our team prioritized downside protection for investors by creating a money-back insurance protocol. Jointer locks 90 percent of the investment along with the investor’s JNTR tokens in a smart contract. After one year, 90 percent of the investment automatically returns to the investor and the JNTR coins are returned to the company. At any time before the one-year contract ends, if the investor is satisfied with Jointer’s performance and the token’s market value, the investor has the option to cancel the money-back insurance and the tokens become the property of the investor. This is the first time ever investors have been able to invest in real estate with 90 per cent downside protection.
A money-back guarantee powered by a smart contract is strong downside protection in the rapidly expanding and evolving cryptocurrency market. This is especially relevant for new brands that are emerging in the crypto space that will soon be competing with mega-corporations that have recently jumped into the crypto universe by announcing their own digital coins. Price volatility will remain an issue in this marketplace unless downside protection mechanisms become a standard feature of digital coins. Trust is what digital currencies need today in order for mass adoption to take place. Downside protection is the answer.
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