Alternative investments are having a moment right now. Collectibles, coins, tokens, fractional shares of real estate and art, cryptocurrency— they are all over the news, social media, and discussed in line at Starbucks with friends and strangers alike. There are always stories about some guy who bought bitcoin ages ago and is now a millionaire, or the lucky user that sold a Lebron James TopShot moment for over $200,000. Someone out there is always striking gold in a new investment type, but does it mean that you should be sinking your hard earned cash into a potentially passing phase?
Here’s the bottom line and say it with me now: crypto is just for fun. And the same goes for other alternative investments. Don’t sink your life savings into a platform or collectible if you need that money later.
Sounds crazy right? Why wouldn’t you need that money? Well, if you invested wisely through a diversified stock and mutual fund portfolio for your retirement savings, have life insurance, and have been saving for years, letting compound interest work in your favor, you may be pretty set with your financial goals being met through standard investment avenues. In which case you can afford to invest in some higher risk alternative investments. But if you need that money that you are sinking into Dogecoin and cannot afford for the value to plummet to nothing tomorrow, you, my friend, cannot stomach that risk and need a less volatile investment platform.
In very simple terms, an investmentment is something you are purchasing now with the hope that it will grow in value over time so by the time you go to sell it your money will have multiplied. And if you are planning to sell anything, it is only worth what someone will buy it for. Hence, there better be a market for your investment wares 5 to 30 years from now, or whenever you plan to cash out that portfolio.
Ok, with those warnings out of the way, let’s take a look at some emerging alternative investment platforms
Rally Road offers the ability to buy shares in one of a kind cars and collectibles which the company houses and secures. They turn each item into a company and sell shares with a maximum market cap for each item. When collectibles are initially offered, there is a 90 day trading freeze before shares can be sold and trading opens up usually about once a month thereafter. There are no management or trading fees. The company may sell collectibles if it chooses and will cash out the proceeds to the investors, though there is no real estimation of an assets growth and appreciation at the time of sale.
Rally Road seems like far more of a novelty than a true investment platform. I could see it as a unique way to give a fraction of an otherwise too-costly collectible to a fan and might be a fun investment to personally own, say, an original rare book or a signed jersey from your favorite player. But if you are looking merely to make money, I would move on. Collectibles are very high risk investments. The item you purchase could be damaged or degrade over time (remember, disasters happen and collectibles are not replaceable, hence their value), despite the protections invested in by the company. If the company is not making money on transaction fees, then I assume it is making money by selling these collectibles at higher than market value to investors, since it needs some way to cover its overhead costs (which I assume are high) to store these items.
NBA Top Shot is a 21st century take on playing cards and collectibles, selling digital basketball “moments,” which are serialized, limited edition, and tradeable. These are serialized video montage clips which are created by NBA Top Shot for purchase in limited edition runs. Fans can buy packs of common moments for only $14 and can collect and trade them like digital playing cards. The Top Shot investing claim to fame is the rare moments, of which only a few are created for big plays by big name players. For example, a Lebron James dunk rare moment once sold for over $200,000. The daily average trade volume on the site is about 20,000 moments changing hands, averaging about $5-10 million in daily sales volume.
Okay, so there’s a market for your specialized digital collectible, but how long will it last. This new venture is breaking ground in the collectibles market and only time will tell how long NBA Top Shot will maintain this volume. As for purchasing moments as an investment? It’s likely a bust. Sure, rare moments have appeared to hold their value but the average investor/collector isn’t shelling out tens of thousands of dollars for a rare 15 second video clip montage of their favorite player. And lower rarity moments have likely been overpriced and showing a small decline in value. The whole system is in Beta and may yet work out some kinks and surprise us all. Basketball fans have no shortage of love for the game and their favorite players, but time will tell whether a digital collectible can hold its value if the collector cannot actually hold the collectible.
Masterworks allows investors to buy shares of artwork held by the company and then share in the profits when the art is sold in 3 to 10 years. Or investors can sell their shares on the secondary market through the Masterworks marketplace. The company researches growth in art markets based on style and purchases representations of that style by artists they believe are due to gain a profit over time, noting that blue-chip art (think Claude Monet or Andy Warhol) has outperformed the S&P 500 by over 180% between 2010 and 2018. Masterworks charges high fees to its users, taking 20% off the top of any growth in the investment and a 1.5% annual management fee to cover Masterworks’ overhead costs.
