7 Alternative Investments You Can Invest in Today
When most people think about types of investments, they typically think of different types of traditional investments – stocks, bonds, savings accounts, retirement accounts, and more. But traditional investments are only part of the story; there’s another category of investments that you should also consider – alternative investments.
Alternative investments are financial assets that don’t fit into conventional categories. These types of investments generally have fewer regulations from the U.S. Securities and Exchange Commission (SEC) and tend to be somewhat illiquid. Because of the lack of stringent regulations, alternative investments are often subject to a less clear legal structure than traditional investments and may be prone to investment scams and fraud.
When it comes to alternative investments, here are 7 products to explore:
- Non-Fungible Tokens
- Real Estate
- Peer-to-Peer Lending
- Crowd Funding
Cryptocurrency, often referred to simply as crypto, is known as any form of currency that exists either digitally or virtually and uses cryptography to ensure secure transactions. Unlike traditional currencies that have a central issuing or regulating authority (like the government), cryptocurrencies circulate without a central monetary authority. Instead, crypto uses a decentralized system to record transactions and issue new units.
Crypto is digital meaning that is it only generated and traded in a digital or virtual format. Additionally, because it is a digital currency, the value of most cryptocurrencies is not pegged to a fiat currency like the United States Dollar or Japanese Yen, nor is it determined by precious metals like gold or platinum. Cryptocurrencies can be mined or purchased from cryptocurrency exchanges.
Types of Cryptocurrencies
Here are some of the most popular types of cryptocurrencies:
- Bitcoin: If you’ve heard of crypto, you’ve likely heard the term Bitcoin. Bitcoin is the largest and most popular form of digital currency. It was introduced to the public in 2009 by an anonymous developer or group of developers using the name Satoshi Nakamoto. One of the key characteristics of Bitcoin is that its coin supply is limited. The maximum number of bitcoins that can be issued – mined – is 21 million, due to the halving feature written into the code. Bitcoin inventors designed this cryptocurrency essentially as digital gold and capped the maximum supply to mimic the finite quantity of physical gold. As of January 2022, 18.9 million bitcoins have already been issued, with 2.1 million still to be released. The current cost of one coin is roughly $20,000, but because of its digital nature, you can purchase fractions of one coin.
- Ethereum: Ethereum is the second-largest cryptocurrency by trade volume and market cap. It is a blockchain network and software platform that developers can use to build apps and other cryptocurrencies. The associated currency for Ethereum is called Ether, and the current cost of one token is roughly $1,500. If you don’t want to purchase a whole Ethereum token or don’t have enough money in your account for a full coin, you can purchase a fraction of one.
- XRP: This is the cryptocurrency of the Ripple digital payment network. The XRP ledger is a decentralized, public blockchain built for digital payments. XRP touts itself as a faster, more efficient way to power global payments. These tokens are much cheaper to purchase, roughly $0.30 per coin. Ripple crashed at the end of 2020 due to actions filed against Ripple by the SEC, causing the price to tank. It is predicted that the price will rise to roughly $1 by the end of 2022.
2. Non-Fungible Tokens
A non-fungible token (NFT) is a digital asset that represents real-world objects like art, music, in-game items, and videos. NFTs are bought and sold electronically online, often with cryptocurrency, and they are generally encoded with the same underlying software as many cryptocurrencies. Although they have been around since roughly 2014, NFTs are starting to gain notoriety now because they are becoming an increasingly popular way to buy and sell digital artwork. The market for NFTs was worth $41 billion in 2021 alone – this amount is approaching the total value of the entire global fine art market!
NFTs are one of a kind, or at least one of a very limited run, and have unique identifying codes. They exist on a blockchain, similar to cryptocurrency. Specifically, NFTs are most popularly held on the Ethereum blockchain (although other blockchains support them as well). An NFT is created, or “minted” from digital objects that represent both tangible and intangible items, including:
- Designer Sneakers
- Graphic Art
- Videos and Sports Highlights
- And more!
Essentially, NFTs are like physical collector’s items, only digital. So instead of getting a physical painting, the investor gets a digital file and exclusive ownership rights instead. NFTs by themselves are not investments, so make sure you understand the value of the underlying asset that you are buying before you purchase the NFT.
3. Real Estate
Real estate is considered an alternative investment when the property is an income generator. And although buying property is not cheap, investing in real estate can create a reliable cash flow stream. To turn a property into an investment, you can either rent the property to tenants or flip the property for a profit. In many real estate investment cases, you make a down payment on the property and a financial institution finances the rest. If you are looking for a financial institution to finance your investment property, we recommend finding a credit union near you. Credit unions, in many cases, have better rates on mortgage loans.
