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How Much Crypto Should You Have in Your Investment Portfolio?

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How Much Crypto Should You Have in Your Investment Portfolio?


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This article/post contains references to products or services from one or more of our advertisers or partners. We may receive compensation when you click on links to those products or services

Bitcoin is exploding in value, but it’s still crazy volatile with a very uncertain future. In fact, the value of bitcoin has gone from roughly $10,000 to $30,000 in the last year. 

But there’s a lot of wild fluctuations, with prices jumping all over the place. So where’s the sweet spot? What percentage of your portfolio should you dedicate to cryptocurrency? 

To find out, I spoke with two finance professionals with Atlanta’s CPC Advisors and Raymond James Financial Services. Varun Marneni, CFP® helps clients navigate the complexities of their finances, and David Hunter, CFA is the firm’s Director of Research and Investments. Naturally, both of them have fielded lots of questions about crypto.

What is Cryptocurrency? A Quick Recap

A cryptocurrency, or “crypto,” is a form of digital currency. The original idea, outlined by creator Satoshi Nakamoto in his 2008 paper “Bitcoin: A Peer-to-Peer Electronic Cash System”, was to give Internet users a currency that they could safely exchange without the need for a third-party, like a bank or PayPal. 

Bitcoin (and other cryptocurrencies) run entirely through the blockchain. A blockchain is like a giant virtual ledger that records cryptocurrency transactions. If I sell you bitcoin, that creates part of a “block” containing a detailed record of our transaction. Blocks of cryptocurrency transactions are linked together in a “chain,” hence the term blockchain. 

So unlike paper currencies, Bitcoin is extremely traceable. “Imagine if every dollar in your wallet had a detailed list of everyone who’s ever had it – that’s Bitcoin” said Hunter. 

Why Professional Wealth-builders Aren’t Fans of Crypto (Yet)

If bitcoin’s price keeps rising, and it’s already turned tons of young investors into millionaires, why would two seasoned financial professionals advise against it? 

Well, as soon as you start talking to investing experts with letters after their name, you start to realize that bitcoin’s beauty is skin deep. 

When I asked Hunter and Marneni how much they think people should invest in crypto, they each gave precise numerical answers. 

Here are four reasons why they aren’t big fans of crypto. 

1. The Value of Crypto is “100% Speculation”

When you look at a traditional investment asset like a stock or a piece of real estate, there are factors you can look at to predict its future value. 

For example, some of the researchable factors that can drive a stock’s value include the global and domestic economy, earnings reports, investor sentiment, management shake-ups, and more. 

With another asset class like real estate, those factors may include things like interest rates, inventory availability, shifting demographics, demand, overall markets, the availability of government subsidies, and so on. 

By comparison, there are just three factors driving the price of a single bitcoin:

  • Supply and demand
  • Access and education
  • Regulation

That list isn’t just shorter – it’s made up of factors that are extremely difficult to measure. As Director of Research and Investments, part of Hunter’s job is to seek out information on cryptocurrency as a potential investment. His conclusion so far? 

“There’s not a lot of information out there about the value of bitcoin. That’s what scares me – I don’t know what the true value of this currency is.” 

2. Crypto is Unpredictable and Virtually Impossible to Forecast

Here’s my contribution to the 2021 Understatement of the Year Awards: the value of Bitcoin is hard to predict. 

To illustrate, here’s the value of a Blue Chip stock, GOOGL, over the past few years:

And here’s the value of BTC over a similar span of time: 

The first chart showcases why financial planners like Hunter and Marneni are more comfortable investing their clients’ money in blue-chip stocks. But bitcoin is going way higher! You might think. True! The value of a single bitcoin has objectively gone up by quite a lot. 

But the crypto’s future behavior is still too hard to predict. Since bitcoin’s value is based upon factors that are as scant as they are transient, nobody can say for sure what BTC will be worth in the future. For every strong prediction that bitcoin will keep going up, there’s another one predicting it’ll go down

Crypto evangelists say it’ll hit $1,000,000 – countless others say it’s a bubble and may plummet to single digits. The crazy thing is, Bitcoin’s past behavior supports both theories; the world’s favorite crypto has lost 25% of its value every year since its creation but rallied back up every single time. 

Could crypto hit a million, or even ten million in our lifetimes? It very well could. For all I know, you’re reading this from the future and giggling since BTC hit $181,255,861 this morning, and now your stoner friend from high school is yacht shopping again. 