Investing in art via purchases of representational shares is an interesting concept, but you never really are comparing apples to oranges when choosing which artist to invest in over another. Masterworks has advisors who can guide you, but you also lose the main joy of art: the art. You don’t get to hang this beautiful piece in your home and feel moved by it whenever you lay eyes on it. No, it is stored in a vault while you pay fees to Masterworks and they attempt to sell it to collectors at a profit, which they then pocket the majority of. Honestly, it seems to me that investing in art shouldn’t be a fractional share endeavor that loses much of the draw of the art and breaks it down into artistic stocks, if you will. If you want to invest in art, then buy art that moves you and may one day move someone else to fork over a pretty penny for it.
Fundrise is a platform for entry-level investors to get into the passive real estate investment business. There is quite the boom in the housing market now and real estate prices are rising, making this an attractive investment option for those interested in the real estate market, though not without risk. With as little as $500 you can invest in a share of a real estate project through a real estate investment trust (REIT). You pay about 1% of your investments in asset management and advisory fees and the site claims that it has seen returns of 8-12% from 2014-2019. REITs are a longer term investment option for folks looking to hold their REIT shares for at least 5 years, not for someone looking to park cash for a few months. Those REIT shares may not be able to be sold easily as they are not publicly traded, but you can sell them back to the platform for a fee. You may also be charged an early withdrawal fee. Alternatively, you can invest in Fundrise’s internal fund which is more liquid and has regular quarterly redemption periods as well as no early withdrawal fees.
If the thought of investing in a REIT brings up bad memories of the housing bubble and subsequent market collapse in 2008, you are right to have a twinge of concern. It’s definitely a higher risk product than investing in mutual funds. A lot has changed over the last decade in the investment world and specifically with REITs, so they have a lot tighter reins now. That being said, you should not invest in anything that you do not fully understand, and any investor is responsible for doing their own research. Make sure you understand the terms and disclosures, and weigh all your investment options before making a decision. If real estate speaks to you, you do your research on projects to invest in, you aren’t too risk averse, and you are willing to hold your investment for a while, this may be an option for you.
Now, what about investing in cryptocurrency? Say it again for the people in the back: cryptocurrency is just for fun. On the whole, investing in currency isn’t lucrative. I mean, holding your Euros for when they eclipse the Dollar again isn’t really a good financial strategy. Currency can fluctuate daily but the overall gains and losses aren’t something to write home about for the average trader. Most currency is backed by a country and their national government, so international politics and internal government policies of that nation may cause the value of a currency to shift based on market perception.
Cryptocurrency is not at all a type of standard currency because it is decentralized by design and not backed by any sovereign government. As such, its value is based purely on speculation, or what the market thinks people will pay for it. There is no way to conduct analysis on governmental policies like you would a fiat currency, nor is there any prospectus, quarterly earnings reports, or company press releases to understand an investment like you would for stocks. Cryptocurrencies, whether they be Bitcoin, Litecoin, Dogecoin, or Ethereum, are all tools to serve a purpose, a medium to exchange for goods or services. People are willing to assign a fiat currency value to each cryptocurrency based on market speculation, so your buying power can be much higher or lower after you buy into it. What you can buy with these currencies is very limited (though I hear Overstock.com takes Bitcoin now) and they have a reputation for being used for criminal activities, thanks to dark-net drug sales and ransomware payments. These digital currencies have no proven rate of return, though some, like Bitcoin, have generally gone up over the last few years they can fluctuate wildly and crash unexpectedly. If you really want to be on the cutting edge of the market and buy some cryptocurrency, go for it. But remember, it’s a tool, not a true investment. There’s no indication that it will continue to grow over the next decade, and could even be drastically diminished as governments attempt to get a handle on cryptocurrencies and apply regulations that apply to conversion of their fiat currency into crypto and ownership reporting guidelines. Crypto is basically the wild west of investing, you never know if you are gonna win or lose a duel. The currencies’ lack of regulations means that you don’t have any protections in your investments whatsoever.
In summary, alternative investments are for fun, not for the bulk of your investing. If you cannot afford to lose the money, don’t invest in risky securities, pseudo-securities, collectibles, or cryptocurrency. Do your research and learn as much as you can about your investment before you put any of your hard earned dollars into it. If you want to buy some Dogecoin as a play investment because it’s a hot commodity right now, go for it. It’s fun to see how your pet investment project pans out. But transferring a chunk of your life’s savings or retirement funds into such a risky investment can mean you run the risk of losing your shirt and working until you are 85. Diversification is the name of the game and spreading your investments into a variety of categories and risk levels ensures that you can have some steady growth as well as hooking into any potentially hot high-growth, high-risk areas, but don’t go all in on high risk alternative investments.
