Crypto’s Horrible, Very Bad Year
After Bitcoin set a new all-time high in late 2021, it’s been downhill for the cryptocurrency space since then.
I’m not talking about the price of the digital assets, those are notoriously volatile. It’s “normal” for them to go through periods of extreme euphoria and exponential growth in valuations. And just as “normal” for that to be followed by periods of extreme dejection and value contractions that seemed impossible just months before.
The institutional framework that helped the industry grow and helped to make it accessible to average people is collapsing. The string of failures and crises is long and ongoing and include Three Arrows Capital, Voyager Digital, FTX and Alameda Research, Digital Currency Group and Genesis Global, Silvergate Bank, Celsius, and BlockFi.
If that weren’t bad enough, we’re not even done sorting through the impact. Popular cryptocurrency exchange Kraken discontinued staking for US customers after a settlement with the SEC. They also suspended ACH deposits and withdrawals after losing Silvergate as a banking partner. The founder of Terraform Labs, which produced the epic collapse of the LUNA token, was recently arrested after being on the run. There are lingering liquidity and trust worries with the remaining centralized exchanges. And it looks like the SEC is starting to ramp up enforcement actions against the industry.
Phew. That’s a brutal set of events, threats, and headwinds to the industry.
Some Other Alternative Assets To Consider
Many people have proclaimed the death of Bitcoin, crypto, etc… over the years and been proven wrong. The reality is that we really don’t know what’s going to happen. That having been said, for someone that is not a long-time investor in the space or a true believer in the potential for web3, it is understandable the events and uncertainty might have them looking for other investment options.
Let’s take a look at what other asset classes could be interesting alternatives. Let’s start with an important question:
What is it about cryptocurrencies that is appealing to you?
We’ve given some guidance below based on the type of answers we anticipate.
The Potential For Explosive Growth (To The Moon!)
If you responded like this we’ll assume:
- You have an extremely high risk tolerance
- The risk of losing all your invested principal is not a deal breaker
- Having a part of your investment portfolio with the potential for large appreciation is extremely desirable
In this case, consider equity crowdfunding. It’s an extremely high-risk part of the world of alternatives, with the potential for substantial gains. In equity crowdfunding you are making investments into private companies that are often much smaller than their public counterparts. Many of them will fail and investors will lose all their principal. A select few may be able to break through and achieve multi-billion dollar exits and exciting returns for investors.
A major difference between crypto and equity crowdfunding is liquidity. Unlike cryptocurrencies that can mostly be traded at any time of the day, investments in private companies are mostly illiquid today. There is some movement on creating secondary markets to trade shares, but that appears to still be far away. In general, once you make an investment in equity crowdfunding you can’t get the money back unless the company is purchased for a gain or goes IPO.
The Yield From Being Able To Do Things Like Staking
Especially during the times of low interest rates, it was difficult to find a reliable source of yield and passive income through traditional markets. While those rates have moved up considerably in the past year, there are plenty of assets that still leave something to be desired when it comes to payouts.
If you’re mainly interested in yield and aren’t risk averse (which seems like a fair assumption), there are a variety of options within the universe of alternatives.
One of the most interesting asset classes to take a look at is music royalties. Basically tiny amounts of revenue are generated for music rights holders when music is streamed on Spotify, purchased, used in a TV commercial, etc… It’s possible to purchase a piece of the royalty income stream as an investment.
Choosing assets wisely and getting them for a good price is extremely crucial to getting a good return. However, if you land a good asset that is for the life of copyright, it could generate you passive income for 70 or more years. Just keep in mind that there may not be liquidity depending on where you make your investment.
Another area worth looking into is the entire debt/lending/financing investment space. There are a variety of platforms that serve different niches. One example is Groundfloor. You can purchase shares of loans given to real estate projects for $10 a piece. The loans are secured by the underlying property to help protect your investment principal. It requires some patience and acceptance of liquidity limitations, but 9-10% returns from a diversified pool of their LRO offerings is possible.
Having Uncorrelated Returns To Traditional Markets
It’s never fun to have your entire investment portfolio enter a bear market at the same time. That’s why diversification and uncorrelated returns can help weather a downturn – financially, emotionally, and psychologically.
Fortunately, there are so many asset classes that are becoming increasingly accessible that haven’t traditionally been correlated with the stock market. In fact, most of the asset classes we cover haven’t historically had strong correlations with the stock markets.
That having been said, one asset class worth taking a look at is Farmland. Based on data compiled by FarmTogether, farmland has a -0.05 correlation stocks. It doesn’t get much lower than that.
As an investment structure, farmland typically involves buying productive farmland. Productive farmland is decreasing in supply while the world population (consumers of food) are increasing. This helps to increase the value over time. Additionally, purchased farmland is often rented to an operator that will use it to generate crops. That rent can generate extra yield and income. Two downsides here are that the main platforms for investing in farmland are exclusive to accredited investors and there is no liquidity until the farm is sold, which could be 10 or more years after the investment is made.
In addition to farmland, music royalties, real estate, and even wine are all interesting options that can help reduce a portfolio’s correlation with the stock market’s performance.
Conclusion
If you are looking for alternatives to stocks and bonds and are willing to look beyond cryptocurrencies, there’s a wealth of alternative assets worth your consideration. All of them have their trade-offs and many are considered to be higher risk. However, when compared to the explosive booms and crippling busts of crypto, these other asset classes may offer similar benefits with the potential for lower volatility.
If you’re interested in learning more about investing in these types of alternative assets, take a look at our introduction to alternative investments. It’ll be a great place to start.