But crypto’s market cap isn’t what’s most important to a professional financial planner. Hunter and Marneni value predictability. Crypto is just too volatile right now, which is why: 

3. Crypto Doesn’t Fit Into an Asymmetric Risk Profile

Marneni and Hunter may have different job titles at CPC Advisors, but they share a common goal: to help clients navigate the complexities of their finances and to build their wealth over time. 

Part of that mission involves safely investing their clients’ money in ways that provide maximum returns with minimal risk. To achieve that goal, advisors build portfolios into what’s known as an asymmetric risk profile – a “bet” where the odds are greatly in their favor. 

“You’ve got to have that asymmetrical risk profile. You want to have the odds really, really in your favor to win over the long-term.” 

A great example of an asymmetric risk profile in action is a casino. “The house always wins” is mostly true – the house wins at least 70% of the time, and never a percentage point less. To protect this number, and ensure the odds are always in their favor, casino games are designed with tremendous research, data, and care. 

In the investing world, risk profiles have to be even more asymmetric, where the house (or wealth advisory firm) wins 90% or more of the time. Naturally, to achieve such odds in the stock market you need tons of financial models, algorithms, and data trend analysis. 

If you’ve ever wondered why returns on retirement accounts are just 7% while Bitcoin is 700%, that’s why; the former has some certainty built into it

At present, cryptocurrency has no certainty built into it; therefore, it simply doesn’t belong in an asymmetric risk profile. The risk of betting on Bitcoin is nearly 100%, and there’s not enough data to say otherwise

So investing in Bitcoin as an early retirement strategy is like giving a horse LSD and expecting it to get you to work. 

Crypto may be based on transient data, impossible to predict, and have no place in a safe investing strategy, but none of these drawbacks are the main reason why Marneni and Hunter have little interest in it. Number four, they say, is the main one: 

“It’s just not necessary.” 

4. Crypto Isn’t Necessary 

Over the years, CPC Advisors has fielded tons of questions about Bitcoin. But one cluster of clients has remained noticeably silent. 

“We’re not getting questions about crypto from our most successful, seasoned clients.” 

According to Hunter and Marneni, CPC’s older, more experienced clients just aren’t that interested in crypto for two reasons: 

  1. They lived through several bubble pops.
  2. They don’t find it necessary.

The second reason is the big one; after seeing what compounding interest can do for their portfolios, they just don’t see the need to invest in cryptocurrency. 

“If you invest $5,000 in a Roth IRA or some bluechips and earn just average returns, you mitigate your risk and still become a millionaire,” Marneni said. 

Sure it’ll take longer, and a $10,000 investment in BTC may be worth $80,000 in a year… but the risk is way less.

“Your financial future isn’t something you should bet on red.” 

Hunter and Marneni acknowledge, of course, that all forms of investing involve some amount of risk. Even 401(k)s dip from time to time. But the overall goal of financial planning, says Marneni, is to “win over time by losing less.” 

So How Much Crypto Should You Have in Your Investment Portfolio? 

To reiterate point number four above, you really don’t need any crypto in your portfolio. You can easily become a millionaire by consistently investing 20% of your income with a human or robo-advisor

But what if I really don’t want to miss this gravy train, guys? 

“FOMO is not an investing strategy.” they said. 

OK, fair enough, good point. Let me ask a different way; considering everything we talked about, how much is safe to invest? 

Interestingly, Hunter and Marneni offered different answers. Both, mind you, were brief. Due to the volatile nature of crypto, and even the most seasoned professional’s inability to forecast its behavior, the two pros could offer little more than a gut feeling. 

They didn’t pick numbers out of thin air – their choices make sense – but don’t expect charts or hard data in this section (because they don’t exist). 

“Maybe 10%, but I still wouldn’t recommend it”

Hunter, who’s done a lot of due diligence on crypto investing, thinks between 0% and 10% is a safe range. He still recommends 0%, but if you’re feeling good about it, 10% is definitely the max. 

Why only 10%? 

“Even if it tanks, you can still retire.” 

“Get $100,000 in safe investments first”

Rather than a percentage, Marneni offers a benchmark. He recommends that you should hit $100,000 in safe investments first, and only then consider a crypto investment. 

The reasoning is that if you can have $100,000 in safe investments by the time you’re 35, and keep depositing another $100 monthly, you’ll retire a millionaire. 

