Diversifying your portfolio is crucial in an ever-changing market. Traditional asset classes tend to have low returns, and their performance depends on inflation, political events, and economic trends, among other factors. That’s why a balanced portfolio should also include alternative investments less sensitive to market movements.
These asset classes include cryptocurrencies, real estate, hedge funds, insurance products, etc. “Exotic” assets, such as artwork, rare coins, and fine wines, fall into this category, too. Another example is the Transcontinental Railroad, considered the first alternative investment in history.
Small businesses can leverage cryptocurrency and other alternative investments to gain a competitive advantage. This approach could lead to higher returns, allowing them to raise capital for future growth.
Plus, it can protect your portfolios against inflation and other external factors.
What Are Alternative Investments?
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Alternative investments are financial assets other than cash, stocks, or bonds. They also differ from fixed-income securities like Treasury bills, money market funds, and certificates of deposit (CDs).
Venture capital funds, hedge funds, and other alternative assets have been around for centuries but were limited to institutional investors. Over the years, they became accessible to everyone, including individual or non-professional investors.
So, if you’re an entrepreneur or small business owner, you can buy properties, gold, artwork, bitcoins, and similar assets by and for yourself.
According to Nasdaq, these assets will reach $17.2 trillion by 2025. Their popularity is due to several factors, such as their high return potential and low correlation to stocks and bonds.
Why Invest in Alternative Assets?
Cryptocurrencies and other alternative assets can help reduce investment risk through portfolio diversification.
Let’s say you normally invest in stocks and bonds. The demand for certain products and services would drop during a recession, causing some stocks to decrease in value. As a result, a stock-heavy portfolio could suffer substantial losses. But if you maintain a diverse portfolio, your losses may be lower.
The old saying, “Don’t put all your eggs in one basket,” applies to investments, too. A portfolio that includes a variety of assets can help mitigate risk and potentially increase your returns.
Alternative investments also serve as a hedge against inflation. For example, gold often increases in value during high inflationary periods.
Similarly, Bitcoin may be considered an inflation hedge due to its scarcity and the fact it’s digital, allowing investors to access it anywhere in the world.
Sure, it’s volatile and poses greater risks than other alternative assets, but it also has the potential for high returns. Its value increased from $0.09 in 2010 to $68,789 in November 2021. Less than two years later, it dropped to $16,605 but recovered quickly and reached $34,154 in November 2023.
Alternative assets also offer more flexibility than stocks and bonds. For instance, you may invest in real estate based on geographical location and expected returns. Plus, you can put your money into an actual property, real estate investment trusts (REITs), or online real estate platforms like CrowdStreet and RealtyMogul.
This flexibility enables investors to tailor their portfolios based on their financial goals, risk tolerance, market conditions, and other factors.
Why Cryptocurrency Can Be a Good Investment for Small Businesses
Bitcoin, Ethereum, and other cryptocurrencies are digital or virtual monetary instruments. Unlike regular money, they’re not issued or regulated by a central authority, such as banks or governments. Therefore, users benefit from increased convenience, greater privacy, and lower transaction fees.
Like other alternative assets, cryptocurrencies have little or no correlation to the stock market.
This lack of correlation means their value doesn’t depend on the economic or political landscape but rather on factors like:
- Adoption rates
- Regulatory changes
- Technology trends
- Supply and demand
- Production costs
However, these financial assets don’t exist in a vacuum. Their performance may vary based on global economic events, but they’re less sensitive to these changes than other investments.
Another advantage is their potential for high returns. One study found cryptocurrencies generate about 20 times higher returns than traditional currencies or equity investments.
Moreover, their value can increase by hundreds or thousands of dollars overnight.
For example, one Bitcoin was worth $39,970 on December 3, 2023, $41,987 on December 4, and $44,076 on December 5. Similarly, one Ethereum was worth $1,889 on November 8, 2023, and $2,120 on November 9.
Many entrepreneurs don’t qualify for loans or lines of credit because they haven’t been in business long enough. Even if you are eligible for funding, you may have to wait months for your application to be approved. Plus, the interest rates and fees can be sky-high.
Investing in crypto could give you the chance to make a profit quickly. While it’s true that no one can guarantee a return, there is potential for significant gains.
Moving forward, let’s see other advantages of cryptocurrency for small businesses.
