Cryptocurrency as an Alternative Investment
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.
What’s the difference between traditional and alternative investments?
Investments are put into different categories. For example, stocks, bonds, and cash would all be categorized as traditional investments. This is where the money is invested in more “well-known” assets. Any investment that is not in cash, stocks or bonds would then be classed as non-correlated assets, also known as alternative investments.
Some of the main differences between traditional and alternative investments are liquidity and investment return.
A house invested in, for instance, would need to be sold before the owner could access the funds, this doesn’t mean that it isn’t worth investing in houses, but more the point that an alternative investment should only be made with funds that an investor can afford to wait longer to exchange the assets for cash.
Alternative investments tend to have a higher minimum investment requirement than traditional investments; however, they also have higher returns. Even when the market is on a low, then alternative investments will often manage to “hold their own” and be more or less unaffected compared to traditional investments. This was even the case throughout the financial crisis of 2008, traditional investments didn’t manage to pull through very well, but alternative investments did better.
This article focuses on cryptocurrency as an alternative investment option.
Why cryptocurrencies are a good choice of alternative investment
Even with a wide range of alternative investments, cryptocurrency has still become an increasingly popular choice of investment in recent times. Here are a few of the reasons that make cryptocurrency a good choice of investment, and why a growing number of people are choosing it as a diversification strategy.
- Cryptocurrencies are becoming more regulated
No longer is cryptocurrency seen as the “wild west”. In recent years there has been an increase in regulation surrounding cryptocurrencies, with many cryptocurrency related companies opting to regulated within their jurisdiction. In the near future, cryptocurrencies are likely to offer more stringent regulation than some other types of alternative investments.
- It’s now possible to exchange cryptocurrency for cash with ease
With financial services such as Wirex now available in several countries, it is now easier than ever to convert cryptocurrency to cash or spend it. Unlike most other alternative investments which are illiquid and it can take a long time to get access to the funds. For example, if a rare collector’s item had been invested in, it would likely take a long time to find a buyer. It can also be tricky to find out the value. When you want to sell cryptocurrency, its somewhat easier to find a buyer.
- A good way to diversify your investment portfolio
Having a diversified portfolio is important for successful investing. Without diversity throughout an investment portfolio, the risk will not be evened out and the portfolio would be vulnerable during times of financial crisis and economic events. By using cryptocurrency as an alternative investment to diversify, these issues could be avoided as cryptocurrency will react to economic factors differently than other investments in the portfolio.
- Get involved in a growing market
As the cryptocurrency market is maturing, the trading market is growing. Offering hedge options and trading flexibility makes cryptocurrency an appealing choice of alternative investment, as it offers some of the benefits that traditional investment provides.
- Reputable companies and organizations are jumping on the bandwagon
Blockchain is the technology behind cryptocurrencies and the large variety of uses across multiple industries including the financial sector. This has attracted the attention of big names such as Google, Microsoft, Apple and even key payments institutions such as JP Morgan and Mastercard. They simply don’t want to be left behind by innovation. Taking into consideration that blockchain is the backbone of cryptocurrency, it would likely be as worthwhile an investment as some other early stage options such as venture capital.
Important things to consider when investing in cryptocurrencies
Although cryptocurrency investment can be an effective non-correlated asset to diversify your portfolio, you should only invest what you can afford to lose, just like any other alternative investment option. We believe cryptocurrency has a strong future because of the characteristics of cryptocurrencies such as Bitcoin: Increasing in adoption and use, limited supply, and a high stock to flow ratio similar to gold. Research demonstrates that a small percentage of your portfolio in Bitcoin reduces volatility and increases return.
Although cryptocurrencies could be seen as a high-risk investment because it is an alternative investment, like other alternative investments, they also offer a higher return. They make a great option for a long-term investment due to the fact that they are likely to remain strong and pull through any financial crisis. It is also easier to both invest in and retrieve the funds than with other alternative investment types. Overall, cryptocurrencies should be carefully invested in, but can provide the best of both worlds in terms of traditional and alternative investment. Crypto has made investing accessible to a broader range of people and has the potential to bridge the gap between alternative and traditional investment.