So what does he mean by “safe” investments? Basically, the building blocks of an asymmetrical risk profile. “Broad-based market ETFs, bluechips, etc.” 

“You should cushion yourself – then you can safely buy $5,000 worth of crypto.” 

Bottom Line

The explosive rise of cryptocurrency is wildly entertaining to watch, and it’s natural to ask yourself whether you should go ahead and invest before it’s too late. There’s a massive potential upside to buying bitcoin, and thanks to marketplaces like Coinbase, it’s never been easier. 

That said, there are totally valid reasons why seasoned professionals like Hunter and Marneni aren’t buying in. Crypto is too volatile. Its value is based on pure speculation, and its future is uncertain. The bubble may or may not burst, but regulation is definitely coming. Lastly, you just don’t need it to get rich. Compound investing is your friend. 

Should you avoid crypto entirely? No, it’s fine to buy a little crypto. Just try to build a $100,000 cushion of safe investments first so your financial future is secure. 



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former FTX CEO Sam Bankman-Fried should be afraid of jail

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former FTX CEO Sam Bankman-Fried should be afraid of jail


Billionaire Mark Cuban isn’t giving up on crypto, despite the implosion of FTX, one of the world’s largest cryptocurrency exchanges.

However, Cuban says former FTX CEO Sam Bankman-Fried should be “afraid of going to jail for a long time,” in an interview with TMZ.

“I talked to the guy and thought he was smart,” Cuban told TMZ. “I had no idea he was going to take other people’s money and put it to his personal use.”

Bankman-Fried said on Wednesday he “didn’t ever try to commit fraud” and was “shocked by what happened,” while speaking to CNBC’s Andrew Ross Sorkin at the DealBook Summit. He admitted he “didn’t do a good job” and “completely failed on risk.”

Alameda research, the trading firm founded by Bankman-Fried, was borrowing billions of dollars from FTX users’ accounts and trading those funds without their knowledge, CNBC reports. FTX also drastically underestimated how much money it would need to keep on hand in case a user wanted to cash out.

Regulators require trading platforms to hold enough money to match what customers deposit. And trading customer funds without their explicit consent is illegal, according to U.S. securities law.

Now, Bankman-Fried, along with celebrities like Tampa Bay Buccaneers quarterback Tom Brady and Golden State Warriors guard Stephen Curry, have been named in a class-action lawsuit filed on Nov. 15 in Miami.

The lawsuit alleges that FTX’s U.S. customers have lost about $11 billion and accuses the exchange of enlisting celebrities to target “unsophisticated investors from across the country.”

FTX and Bankman-Fried did not immediately respond to requests for comment.

FTX is based in the Bahamas, which would normally complicate this type of lawsuit, but it’s possible to overcome since most of the defendants are located in the United States, says Yuliya Guseva, the head of Rutgers University’s fintech and blockchain research program.

Guseva says more crypto regulation is needed to prevent another FTX-like downfall.

As the lawsuit makes its way through the court system, the collapse of FTX could have a domino effect on the overall crypto industry.

In its wake, distressed cryptocurrency lender BlockFi filed for Chapter 11 bankruptcy on Nov. 28. In the filing, the company listed an outstanding $275 million loan to FTX US.

Overall, more than $1.3 trillion of value has been wiped off the crypto market this year, and the FTX collapse has only worsened the situation, according to analysts.

“FTX may be the falling domino that finally makes cryptocurrency un-investible for ordinary people,” says James Royal, principal reporter at Bankrate. “If new money ceases to flow into crypto assets, [crypto’s] meteoric rise cannot continue.”

Investors should understand that, unlike stocks and bonds, cryptocurrency’s value isn’t backed by an underlying asset, says Royal. This is why prices are subject to erratic and unpredictable fluctuations and downfalls.

“Crypto goes up only if more people move money to the virtual asset, so it relies on investor confidence to keep the game moving,” he says.

Investors should also research how an exchange platform holds their assets, or they “could be subject to the same wipeout experienced by FTX’s clients,” says Royal. “If you continue to see cryptocurrency as a viable investment vehicle, you have to understand the exact nature of the exchange’s legal obligations to its clients.”

As for Cuban, he plans to continue investing in crypto and says it’s important to “separate the signal from the noise.”

“There’s been a lot of people making a lot of mistakes, but it doesn’t change the underlying value,” he told TMZ.

Cuban believes that smart contracts, one of the key underlying technologies that allow crypto transactions to be made, will have a significant impact in creating valuable applications that have can be used by everyone.

