After the global financial crisis of 2008, many financial companies and their clients recognized the importance of diversifying their asset allocation and portfolios. Portfolio managers were then tasked to add alternative investments or ‘safe-haven’ investments to their client’s asset allocation models.
Cryptocurrency and its increasing popularity over the years became a key consideration as an alternative investment opportunity.
Unfamiliar with Alternative Investments?
Alternative investments generally refer to non-correlated assets, meaning that their performance does not follow that of more traditional asset classes such as bonds. Because these assets differ from traditional investments, they are known to be ‘safer’ and a necessary precautionary measure against market downturns. Many financial advisors even consider it to be an effective way to balance risk in a portfolio. Most people consider a hedge fund to be the only alternative investment. This may be true for some investors, however, most hedge funds are only available to large investors and require large amounts of paperwork, high fees and a tax nightmare.
Should You Consider Alternative Investments in Your Portfolio?
Some financial advisors are of the opinion that alternative investments are a prudent aspect of asset allocation for retirement accounts. If an investor wants alternative investment to be made in the form of a cryptocurrency or related asset, they will need to be made aware that the investment may lack stability until the cryptocurrency market matures or stabilizes. Of course, the profitability of an investment does depend on how much is invested into the cryptocurrency and which cryptocurrency is chosen.
Traditional alternative investments include gold and hedge funds and they can provide good solid returns. However, there has been a decline in these assets of late, particularly gold. It has been reported that the average hedge fund returned 8.5% in 2017, this is low in comparison to the S&P 500’s return for the same investment. Many cryptocurrency enthusiasts believe that companies will slowly start pursuing Blockchain technology as an alternative investment option.
There are Cryptocurrencies Beyond Bitcoin
There are many other cryptocurrencies available on the market besides Bitcoin. Although Bitcoin has become a popular asset choice, aggressive investors may want to look at other alternatives. There are exchanges that buy and sell many of these cryptocurrencies on a daily basis. Ethereum, for example, has soared in price and it has been reported that XRP is being used in blockchain projects involving existing banks.
At this stage, there are not many products or tools available from traditional or online brokers that allow for seamless investments into the cryptocurrency markets. There are of course technological systems that allow retail and individual investors to enter these markets and trade through a series of algorithms that require little to no manual input from the user. For these tools, we suggest additional reading and research be done by the potential investor. The Bitcoin Profit review is a good example of a detailed analysis on how some of the popular crypto trading platforms really work.
Many potential investors are wary of Bitcoin since it has been rumoured to be a Ponzi scheme. However, it has been reported that companies like Overstock.com, Amazon, Target and Expedia are now accepting it as a form of currency, very similar to how credit cards are used online.
Blockchain technology is quite frankly a very complex infrastructure to understand, but there are many use-cases where successful tests are being run and processes are being improved. With that being said, we cannot solidify that cryptocurrency has explicitly been classified as an alternative investment as yet, but it is being heavily considered as such. It is also expected that many financial advisors may dismiss these alternative investments, because of the volatile nature of the cryptocurrency market, but it has been predicted that in the next year or two, cryptocurrency may just be what every investor beads to diversify their portfolio.