Cheaper and Faster Transactions
Users can transfer or cash out most types of cryptocurrencies within seconds. They only need a digital wallet and access to an alternative investment platform, online peer-to-peer platforms, or a Bitcoin ATM (depending on how they plan to use the funds).
These transactions are instant and require no paperwork—just ensure you record them in your accounting system. On top of that, the fees are often lower than what you’d pay for a wire transfer.
Better Accounts Payable Management
Given the low transaction costs and fast transfer speed, crypto can be a good choice for international payments. This option has particular appeal to online retailers and other merchants who work with suppliers worldwide.
They’ll get their money faster by paying your vendors and suppliers with cryptocurrency (if they allow it). Some may offer early payment discounts, helping your small business cut costs.
Therefore, this practice can simplify the accounts payable workflow and ensure you stay on top of your invoices. See these six strategies to better accounts payable management for other tips.
Bitcoin and other cryptocurrencies are stored in digital wallets and recorded in public ledgers. You’ll also need a personal key to access the funds and authorize transactions.
The data that flows between these systems is secured through public–private key encryption. This technology ensures your transactions are safe while eliminating the need for a middleman like a bank, stockbroker, or money transfer company.
Low Entry Barriers
Real estate, vintage cars, and other alternative assets require a substantial investment and can be difficult to convert into cash. Cryptocurrencies, on the other hand, have higher liquidity and lower barriers to entry.
Your small business can afford a monthly investment of $1,000. You could buy a fraction of Bitcoin or invest in cheaper cryptocurrencies, such as Dogecoin, Ripple, VeChain, or Ethereum.
This approach allows you to build a diversified portfolio without breaking the bank. You can trade one cryptocurrency for another or sell it for cash and then withdraw the funds to your bank account.
Streamlined Investment Management
Buying and selling cryptocurrency is quite straightforward, even for beginners. First, you need to pick a cryptocurrency exchange platform or broker.
Crypto exchanges enable users to trade directly with other investors. On the other hand, brokers act as financial intermediaries, taking some guesswork out of cryptocurrency trading. This option is more suitable for novice investors but involves higher fees.
Next, you must register for an account and complete the verification process. After that, add funds to your account and start trading.
As discussed earlier, investing in different asset classes is best to diversify your portfolio. With that in mind, compare the best alternative investment platforms and choose one where you can track all your assets in one place.
This extra step ensures you have a complete picture of your portfolio, which can streamline investment management. Some platforms come with real-time crypto tracking tools, budgeting tools, advanced reporting, and other features.
Crypto Trading Doesn’t Come without Risks
Whether we’re talking about stocks, bonds, crypto, or real estate, all investments carry some risk. That’s why you need to assess your options, build a diversified portfolio, and invest only what you can afford to lose.
Cryptocurrency carries higher risks than other asset classes due to its volatility. Their value can fluctuate from day to day, resulting in significant gains or losses.
There’s also the risk of losing your virtual wallet or private key. If that happens, you won’t be able to access your funds. Plus, you cannot modify or cancel a cryptocurrency transaction after initiating it.
Small business owners must also be aware of the operational challenges associated with these investments.
Handling transactions, accounting for cryptocurrency holdings, and managing crypto wallets requires specialized knowledge. On top of that, you’ll need to research and comply with the tax laws governing cryptocurrency.
Last but not least, your investments may be at risk for cyber-attacks. According to a recent study, hackers stole nearly $4 billion worth of cryptocurrency in 2022 alone. These attacks targeted major crypto exchanges and platforms like FTX, Coincheck, Mt. Gox, Bitmart, and Ronin Network.
Leverage Cryptocurrency to Grow Your Business
Alternative investments can open up many opportunities for startups and small businesses. These financial assets allow you to diversify your portfolio and potentially earn returns higher than those from stocks, bonds, or fixed-income securities.
Cryptocurrency, in particular, can be a good choice due to the low barriers to entry. With this option, investors may earn substantial returns in a matter of days and reduce portfolio risk.
Those funds would allow you to pay your suppliers, buy new equipment, or develop new products without applying for a loan. But there is also the risk of losing your money overnight, given the volatility of crypto assets.
Do your homework before investing in Bitcoin, Ethereum, or other cryptocurrencies. Set realistic goals, assess your risk tolerance, and start small.
Contact a financial advisor to discuss your options and decide on the next steps.