Don’t miss: FTX’s Sam Bankman-Fried lost billions and the company filed for bankruptcy—it could signal the ‘demise’ of crypto, expert says





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Bitcoin price could fall 40% to $10,000 in 2023, Mark Mobius says

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Bitcoin price could fall 40% to $10,000 in 2023, Mark Mobius says


Mark Mobius, founding partner of Mobius Capital Partners.

Paul Morris | Bloomberg | Getty Images

Bitcoin could crash to $10,000, a more than 40% plunge from current prices, veteran investor Mark Mobius told CNBC on Thursday.

The co-founder of Mobius Capital Partners, who correctly called the drop to $20,000 this year, said that bitcoin is “not far away” from $10,000 now that it has broken the technical support levels of $18,000 and $17,000.

While Mobius expects bitcoin to hover around its current $17,000 level, the move to $10,000 could happen in 2023, he said.

The investor, who made his name at Franklin Templeton Investments, told CNBC that his bear case for bitcoin stemmed from rising interest rates and general tighter monetary policy from the U.S. Federal Reserve.

“With higher interest rates, the attraction of holding or buying Bitcoin or other cryptocurrencies becomes less attractive since just holding the coin does not pay interest,” Mobius said via email.

“Of course there have been a number of offerings of 5% or higher interest rates for crypto deposits but many of those companies offering such rates have gone bust partly as a result of FTX. So as those losses mount people become scared of holding the crypto coin in order to earn interest.”

There have been numerous companies offering investors sky-high interest rates for parking their crypto with them. Often, these companies would rely on lending users’ crypto out to others at really high interest rates, then splitting the proceedings with users. But as crypto prices crashed and liquidity dried up earlier this year, many of these companies collapsed.

One such company is Celsius which filed for bankruptcy in July. Another is BlockFi, which had large exposure to the fallen exchange FTX.

Mobius also said the boom in crypto was directly related to the Fed’s “printing machine working over time so that money supply in USD rose by 40% plus in the last few years.”

“So there was abundant cash to speculate on crypto coin,” Mobius added.

The Fed has had ultra-low interest rates and engaged in quantitative easing over the past few years which has been credited with helping the boom in areas of the market like technology stocks and crypto. But the central bank has been tightening its monetary policy this year by raising interest rates sharply.

“Now as the Fed is drawing back that cash the ability for people to play in the market becomes much more difficult,” Mobius said.

Mobius has been relatively successful with his bitcoin calls this year. In May, when the price of bitcoin was above $28,000, he told Financial News that bitcoin would likely fall to $20,000, then bounce, but ultimately move down to $10,000.

While the $10,000 mark has not been reached, bitcoin has fallen as low as $15,480 this year.

If Mobius’s $10,000 call materializes, it will add to a miserable few months for the cryptocurrency market which has seen more than $1.3 trillion wiped off of its value this year.



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Alternative Assets Are Growing in Popularity. Is That a Good Thing?

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Alternative Assets Are Growing in Popularity. Is That a Good Thing?


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Together With

You’re reading the August 2022 issue of Automated Teller Machine (ATM) brought to you in partnership with Masterworks. Masterworks is a fintech platform that allows anyone to invest in SEC-qualified shares of multi-million dollar paintings by names like Banksy, Basquiat, and Picasso. In just three short years, Masterworks has built a portfolio of nearly $700 million in world-class artworks, introducing over 575,000 individuals to the $1.7 trillion art market. Seven of Masterworks’ last eight exits realized a net return of 17.8%+ each.

It goes without saying that 2022 hasn’t been an excellent year for the market. At the time of writing, the S&P 500 is down 19.77% year to date, with the Dow Jones following at -11.84% right behind it.

We’re also witnessing the painful economic path to recovery following Covid-19. In the United States, inflation reached a 40-year high this year. In the UK, the pound fell to an all-time low, with the Euro also hitting 20-year lows alongside it.

These bearish figures aren’t just impacting people’s portfolios either, but rather every aspect of finance. Consumer credit card debt is at all-time highs in the United States, and people are feeling the pinch of inflation pretty much everywhere, from the grocery store to the gas pump. Some economists are still hesitant to call this a full recession, but it’s clear that there’s been some pain this year, with more potentially on the way in the face of slow economic growth and shrinking market liquidity.

