Over the last decade, alternative investments have increased in both popularity and accessibility as individual, retail and institutional investors seek to diversify their portfolios. According to Harvard Business School, this is primarily due to the global financial crisis, which saw the value of traditional investments plummet.
In that same period of time, digital assets like cryptocurrencies and NFTs have cemented themselves in the public zeitgeist, becoming a popular choice for alternative investments. While many investors initially scoffed at these kinds of assets, their meteoric rise has quickly shifted public opinion. But what are cryptocurrencies and NFTs, and are they actually a worthwhile investment?
Below, we share what you and your clients need to know. Crypto aligns with the TIFIN Personality “Viewpoints” financial personality type. To learn more about uncovering what’s most compelling to your clients in order to hyper-personalize their investments, book a short demo.
Since cryptocurrency and NFTs are not a type of stock, bond or cash, they are considered alternative investments. That also means that they are not currently regulated by the United States Securities and Exchange Commission (SEC); however, many cryptocurrencies may be regulated by the SEC in the future.
Cryptocurrency is a type of digital currency that does not have a central issuing or regulating authority behind it. Instead, it uses a decentralized system called the blockchain to record transactions in “blocks” of unalterable data that are “chained” together in a ledger. While anyone can view these records, cryptography helps ensure that the transactions are secure.
Certain cryptocurrencies are obtained through a process called mining, wherein a computer solves complex mathematical equations to produce coins.
What Is an NFT?
NFTs are a technology that allows individuals to register the ownership of a digital item on a blockchain. For example, if you purchase an NFT of a work of digital art, you are now considered the owner of the original file. While some people purchase NFTs for enjoyment, many others hope to sell them for future profit. But what gives NFTs value?
NFTs are considered non-fungible because, while they can be sold or traded, their value does not remain consistent. That is because the value of any NFT is entirely determined by what the market will bear, according to NerdWallet. Some NFTs carry additional value like perks promised by the seller. These can include anything from rewards in a video game to a free conference pass.
Cryptos and NFTs as Alternative Investments
Here are a few reasons why people are investing in cryptocurrencies and NFTs to diversify their investment strategies:
- They are increasingly regulated. According to FiCAS, governments and crypto companies alike are imposing more stringent rules around cryptocurrencies. These regulations are only going to increase in the future as cryptocurrencies and NFTs grow in popularity.
- Large market cap cryptocurrencies are often simple to liquidate. Unlike many other alternative investments, converting cryptocurrencies into cash is relatively straightforward. The high demand for these coins means that you will have an easier time finding a buyer. NFTs, however, can be more difficult to sell depending on the underlying asset and its sustained popularity.
- There may be improved security. One of the primary benefits of NFTs and cryptocurrency is its security, says Analytics Insight. The decentralized system makes it nearly impossible for any one entity to take control, and the cryptography makes these assets much more difficult to hack than traditional investments. Having said that, many of the side chains and decentralized finance (DeFi) platforms have had arguably more hacks than traditional investments, so investors should do their homework.
- They are easily accessible. Alternative investments were traditionally restricted to the wealthy, as they have a high upfront cost and are often only sold through accredited investors. However, anyone with an internet connection can buy and sell cryptocurrencies and NFTs, making them highly accessible.
- They diversify your portfolio. As Times of India points out, cryptocurrencies and NFTs react to economic factors differently than other assets. This means that they can cushion the financial impacts of crises and economic downturns. Crypto exposure, or adding crypto assets to your investment portfolio, is an excellent way to diversify your finances and insulate yourself during times of hardship.
While investing in cryptocurrencies and NFTs may be a good way to diversify your portfolio, it is critical to note that, just like any other option, you should only invest what you are willing to lose.
Cote, Catherine. “The Future of the Alternative Investments Industry.” Harvard Business School, https://online.hbs.edu/blog/post/alternative-investment-industry
Chen, James. “Alternative Investment.” Investopedia, 26 Feb. 2022, https://www.investopedia.com/terms/a/alternative_investment.asp#:~:text=Conventional%20categories%20include%20stocks%2C%20bonds,classified%20as%20an%20alternative%20investment
Rosen, Andy. “What is a Non-Fungible Token (NFT)?” Nerd Wallet, 3 March 2022, https://www.nerdwallet.com/article/investing/nfts#:~:text=An%20NFT%20%E2%80%94%20short%20for%20non,file%20of%20a%20music%20recording
“Cryptocurrency as an Alternative Investment.” FICAS, https://ficas.com/blog/cryptocurrency-as-an-alternative-investment/
“What Makes Cryptocurrencies a Great Investment?” Analytics Insight, 13 April 2022, https://www.analyticsinsight.net/what-makes-cryptocurrencies-a-great-investment-option/
Patel, Edul. “Looking at Cryptocurrency as an alternative investment avenue? Find the best asset for you.” Times of India 2 July 2022, https://timesofindia.indiatimes.com/blogs/voices/looking-at-cryptocurrency-as-an-alternative-investment-avenue-find-out-the-best-asset-for-you/