If there is any lesson to be learned from the ongoing crypto bear market, it’s that avoiding the more bizarre type of blockchain volatility requires protecting your portfolio through uncorrelated assets. But this doesn’t just have to happen during a market downturn.
Portfolio diversification is a key pillar every financial advisor, crypto or otherwise, suggests to an investor. However, this advice seems to have fallen by the wayside of those strictly focused on digital assets.
Though no bear market lasts forever, now is an opportune time to explore the advantages of uncorrelated assets to stabilize a portfolio, no matter the size.
Pedal to the metal
Classic “safe-haven” investments like gold and other precious metals like platinum or silver garner this reputation due to relative immunity from overall market factors. But for rookie investors, it can be tough to visualize exactly what that means.
Gold, for instance, is a unique hedge because its correlation is known to adapt easily to market changes. In a good market, the correlation is higher, but in a downturn, the correlation is lower—making it favorable for investors in both environments.
These traits of adaptable correlation are not strictly reserved for gold but occur with other precious metals. Investing in platinum and silver as uncorrelated assets follows a similar track to gold, allowing more diversity in an asset roster. Precious metals are an investment cornerstone, and although they may not be the most hyped or trendy, they have a proven track record to be winsome in any market environment.
Real rarities
Those looking to dip a toe into other worthwhile uncorrelated assets can look beyond gold into other valuable rarities and collectibles. For more fashionable investors, there is the investment allure of fine jewelry and luxury goods, while cultural collectibles like fine art continue their dominance as a lucrative alternative asset class.
When bringing up art and collectibles for investment, it might set off alarm bells for those that felt the sting of the NFT market crash or the OpenSea hack. However, physical art and rare collectibles are a classic choice to lay resources into.
Yes, the art world does have its own lexicon and learning curve to overcome which may turn away more novice investors. In these cases, a savvy advisor or consultant specializing in the arts can be immensely valuable to navigate the space properly. Art shares and community investment platforms are gaining traction to help alleviate costly entry barriers, presenting a more accessible way to enter blue-chip art collection.
Another unconventional yet highly effective alternative-asset class are rare goods or collectibles in the luxury fashion and jewelry industries. Often classified as “recession-proof”, luxury goods are a powerful industry known for resilience in economic downturns—so don’t let the brand names fool you into thinking of a superficial shopping trip. Though it may also have a steep entry price, elder statesmen in finance increasingly recommend adding these goods and rare commodities as part of a diverse portfolio.
Unique propositions
Uncorrelated assets follow the price actions of their respective commodities outside a traditional stock or crypto market, so building an investment assortment can take on many unique forms.
An offshoot from luxury goods, investors are now adding wines to their portfolios as an alternative asset, building collections of valuable and rare bottles. Again, the initial entry price can be inaccessible for the average person. But like fine art, investment platforms do exist for those curious about expanding their sommelier and financial skills.
Emerging technologies also unlock new opportunities and avenues for investors looking to diversify a portfolio outside the traditional markets. One such technology can be seen in Darrow, a justice intelligence platform that scours the internet for hidden legal violations using AI. These cases are then appraised on their potential wins with legal expertise, while users can choose to invest in cases they feel have a good chance of ruling favorably, potentially collecting hefty returns should the case proceed.
For the ecologically conscious investor that may feel turned off by the environmental impacts of cryptocurrency mining, there are ways to now invest in the emerging carbon market. Though this industry is novel, new platforms allow everyday investors and small businesses to join the blossoming $851 billion carbon trading industry. Carbon trading is a major method for large corporations and governments to maintain their ecological impact goals, but these markets until now have been mostly entirely inaccessible to regular investors.
Carbon trading and legal case outcomes are, of course, also uncorrelated to stock market fluctuations and Bitcoin prices, providing an alternative to more traditional safety-net asset classes.
It should not take a bear market for investors to realize the value of a diverse asset portfolio, but realizing late is better than never. Although crypto and traditional markets can seem like they are in total disarray, there is a way for cautious investors to utilize this to their advantage. Uncorrelated assets have the potential to thrive in the best and worst of times and can provide a safety net as investors recover or shift focus in the financial world.
By Alexander Tkachenko, Founder & CEO at VNX