This brief overview of the last year can seem quite doom and gloom, admittedly. But the state of the market and overall economy naturally impacts how people choose to invest,  which is why it’s important to outline. And as markets take a downturn and inflation rises, it can become even more important to find new ways to put your money to work and to protect your wealth.

Enter the exciting world of alternative investments. While markets have been feeling the pain, investors have increasingly been looking to alternatives asset classes to diversify their portfolios. And thanks to technology, it’s incredibly easy to start dabbling in alternatives like collectibles, artwork, and real estate, even without much starting cash.

But what are the factors contributing to the rise in alternative investing? And, are alternatives even an effective way to outperform the market or dodge a downturn?

In this edition of ATM, we’re covering the pros and cons of alternative investments, how they became popular in the first place, and what investing trends are around the corner so you’re better prepared.

What Are Alternative Assets?

An alternative investment is an investment that’s not a traditional asset class like stocks, bonds, or cash. In recent years, alternatives like cryptocurrencies and NFTs have largely been center stage. But digital assets are just one type of alternative investment, with other examples including:

  • Artwork
  • Collectibles
  • Commodities
  • Derivative contracts
  • Hedge fund investments
  • Private equity
  • Real estate
  • Wine
  • Venture capital

Many types of alternatives have actually been around for much longer than our modern monetary system and the stock market. Take gold as an example. By approximately 1,500 BC, gold was the monetary system for the Ancient Egyptians, serving as a medium of exchange. Or, look to slightly more recent events, like the 17th century Dutch tulip bubble, which saw the sharp rise and crash of exotic tulip prices in Holland between 1636 and 1637.

Dutch tulip crazeThe point is that throughout history, societies have always had some form of trading and collecting, whether it’s precious metals, artwork, or rare flowers.

But how did the concept of alternative investing start? In other words, when did people start looking at assets like artwork, fine wine, and trading cards as a potential way to protect and even grow their wealth?

Let’s take a look.

A Brief History of Alternative Asset Investing

If you’re a younger investor, it’s easy to think that the stock market only goes one way: upwards.

However, the reality is that the general market is much more cyclical, and, at times, brutal. Take some of the major crashes over the last century as an example:

  • 1929 Wall Street Crash and Great Depression
  • 1972-1973 Stock Market Crash
  • 1987 Black Monday
  • 2000 Dot-com bubble
  • 2007-2008 Financial Crisis
  • 2020 Covid-19 Market Crash
Image courtesy of Morningstar.

Considering that the market can and does have downturns, it’s not too surprising that people gradually began looking for alternatives to good ol’ fashioned stocks and bonds.

But one push for diversification began in the 1950s, when economist Harry Markowitz developed the Modern Portfolio Theory (MPT), which essentially theorizes how investors can build a portfolio that maximizes returns while quantifying the level of portfolio risk. This theory is actually the basis for many modern robo-advisors, and it marks a major moment in investing history and the argument for diversified portfolios.

However, MPT wasn’t the only catalyst for diversifying portfolios. Following the 1973 market crash, the U.S. government passed the Employee Retirement Income Security Act (ERISA), allowing pension funds to invest in more types of assets. Across the pond, The British Rail Pension Fund began investing in artwork as a means to diversify its portfolio that same year.

Of course, there were other notable events and changes to investing strategy that occurred in the 20th century. The world saw the creation of the first artwork fund, the first hedge fund, and plenty of legislative changes relating to real estate investments. Put all of these factors together, plus some technological advancements which I’m about to cover, and you get the framework for the world of alternative investments we have today.

The Modern Rise of Alternative Investments

According to a 2020 survey by KKR, ultra-high-net-worth investors ($30 million+) allocated 50% of their portfolios to alternative assets and high-net-worth investors ($1 million+) had 26% of their portfolios in alternatives. In comparison, alternative investments make up less than 5% of the average investor’s portfolio according to Personal Capital.

But this doesn’t mean younger, newer investors aren’t interested in alternatives. In fact, a 2022 study from Bank of America found that 80% of young investors are now looking to alternatives like private equity, commodities, and real estate in hopes of achieving above-average returns. In contrast, investors 43 and older are still largely sticking with equities.

So, it’s clear that the younger wave of investors are starting to dive into a wider range of assets. And as the world has modernized, technology has played a significant role in bringing alternative investments to more people. These days, practically anyone can open an account with an online broker or investment app and begin trading traditional securities, but also alternatives. And the world of fractional investing now means that you can buy shares in assets like apartment buildings all the way to Lamborghinis.

