Cryptocurrencies Are the New Alternative Investment

It's time to recognize cryptos as an investment option in your portfolio

Does Bitcoin Fit With Other Global Currencies?.

The time has come!

After the financial crisis of 2008, many financial firms and their clients recognized the importance of asset allocation and the need to diversify client portfolios. This led to an increase in the use of alternative investments into client asset allocation models.

A survey in 2015 showed that advisers had 73% of their clients in alternative investments and 70% of advisers planned to maintain their current alternative investment allocations for clients, although half of them feel that alternative investments had underperformed since 2008.

The survey shows that in terms of asset allocation, most advisers were recommending a range of 6% to 15% of a client's portfolio in alternatives. Many (18% of advisers) were recommending 16% to 25% of their clients' portfolios in alternatives.

What's an alternative investment?

Retail firms like Morgan Stanley and Merrill Lynch have recommended allocation models for clients with alternatives near or above 20% of a portfolio. Of course, every client is different and allocations will vary for each client, but it's safe to say that a current discussion with your financial adviser will probably include the topic of alternative investments in your portfolio.

For those who are not familiar with them, alternative investments are defined as "noncorrelated assets", that is their performance doesn't follow that of more traditional asset classes such as stocks and bonds. They are considered an effective way to balance risk in a portfolio and to provide a "cushion" in the case of a stock or bond meltdown and are appropriate in a small portion of your overall portfolio.

Even if you look at your portfolio and don't directly see something that you recognize as an alternative investment, they may be there as ETFs or funds, as well as many large institutional funds such as pensions and even retirement fund offerings, that have alternative investments in them.

Most people associate a hedge fund as the most common alternative investment and for many investors, that's true.

However, most hedge funds are available only to large investors and require a significant amount of paperwork, high fees and tax headaches. However, most investors are achieving exposure to alternative investments through liquid alternatives such as mutual funds, ETFs and closed-end funds that provide daily liquidity, but have complex investment strategies that seek to retain their non-correlated status.

A look at Blackrock's listing of alternative investments include strategies such as long/short equity, event-driven equity, real estate and commodity funds. Many people consider their real estate, gold holdings, wine and stamp collections as alternative investments as well.

Should they be in my portfolio?

In 2014, I expressed my belief that the inclusion of alternative investments is a prudent aspect of asset allocation for my retirement account. I discussed my intent to utilize 5-10% of my retirement portfolio to this non-correlated investment class. I also decided that my alternative investment of choice would be bitcoins.

You can read the full series of articles from Marketwatch.com about that investment over the two years that I've had it. The bottom line is that the investment was a rocky one (at one point, losing half of the account value) but it ultimately has paid off and I've achieved a double-digit gain on my investment in GBTC, which at this point is the only pure bitcoin-based investment you can buy through your adviser (yes, you can actually buy it either from an adviser or online broker).

The price of bitcoin has doubled from where it was a year ago. GBTC is currently tracking a return of over 16% year to date. But, as I said and reported during my time being long GBTC and bitcoin, it's been a profitable, but volatile, journey along the way.

For comparison purposes, let's look at the investments that are "traditionally" called alternative investments – gold and hedge funds. The average hedge fund is down nearly 4% (in 2015, the average hedge fund was down 3.64%) and many are suffering double-digit losses.

Tracking the value of Gold through the GLD ETF indicates that although its 3-year and 5-year numbers are in negative territory, the current one year return is positive at 5%.

It probably won't be long before you see an ETF made up of companies pursuing Blockchain technology (will that be considered an alternative investment?).

Some hedge funds are already including bitcoin into their portfolios. There are probably hedge funds that already have Bitcoin and Blockchain startups that may one day be public traded companies in their portfolios. If a hedge fund is considered an alternative investment and they're already using bitcoin, then why can't firms and the media finally declare bitcoin as an alternative investment?

What about beyond Bitcoin?

If you're a very aggressive investor, you may even want to look at other cryptocurrencies. That's right, Bitcoin is not the only digital currency. In fact, there are exchanges that buy and sell each day many of these different cryptocurrencies, including ETH ( Ethereum), which has soared or XRP which is from Ripple Labs and is being used in blockchain projects involving existing banks.

I'm not aware of any products available from traditional or online brokers that will easily allow you to invest in cryptocurrencies, outside of doing so on your own with an account with one of the exchanges that buy and sell them, such as Poloniex. But they're coming. A young startup called lawnmower.io is building the capability to allow for individual investors to invest in a portfolio of cryptocurrencies, including Bitcoin. They'll even have the ability to do these trades from a mobile device and using dollar cost averaging techniques.

Even with all of this current and future activity, I don't see any firm, any advisor or any publication explicitly classifying Bitcoin or any other cryptocurrency as an alternative investment. There's little doubt that they're non-correlated to stocks and bonds. They could even be considered a currency (in fact, they were the best-performing currency in 2015).

My point here is not to convince you to invest in Bitcoin, GBTC or cryptocurrencies, but to let you know that many others are doing it. As with any investment, some are making money doing it and some are losing money doing it. It's important that you recognize that these investments are not for the faint of heart, but it's a growing and yes, they present a very real investment opportunity.

If you still think that Bitcoin is nothing more than a Ponzi scheme, then why are companies like Overstock.com, eBay, Amazon, Target and Expedia accepting it as a form of currency similar to credit cards?

If you think Blockchain technology (the underlying infrastructure of Bitcoin) is of little value, then why are finance companies like Bank of America, Merrill Lynch, Citi, Credit Suisse and JPMorgan, John Hancock and the DTCC running tests with it to improve their current processes?

Time to consider them as part of a portfolio!

I believe that the time has come for investors and financial firms to classify investing in Bitcoin, cryptocurrencies and blockchain based technologies as alternative investments, and thus having a place in a properly allocated investment portfolio. Over the next few years, it's clear there will be more and more opportunities to invest in them. As these investment opportunities open up, they need to be classified appropriately in order to be placed in investor portfolios using proper asset allocation models.

Most people will dismiss them, including probably your adviser. But I venture to say that with the progress (and profits) being made, over the next year or two, I won't be the only person telling you about how they may fit the alternative investment sleeve of your portfolio.

Just make sure that your investments in them follow the rules of proper asset allocation. I don't want you to be an irresponsible investor.

DISCLOSURE - Jack owns numerous cryptocurrencies in his portfolio including Bitcoin, XRPs, ETHER, and Factoids. He's also an advisor to lawnmower.io, which is mentioned in this article.