Over the past decade, alternative investments have become increasingly popular with investors looking to diversify their portfolios. In more recent years, cryptocurrencies have become a popular choice of alternative investment. These are digital currencies like Bitcoin (BTC), Ethereum (ETH), Ripple (XRP) and many more.
Investment in cryptocurrencies is rapidly growing. The famous Winklevoss twins of Facebook fame found success in their investments, becoming the first Bitcoin billionaires back in 2017. And in the recent past, billionaire and ex-hedge funder Michael Novogratz invested 30% of his fortune in cryptocurrencies.
Though cryptocurrencies have been suggested to be a new and popular form of investment, is it a good option for ambitious investors? In this article, we take a look at how alternative investments are compared to other types of investments and which crypto assets you should consider investing in.
Understanding alternative investments
Today, investors are showing interest in alternative assets beyond the usual stock and bond investments that do not fit within traditional portfolios. There are two types of alternative assets.
The first type is non-traditional assets, including private debt, private equity, hedge funds and forms of obscure precious metals, and other collectables such as artforms. The second one is exotic derivative products such as CDS or Credit Default Swaps and MBS or mortgage backed securities
Initially, alternative investments were available only to institutional and accredited investors with a certain amount of investable assets. But in recent years, new investment options like Mutual Funds, ETFs, and cryptocurrencies have made this asset class more accessible.
One of the main reasons why investors consider alternatives is diversification. This is because even though traditional assets like stocks and bonds often move in sync, the alternatives have their own performance cycles. Alternative investments make up an important element of a diversified portfolio.
How cryptocurrencies compare to traditional investments
A cryptocurrency is a digital currency and is not issued by the government, central banks, or other financial institutions. Crypto units are safeguarded by cryptography and cannot be easily counterfeited, nor can they be spent more than once. Encryption algorithms allow for secure payments online, which are called ‘tokens’ or ledger entries.
Many cryptocurrencies are decentralized networks based on blockchain technology, which is a distributed ledger spread over a wide network of computers.
Although the oldest and most popularly known cryptocurrency is Bitcoin, there are thousands of alternate cryptocurrencies. Some are similar to Bitcoin, while others are based on distinct technology and offer to differentiate risk and return characteristics.
Unlike traditional currencies, some cryptocurrencies limit how many coins can be minted. This, in turn, ensures that the crypto market cannot be flooded, creating inflationary pressure. As a result, cryptocurrencies can be used as a hedge against inflation.
Why cryptocurrencies are a good choice for alternative investments
Cryptocurrencies have become an increasingly popular choice of investment in recent times. Here are a few reasons that make cryptocurrency a good choice of investment for a diversification strategy.
Cryptocurrencies are becoming regulated
In recent years there has been strictness in regulation surrounding cryptocurrencies. In the near future, cryptocurrencies are likely to offer more stringent regulations than some other types of alternative investments.
Possibility of exchanging cryptocurrency for cash
The usual alternative investment options are usually illiquid. For example, most hedge funds require their investors to wait for a certain period before allowing them to cash out. On the other hand, cryptocurrencies are usually very liquid.t has become easier than ever for traders and investors to convert cryptocurrency to cash or spend it. Furthermore, when you want to sell cryptocurrency, it is easier to find a buyer.
Great way to diversify an investment portfolio
For an investment that earns consistent returns, it is important to have a diversified portfolio. With cryptocurrency as an alternative investment for diversification, your portfolio would not be highly vulnerable in times of financial crisis. This is because cryptocurrency will react to economic factors differently than other investments in the portfolio.
Reputable companies are jumping on the bandwagon
Blockchain technology has attracted the attention of big names like Google, Microsoft, Apple, and key finance institutions like JP Morgan and MasterCard. Considering that blockchain is the backbone of cryptocurrency, it would be a worthwhile investment as some other early-stage options like venture capital.
Top crypto assets that you should invest in Ether (ETH)
In April 2021, the Ethereum market cap grew to over $250 billion. A technology that powers this crypto asset is the decentralized finance (DeFi) applications. Well-known companies like JP Morgan, AWS (Amazon Web Service), Microsoft Azure, and more have taken a step towards the adoption of Ethereum. Ethereum-based applications are attracting many more industries and therefore, ETH is amongst the most sought-after cryptocurrency.
Polkadot Crypto brings together many specific blockchains to a unified network. Key finance institutions like Goldman Sachs, JPMorgan, ICAP, and UBS have bought the first ETP (Exchange-Traded Product) that offers exposure to Polkadot’s DOT cryptocurrency for clients. It is safe to say that with such future developments the DOT token could be a great long-term investment.
Cardano is among the top performing cryptocurrencies in the market. IOHK (the company behind Cardano), in April 2021, announced that Cardano’s blockchain technology would assist in revamping the education system in Ethiopia. Blockchain technology will therefore create a secure system for recording information related to 5 million students across 3500 schools. its use cases across education, retail, finance, and healthcare make it a good choice of investment.
In the recent past, DogeCoin gained a lot of popularity after Elon Musk tweeted about it to his 52 million followers. Companies have also taken a step towards the adoption of DogeCoin as a means of payment, including NBA’s Dallas Mavericks, Kessler Collection (luxury hotels), AirBaltic (Latvian Airlines), Suchlist, Strange Donuts, STEEM, Burger Bear, AllGamer, and more.
Binance Coin (BNB)
Binance Coin launched by Binance (the world’s largest cryptocurrency exchange) can be used to make payment of transaction fees on the Binance exchange or can also be used to trade for other cryptocurrencies. Many companies like QLink, Gifto, Propy, Pundi X, MoreCoin, TravelbyBit, etc., are moving towards the acceptance of BNB.
Cryptocurrencies can be a valuable asset to add to your alternative investment strategy. However, they should be carefully invested in. Crypto has made investing easily accessible to a wide range of people and has the potential to fill the gap between alternative as well as traditional investments. Their unparalleled performance to other asset classes can enhance potential returns while reducing overall portfolio risk.
Views expressed above are the author’s own.
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