Covid-19 and the most recent market downturn, coupled with inflation, has also seen a spike in alternative asset investing. Let’s take a look at what the data says, as well as how alternatives are becoming more mainstream.

Alternative Asset Investing Statistics

Preqin provides data and insights into the alternative investments market. And according to its 2022 annual report, it predicts significant growth in alternatives over the next five years.

Alternative asset investing AUM growth

Specifically, it found that assets under management (AUM) in private equity grew from $4.08 trillion by the end of 2015 to $8.90 trillion by the end of 2021. By the year 2026, Preqin forecasts a compound annual growth rate of 14.8%, bringing private equity AUM to a whopping $17.77 trillion.

This figure is still smaller than major stock exchanges like the NASDAQ. But what’s most important and interesting is that Preqin is forecasting the rate of growth in alternatives to increase, at least for private equity.

But other alternative categories aren’t slacking. Investments in hedge funds, private debt, real estate, and natural resources are also forecasted to continue growing.

Interestingly, Preqin’s data also estimates that the growth of alternative asset investing will occur quite evenly in three regions: North America, Asia-Pacific, and Europe. The rest of the world will still see growth, just not at quite as rapid of a pace:

According to Preqin, there are a few factors attributing to this rise in AUM for alternatives. The first is that private equity has traditionally had strong returns, so it’s natural for investors to continue pouring money into the space and to reinvest previous gains.

And Preqin also argues that investors will continue to seek higher returns, even in the face of rising interest rates and some pretty compelling high-yield savings accounts and fixed-income products.

Alternatives in Pop Culture

Looking at data and forecasts is one method to gauge how alternative investing trends might play out. But in the past few years, it’s also been interesting to see the intersection of pop culture and investing, including in the alternatives space.

The crypto and NFT mania of 2021 is a shining example of this. For better or worse, celebrities, athletes, politicians, and influencers alike voiced their opinions about the merits, or lack thereof, of digital assets.

Some individuals, like Kim Kardashian, ended up getting fined $1.26 million by the SEC for promoting cryptocurrencies without disclosing that she was getting paid. In contrast, other individuals, like Elon Musk, managed to pump coins like Dogecoin and Shiba Inu to historic heights, all through the power of Twitter and memes.

Dogecoin Elon Musk Meme

And this is just in the world of crypto and NFTs. Thanks to COVID, stimulus checks, and perhaps widespread boredom, other alternatives also began to boom and become somewhat mainstream.

Take Pokemon cards as another example. In 2021, The Pokemon Company had to print 9 billion cards to keep up with demand and to maintain proper card supply. Investors piled into the highly-speculative investment, buying unopened packs in hopes of drawing rare, shiny Pokemon cards to flip for a handsome profit.

At its height, celebrities like Logan Paul were getting in on the action. In fact, Paul spent over $5 million on a PSA Grade 10 Pikachu Illustrator card. He also wore a First Edition Charizard necklace to his much-anticipated boxing bout with Floyd Mayweather.

A few years ago, I don’t think many people would have predicted investments like NFTs or Pokemon cards to take off how they have. But it goes to show how quickly the alternative investment space can move, but also how accessible it’s becoming.

New Investing Tech

As mentioned, improvements in investing technology has pretty much made all types of investing more accessible.

A perfect example of this has been the rise of retail investors. As more brokers have gone commission-free and investing apps like Robinhood have become popular, pretty much anyone can begin trading. You don’t need any experience, much capital, or even a game plan if your only plan is buying GME and holding it with diamond hands.

Naturally, an increasing number of “everyday investors” impacts the alternatives market. Crowdfunding is really the engine behind much of this growth, and it seems like there’s a new platform springing up every month that lets you buy shares of some different asset class.

Just take a look at some of the alternative investment platforms that have launched over the last decade or so:

  • Masterworks: A platform for investing in blue-chip artwork.
  • Collectable: Provides an easy way to buy shares of sports cards, sports memorabilia, sneakers, and other collectibles.
  • Fundrise: A leading real estate crowdfunding platform that lets you start investing with only $10.
  • Vinovest: Lets you invest in portfolios of fine wine or individual bottles.
  • Yieldstreet: An alternative investment platform that offers its own unique funds as well as individual deals.

With investing minimums being as low as $5 and $10 in many cases, the barrier to entry for alternatives is gone. You don’t need to be an accredited investor anymore, or have a million dollars in the bank, to dabble in many of these asset classes. And you don’t need to know a hedge fund manager or deal with private funds either. To invest in alternatives these days, all you need is your smartphone.

