Expansion of the global economy has brought many opportunities to investors the world over—and many challenges as well. While investors have always had to face volatility in portfolios, today it is more pervasive than ever. And as the markets of 2008—and 2020—taught investors and advisors alike, portfolios diversified between traditional stocks, bonds, and cash alone may not be diversified enough.
Alternative investments were not widely accepted in 2008, but over the past 12 years, they have earned their way into the mainstream, with most major asset managers offering alternative investment options and the majority of institutional investors allocating to this asset class. In fact, since 2008, U.S. pension funds have increased their allocations to alternatives from 7% to 20% of their total assets, which is in line with the recommendation of 10% to 20% most experts espouse.
“Alternative investments” has long been a catchall phrase that can include alternative strategies, like long-short strategies, leveraged funds, and private equity, as well as alternative assets—which are technically anything other than stocks, bonds, and cash. The most prolific alternative assets are things like:
And today, cryptocurrency is an alternative asset that is growing in popularity.
Consider that cryptocurrencies are typically not tied to fiat currencies and may not be as highly correlated to market moves as other currencies. The most well-known cryptocurrency today is Bitcoin. In a recent interview with CNBC, Bill Miller, founder and chief investment officer (CIO) at Miller Value Partners, said, “the risk of investing in Bitcoins is very high, but so is the possibility of making a profit. And the lack of a correlation with traditional markets makes it an ‘excellent diversifier.’”
Digital assets can be volatile and many investors may not be ready to put 10% to 20% of their portfolio into a cryptocurrency like Bitcoin. But a recent study by Yale economist Aleh Tsyvinski provides some guidance. In the study, Tsyvinski concluded that in order to achieve optimal portfolio construction, investors should allocate about 6% to Bitcoin. The study further states that even skeptics should allocate 4% and the staunchest opponents should still invest 1% in Bitcoin.
And this is not the only study of its kind. Dragan Boscovic of Arizona State University found that "institutional investors are recognizing this new asset as a valued investment opportunity; this will encourage individual investors. It will also encourage consumers and small shops to start trading in cryptocurrency."
Today, there are a number of ways to invest in cryptocurrencies like Bitcoin or cryptocurrency technology through:
And soon, crypto ETFs may make cryptocurrencies like Bitcoin available to all investors.
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