There are a few ways to turn real estate into an investment property:
- Rental Property: this type of real estate investment involves purchasing property to rent out to tenants. Reliable tenants generate a consistent stream of income, and your expenses are typically limited to maintenance and repairs. If you want to own rental property without having to manage it, you also have the option to hire a property manager or property management company. A property manager handles the day-to-day responsibilities like dealing with tenants, making repairs, and collecting rent. Hiring property managers will cost money, but it may be worth it to you in the long run.
- Development and Resale: this type of real estate investment involves purchasing a property, making improvements, or “flipping it” (think HGTV’s Flip or Flop), and then reselling it for more than you purchased it. Properties purchased for flipping are often bought for a significant discount because they need substantial repairs and improvements. This is a risky way to invest in real estate because flipping a property requires specialized skills and expertise. However, if you have the required skills to be successful at flipping, you can often get a better return on your investment than just owning a rental property.
Commodities are raw materials that are either used directly or indirectly (think precious metals, oil, agriculture products, and more) and are often overlooked as an investment product used to help diversify your portfolio. However, some experts argue that investing in commodities can help reduce risk and smoothen out returns. Commodities move based on their own highly specific market conditions. That can make them attractive trades when you’re looking to diversify your portfolio.
Common commodities include:
- Natural Gas
There are several ways to invest in commodities, including by purchasing physical goods (like gold) or by purchasing exchange-traded funds (ETFs) that track specific commodity indexes. You can also purchase stocks of commodity-related businesses such as oil and gas producers or miners of precious metals. Commodities can be quite volatile, so it’s important to understand the risks you’re taking before making an investment.
Collectibles are any items that are worth more now than when they were originally sold. Investing in collectibles means purchasing and maintaining physical items with the hope that the value of the assets appreciates over time. On the surface, these investments sound interesting and exciting; however, they can be riskier than other types of investments due to the high cost of acquisition, a lack of dividends or other income until they’re sold, and the potential destruction of assets if not stored or cared for properly. To get a true return on your investment in collectibles, it’s important to have the skill and experience necessary to maintain the items.
Collectibles include a wide range of physical items, like:
- Fine Art
- Baseball Cards
- Rare Wines
- Vintage Cars
When investing in collectibles, it’s important to understand how to vet dealers and discern between genuine and fake items. This is because the world of collectibles has a dark side rife with scams, con artists, and fraudsters. However, when purchased intentionally with thoughtful research, collectibles have the potential to appreciate and deliver exceptional returns.
6. Peer-to-Peer Lending
Peer-to-peer lending (P2P), also known as “social lending” or “crowd lending” is a relatively new investing strategy. P2P lending enables individuals to obtain loans directly from other individuals, cutting out financial institutions as the middlemen. For many investors, this can be a great way to earn a passive income while also helping other people reach their own financial goals. P2P lending also offers a low barrier to entry, so investors don’t need to be millionaires to get involved. In fact, one of the most attractive aspects is that almost anyone can participate, with options available to fund loan notes in increments as small as $25.
However, as with any other alternative investment product, there are some distinct drawbacks to P2P lending. Loans fulfilled through P2P lending are unsecured, so investors risk losing everything if the borrower is unable to make payments. Additionally, P2P loans are not insured by the federal government, which means that investors will be left empty-handed in the event that a platform fails, or a borrower can’t fulfill their payment obligations.
7. Equity Crowdfunding
Equity crowdfunding allows startups and private businesses to raise capital from the public. In exchange for relatively small amounts of cash (sometimes as low as $100), public investors get a proportionate slice of equity in the business venture. Startups that need funding can offer shares of their company on crowdfunding sites like AngelList, CircleUp, and SeedInvest. If you invest in a company through a crowdfunding site, you own part of the company and will be rewarded if the company succeeds.
However, there are some major risks with investing in a company through crowdfunding. For starters, if the company fails, you lose part of all your money. A business that has been capitalized through equity crowdfunding runs a greater risk of failure than one that has been funded through venture capital or other traditional means that offer seasoned professionals to help steer a start-up through early development challenges. Additionally, investing in equity crowdfunding puts you at a greater risk of fraud. Never skip the step of doing due diligence on any investment you’re considering.
Further Resources on Alternative Investments
Here are some further resources on alternative investments.
- Investopedia: This website provides comprehensive information on a variety of alternative investments, including real estate, private equity, hedge funds, commodities, and more.
- The Alternative Investment Management Association (AIMA): AIMA is a global trade association for alternative investment managers, investors, and service providers. They offer research, education, and advocacy for the alternative investment industry, as well as networking opportunities and industry events.
- The National Association of Investment Companies (NAIC): NAIC is a trade association for minority and women-owned private equity firms and hedge funds. They offer resources and networking opportunities for their members, as well as advocacy and research on issues related to diversity in the investment industry.
The Bottom Line
Alternative investments offer you greater portfolio diversification and help to hedge against inflation. However, because of the lack of stringent regulations and oversight, it’s important to do your own due diligence before diving headfirst into the world of alternative investments.