Masterworks logo dark

This edition of the November ATM is brought to you by Masterworks, a leading artwork investing platform.

Masterworks lets you invest in shares of blue-chip artwork from artists like Banksy, Monet, and Picasso. This lets everday investors tap into the global, multi-billion dollar artwork industry. If you want to diversify your portfolio with artwork, Masterworks is one of the best solutions on the market.

The Argument for Alternative Investments

So, we’ve explored a bit of the history of alternative asset investing. We’ve also covered some of the investing trends in this space and factors that have alternatives more mainstream and accessible.

But is there an actual argument for alternatives besides the simple sake of diversification?

Lack of Market Correlation

One of the advantages of many alternative investments is that they don’t correlate strongly, or at all, with general market movement. In other words, if the market is on a bull or bear run, the value of certain alternatives doesn’t seem too impacted.

For a few years, cryptocurrency advocates thought that Bitcoin was the poster child for this. But in recent months, we’ve seen that Bitcoin, and many altcoins subsequently, have correlated with the market.

Image courtesy of CoinDesk.

For now, it seems like crypto is out of the equation for downside protection, but what about other alternatives?

As it turns out, there are several popular non-correlating assets that investors often turn to. Real estate and precious metals like gold are perhaps the most common. But artwork is one of the most uncorrelated assets that you can invest in today, according to Citi’s recent 2022 Art Market Report.

Art & Stocks Correlation
Citi Global Art Market Disruption Report

Investing in non-correlated or inversely-correlated assets is actually one strategy hedge funds use, and this is where the name comes from. By investing a portion of a portfolio in instruments that are uncorrelated or inversely-correlated to the market, hedge funds “hedge” their bets, providing clients with some downside protection. And while this won’t necessarily pay off during a bull run, it can certainly help in a bear market.

Inflation Hedging

Another argument for investing in alternatives is to hedge against inflation. And considering how inflation has been at 40-year highs, this is certainly a compelling argument.

Once again, precious metals are a common hedge. The downside of buying pure gold and silver is that they don’t generate income. But options like mining or gold ETFs can help get the best of both worlds.

Collectibles like wine and art are becoming more popular inflation hedges as they become more accessible to everyday investors. According to Masterworks, art prices have outpaced both stocks and gold during periods when inflation was above 3%.

art vs inflation
Image credit: Masterworks

Real estate is another popular inflation hedge, and unlike most of the other assets mentioned, it does generate income. As more crowdfunding platforms launch and offer more funds, it’s only becoming easier to add real estate to your portfolio.

Potential For Outsized Returns

If you’re a passive investor, you might be content with dollar-cost averaging your way into the market with hopes of earning 7% annual returns or so. Personally, this is my sort of strategy, and I mostly stick with ETFs and Index Funds rather than individual stocks or alternatives. Some investors take this a step further, lowering risk even more by focusing on bonds and dividend stocks.

But if you want to outperform the general market, these strategies won’t work. In this case, you need to either invest in higher-growth stocks and funds or alternatives.

Whether or not an alternative asset provides better returns than the stock market greatly depends on timeframe. For example, gold has outperformed the general market in 2020 and 2021. But historically, stocks generally return more in the long run. And with crypto, it’s all too easy to cherry pick points where different coins either drastically outperform or underperform the market.

Crypto is a perfect example, and from 2011 to 2021, Bitcoin was the best performing asset class of the decade. In fact, it saw cumulative gains of over 20,000,000% in this time period versus the Nasdaq’s 541% return.

Bitcoin Best Performing Asset of Decade
Data courtesy of Yahoo Finance.

You simply can’t find these types of returns with basic dollar-cost averaging into the S&P 500. And it’s perhaps this reason why there will always be a class of investors holding Dogecoin, rare Pokemon cards, or Ape NFTs, hoping to strike it big.

Things get a bit more interesting when we look at longer-term alternatives that can lead to outsized returns.

For example, according to artwork investing platform Masterworks, contemporary art has outperformed the S&P 500, real estate, and gold from 1995 to 2021, and by a meaningful margin:

Masterworks Artwork Return

Just this November, the historic auction house Christie’s sold $1.5B+ of art in a single night. That shattered the previous record by over 63%.

