By Stephen Yong
Alternative investments including Bitcoin, P2P lending and gold are increasingly popular. Gain insight on what are alternate investments and its appeal for Malaysians. What are the risks and rewards for investing in alts.
What are Alternative Investments?
Alternative investments are called as such because these financial assets do not fall into the more conventional asset classes of equity, bonds, properties, or cash investments. Alternate investments can be further divided into subcategories such as commodities, private equity, collectibles, and cryptocurrencies. Typically, alternate investments do not form the core of your investment portfolio but instead form less than 10% of your overall portfolio.
Whether you call them as alternative investments, this asset class has been grabbing headlines. At the forefront is cryptocurrency with Bitcoin having skyrocketed to a new high above RM100,000 (USD25k) per Bitcoin. Another increasingly popular alternate investments include gold which has gained some new followers with FinTech now allowing you to buy fractional gold via an app. Lastly, we have P2P financing which allows investors to legally lend money to small businesses and entrepreneurs via an online P2P platform.
What is the Appeal of Alternative Investments?
Alternative investments are generally viewed as higher risk and higher volatility. These investments are also more often embraced by tech savvy investors who are comfortable with financial technology (FinTech). While older investors may shun away from investing online or via an app into an investment that talks about using a blockchain or fractional investing. Older investors may also have a preference towards more traditional investments such as stocks and property.
Blockchain: a digital ledger of storing information, often in a decentralised manner, with transactions duplicated across many different computer systems making it near impossible to hack or change.
Alternate investments, especially those powered by FinTech, have the following advantages:
More transparent with details of the investment available 24/7 on your mobile
Lower fees than more traditional investments with FinTech lowering costs
Higher potential returns for investors with a higher-risk appetite
Increased diversification having assets not correlated to the stock market
Higher volatility which is beneficial for traders to make higher gains
Keeping up against inflation better than most traditional investments
Alternate investments do have its own set of drawbacks and disadvantages:
Difficult to value as there’s less publicly available information or fundamentals to be analyzed
Illiquid if there’s no willing buyer or causing the spread to be wide reducing your returns
Volatility causing you to suffer losses if you are forced to sell your investment during a downturn
How do Alternative Investments Perform?
Accompanying the higher risk and volatility, alternative investments also enjoy potentially higher returns. For example, Bitcoin’s YTD (year-to-date) returns at point of writing is at 250% towering above most if not all other asset classes. YTD returns for gold is around 23%. While P2P financing returns can range from 10% to 18% according to data provided by P2P financing operators in Malaysia.
While alternative investments appear to be doing well, it is a double-edged sword with investments potentially going downwards significantly as well. For example, in the Great Crypto Crash of 2018 Bitcoin declined 80% from its peak which is an even bigger magnitude of loss than the dot-com crash. Gold is often falsely perceived as low risk as a safe investment during times of crisis. In fact, gold is highly volatile with an average volatility moving upwards (or downwards) of 16% a year! P2P financing investors on the other hand face risks in the face of rising default rates whereby borrowers are unable to pay and the losses affect investor returns.
What Do You Need to Know as an Alt Investor?
Investing in alternate investments does come with own fair share of risks and know-how. For example, a common question when investing in alternative investments is whether you will be taxed in Malaysia. Cryptocurrency is not taxed if you are not trading crypto as your primary source of income. However, for P2P financing, investors are required to declare gains and will be taxed. For gold investing if you are a Muslim, you will need to pay zakat, a mandatory form of Islamic obligation tax, if you hold gold above 85 grams. This applies even if you cannot see or touch the gold physically as halal gold must be backed up by actual physical gold to by Syariah compliant.
Let us narrow down into good rules of thumb for investing in these alternate investments. Bitcoin is a highly speculative investment with massive gains and drops thus you may want to hold no more than 5% of your investment portfolio in cryptocurrency. Of note as well is that cryptocurrency is not viewed as legal tender in Malaysia but there are 3 Securities Commission recognised market digital asset exchanges aka cryptocurrency platforms in Malaysia. P2P financing face increasing risk of defaults thus you may want to make sure you spread your risk across different borrowers (or even different P2P financing platforms). Do read up on the borrower’s financial information before investing in any P2P financing notes. Gold has its fair share of criticism as well as it does not generate any returns but is a good hedge against times of crisis. Do be aware of the gold spread, which is the difference between buying and selling price of gold, and any fees charged which will reduce your returns.
What Lies Ahead for Alternate Investments
Cryptocurrency especially is an interesting alternate asset to watch. Cryptocurrency is increasingly being viewed as a store of value thus earning a nickname as digital gold. Digital payment platforms PayPal and Venmo announced that they will support transactions in Bitcoin and other cryptocurrencies driving an increase in usage and liquidity. There is also growing institutional investors in Bitcoin as a reserve asset and an alternative to fiat currency such as USD which is showing a decline in value.
Overall, alternate investments are becoming increasingly popular with financial technology and slick shiny apps appealing to young and young at heart investors. Increased competition, lowered costs with fintech, and an increasingly global investment market will further spur growth in alternate investments.