By Bogdan Getx
Alternative investments have become more popular among investors searching for new ways to diversify their portfolios. And one of the assets that attracted investors' attention is cryptocurrencies. If you are new to this sector, you should know that investments are of two types: traditional and alternative. Traditional investments include bonds, stocks and cash, while alternative ones include all the other assets available. In the last few years, alternative investments have gained more popularity, and now digital currencies, like Bitcoin, are more considered options.
Investors opt for many alternatives to diversify their portfolios, but reports reveal that the digital currency of choice for many of them is Bitcoin. More than that, some have estimated that 82% of millionaires interested in digital currencies trade Bitcoin. However, they also consider Ethereum, as it brought many innovations in the game and offers something new that is appealing to numerous people.
So, let's take a look and see why cryptocurrencies are a good option as alternative investments.
What are alternative investments?
Alternative investments differ from traditional ones, covering a huge range of assets that don't fit into the conventional categories. So, any assets that are not traditional, like cash, bonds and stocks, can be considered an alternative investment, be they cryptocurrencies, real estate, or fine arts. Alternative investments have always been popular but haven't been really considered by investors until recently. In the past years, wealthy people were the ones who put their money into alternative assets, but the average investors were less tempted to do so.
However, this has changed in recent years with the growth demand for alternative investments, which continues to increase at a high rate. According to data, the global market for alternative investments is expected to surpass $23 trillion by 2026 because they are becoming more preferred options.
One of the reasons for the popularity of alternative investment is represented by the new investment venues, like cryptocurrencies, that didn't exist 15 years ago.
Why is crypto a good alternative investment?
Digital currencies have grown in popularity nowadays and have become a new alternative to the traditional money people were more used to. They are digital options created and used solely on the internet and don't have a physical form, like fiat money (euro, dollar, pound). However, they can be traded for cash.
Crypto assets are created on blockchain technology, an innovation that has improved many industries and sectors. They are decentralized, meaning that no other authority controls them. Since they first appeared in the world, they have had continuous growth. For example, in 2021, it has been reported that they reached their bullish peak and hit the $3 trillion mark. And this is why some believe they represent good alternative investments.
Why are investors interested in cryptocurrencies as alternative investments?
Even though investors have many opportunities, cryptocurrencies can be their first choice. Here are the reasons why this is happening.
Cryptocurrencies are becoming more regulated
The crypto sector had no previous regulations, but things have changed. In recent years, there has been an increase in regulation regarding crypto assets, and things are expected to become even more strict in the future.
Cryptocurrencies can be exchanged with cash
Many exchange platforms are available worldwide, so it is very easy for investors to convert digital currencies to cash. This is not the case with the other alternative investments, as many are illiquid and take longer to access them. For example, rare collectibles take an extended period to sell, so it is hard to estimate their true value.
Cryptocurrencies are great assets for portfolio diversification
A well-diversified portfolio is the one that will make the difference between a successful and an unsuccessful investment. This is why a portfolio lacking diversity can present more risks, especially during financial crises or challenging economic times. However, the portfolio can be diversified with cryptocurrencies to reduce the risks that might appear in the market.
Cryptocurrencies offer access to a growing sector
The crypto market becomes more popular each day, and the commodities offered by blockchain technology are more appealing to everyone. This is why the investors who join this sector have many advantages, including access to a growing market.
The pros and cons of alternative investments
As with other things, investing in alternative assets has advantages and disadvantages. So, let's first focus on the positive. The main benefit investors have if they consider alternative investments is that they will have a bigger portfolio diversification and a lower overall risk. So, alternative investments can have high rewards in the long run. Plus, many assets can be considered in the alternative investments, which ensures flexibility and allows all investors to choose the most appealing one they want to opt for.
Now, let's talk about the disadvantages. Since alternative investments are less widespread than conventional assets, they tend to have higher fees. Also, their low liquidity might be an obstacle for investors who need cash urgently. Plus, because they have increased complexity, many people don't consider them, as they need to do a long research before deciphering them, which some do not want to go through.
Final words
Digital currencies are the most popular financial instruments of blockchain technology and an alternative for people who want something different from fiat money. The investments in cryptos are escalating, which is also proved by studies. For example, there are statistics that show that around 25% of people are expected to own digital assets in the future.
They have become so popular among investors because they bring innovations that traditional money doesn't have. For instance, one of their best advantages is that they are decentralized, which means that no authority controls them like a central bank or the government. Also, they are created on blockchain technology, which contains encryption algorithms that offer more secure online payment and transactions. However, cryptocurrencies are volatile, so this is an aspect that every investor who wants to opt for crypto should know.
