With big advertisements for cryptocurrencies during Super Bowl LVI, cryptocurrencies must be mainstream now, right? Well, at the risk of sounding like the “boring investor” that I discussed in my blog posted on 5/18/22, I would say, probably not.
Cryptocurrencies fall into a category called “alternative investments”. They are not like the traditional investments that have been around for years which trade on public stock or bond exchanges. Some would argue that cypto is not an investment at all because it is a form of speculation with no government backing.
Alternative investments are usually off-beat assets such as real estate, commodities (including oil, gold, lumber, crops, pork bellies, etc.), currencies (including cryptocurrencies), private equity, and specialized investment products that may involve leverage (borrowing in hopes of magnifying returns) or futures and options strategies.
The attraction of alternative investments is that they are believed to perform differently than mainstream investments such as stocks or bonds. In other words, they have the potential to be good diversifiers because they don’t move together with stocks or bonds. When stocks are performing poorly, alternative investments may be holding steady or increasing in value.
Big gains, big losses
Another attraction is that they can often produce gigantic returns in a short period of time—as well as equally gigantic losses. We often hear about these types of investments after they have produced enormous returns. Then, we may feel like we have missed out on a great investment opportunity. So, when an investment rises and falls dramatically, it typically has more risk because you could lose money as quickly as you may have earned it.
Can I sell it now?
Alternatives also tend to be less liquid than most other investments. Many, such as real estate or private equity investments, may require a “lock-up” period. In other words, you cannot log on to your brokerage account and sell it instantly with a few keystrokes. That lack of liquidity can be a problem if you need access to your investment on short notice.
Back to cryptocurrencies
In our opinion it is still early days for crypto. While several large investment firms have begun offering it as an investment option and some retailers are now accepting it for the purchase of their products, it is far from mainstream.
In addition, I’ve never had a particularly high opinion of currencies as an investment. They can be volatile, don’t pay dividends, and often move in the opposite direction expected by professionals.
I am taking my queue from an young alumni event I attended many years ago where the head international currency trader for Bank of Boston talked about what it was like trading currencies all day long. He described a casino environment where traders could win or lose a million dollars or more for the bank in a single day. His talk seemed more like an advertisement to get a job on the teller line rather than the high stakes (and high stress) of working in the currency trading department. At the time, it all sounded pretty exciting to me, but I’ve never forgotten that presentation.
While I do think that cryptocurrencies will eventually find their place as a new form of currency, in my opinion currencies are not an investment in the traditional sense. So, for most investors it should not be a significant part of their portfolio.
Looking for opportunities in a down market
With US stock indices down significantly so far in 2022, many investors are asking where else they can go to find good opportunities. It’s not easy—it’s never easy. That said, we do believe that in certain situations with certain qualified investors, alternatives can make a meaningful contribution to an investment portfolio.
Do you want to have a conversation about alternative investments? Give us call. We’re here to help. You can schedule a quick call with me by clicking HERE.
Lyman H. Jackson
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Alternative investments involve special risks and may only be available to investors who meet certain minimum income, net worth and/or investment experience requirements. You may lose money. Diversification does not ensure a profit or guarantee against loss.
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. FPS provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client after entering into an advisory relationship. Information herein includes opinions and forward-looking statements that may not come to pass. Information is derived from sources believed to be reliable. Information is at a point in time and subject to change without notice. Such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.