We see a similar story with wine investing. According to wine investing platform Vinovest and data from Liv-Ex, fine wine has also outperformed the S&P 500 from 2000 to 2018:

Wine vs. Stocks Vinovest
Image courtesy of Vinovest.

Finally, real estate has also outperformed the S&P 500 at different points in time. And according to data from The National Association of Real Estate Investment Trusts (NAREIT), it’s only within the last decade that the S&P 500 has been outperforming REITS:

So, it’s clear that certain alternative assets can outperform the general market. And some of these assets are also uncorrelated, so they can provide a bit of downside protection.

This begs the question: why don’t more people invest in alternatives to try and get outsized returns and diversify their portfolios?

Alternative Assets & Annual Returns – Are They Too Good To Be True?

The last argument for alternatives – that is, outsized returns – is probably the most exciting argument. After all, who doesn’t love the idea of beating the market? Many alternative investment platforms often tout annual return figures in the 10-15% range, or even more in some cases. But, depending on the asset and platform, these numbers could be somewhat misleading.

With certain alternatives, these lofty returns may only be possible if you purchase the asset early and hold it for several years before selling. With wine and spirits, for example, older vintages and casks are more valuable than younger ones. So if you buy a young cask, it may only raise a few percentage points in the first few years before really gaining steam down the line. You’re not generating income each year in the meantime, which is a notable downside.

These factors can muddy the waters when it comes to calculating “annual” returns on certain alternative investments. Also, if you can’t find a buyer for your alternative asset, you might have no realized returns at all after years of holding.

Finally, it’s important to evaluate how the reported annual returns for a particular asset are being tracked. Unlike with stocks, it’s difficult to capture every transaction of wine, art, sports cards, or other alternatives. There are certainly indexes that try to approximate the returns of these asset classes. But often these indexes only track the most sought-after items in a specific category. So if you don’t happen to own one or more of those items, your personal returns are likely to be different.

Other Potential Risks Investors Should Consider

Every alternative asset class and individual deal can be different. But generally, there are some risks and downsides to this type of investing that are worth considering:

  • Liquidity: Oftentimes, alternatives are highly illiquid. Even if an investing platform or firm has a secondary marketplace or says that it allows cash outs, liquidity might not be guaranteed.
  • Fees: Many alternative investing platforms charge asset management fees that are often 2% or higher. Others may require to pay a seller fee if you exit an investment early.
  • Due Diligence Requirements: Dollar-cost averaging into various index funds is a very passive way to invest. But how much time does researching Pokemon cards, contemporary artwork, or private REITs take? The chance for fraud or lackluster investments is very real in the world of alternatives, so a lot of due diligence is required.
  • Potential Tax Implications: Some alternative assets can create tax implications that can be a headache to manage. Crypto and NFT income is one example, and if you’re dealing with serious volume, you’ll probably want special crypto tax software and some accounting help to ensure you accurately report gains and losses.
  • Some Accreditation Requirements: Fractional investing has helped remove barriers to entry for many alternatives. But some deals, especially when working with hedge funds or private equity firms, still require you to be an accredited investor.

The Future of Alternative Asset Investing

There’s no single “right” answer for creating a diversified portfolio. And no investor has a magic crystal ball that lets them know how the market, or world for that matter, might change in the future.

But if the last few years have reminded us of anything, it’s that volatility is an inevitable part of investing. Considering this fact, the steady rise of alternative asset investing really isn’t too surprising as people continue to search for ways to protect and growth their wealth. And thanks to crowdfunding companies and technology, you don’t have to be a millionaire to get started,

That said, I don’t think stocks, bonds, and good old fashioned cash are going anywhere anytime soon. However, it’s clear that there are some advantages to a robust portfolio, whether that’s downside protection or the potential for outsized returns.

Ultimately, how much of your portfolio you dedicate to alternatives depends on your goals, risk tolerance, and if you even want to dabble in alternatives in the first place. Thankfully, it’s never been easier to get started thanks to various crowdfunding platforms and investing tech. But you still need to do your research and due diligence before jumping in.

Together With

Masterworks

This edition of the November ATM is brought to you by Masterworks.

Masterworks is a fintech platform that allows anyone to invest in SEC-qualified shares of multi-million dollar paintings by names like Banksy, Basquiat, and Picasso. In just three short years, Masterworks has built a portfolio of nearly $700 million in world-class artworks, introducing over 575,000 individuals to the $1.7 trillion art market. Seven of Masterworks’ last eight exits realized a net return of 17.8%+ each.



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