While most people may be more familiar with traditional public market stocks, bonds, and mutual funds as investment opportunities, there is another side to investing that can unlock unique investments like startups, cryptocurrency, and even wine or baseball cards. Alternative investments have been around for thousands of years, but have become more common, especially in recent years. In this blog, learn more about alternative investing.

What are Alternative Investments?

Alternative investing refers to the practice of making investments in assets that are not part of traditional asset classes. These investments encompass a diverse range of assets that go beyond the traditional stocks, bonds, and cash. These non-traditional investments can include real estate, hedge funds, private equity, cryptocurrencies, startups, commodities, and more.

Types of Alternative Investments

Startups

Startups are one type of alternative investment that has been characterized by many as “high-risk, high-reward”. Previously accessible by those who meet certain income, net worth, or knowledge requirements outlined by the SEC, known as accredited investors, new avenues have emerged for the everyday person to invest in startups, like equity crowdfunding.

Three types of investments in startups include: venture capital, angel investing, and equity crowdfunding.

Venture Capital

Investing in venture capital typically involves putting capital into a pooled fund of multiple accredited investors to provide financing to early-stage companies that may have high-growth potential.

Angel Investing

Angel investing is another way to invest in startups. In this case, investors are typically investing their own personal funds into a startup, often during the earliest stages of development. Angel investors may put in lower amounts of capital than venture capitalists, but also can have the opportunity to develop a deeper relationship with the startup due to the early timing of the investment.

Equity Crowdfunding

Where equity crowdfunding fits in is as the bridge between accredited and non-accredited investors. While venture capital and angel investing have historically been reserved for accredited investors, equity crowdfunding is accessible by anyone. Usually with significantly lowered investment minimums, the average person can now invest in startups as an alternative investment.

Whether investors choose to participate in venture capital, angel investing, or equity crowdfunding depending on their accreditation status, these paths of investing in startups open up new alternative investing opportunities.

Cryptocurrency and Blockchain Investments

With the entrance of Bitcoin, Ethereum, and Solana, cryptocurrency has introduced a new dimension to alternative investments. From memecoins like Dogecoin and Shibi Inu to stablecoins backed by fiat currency like USD coin and Euro coin, there are many ways for investors to gain exposure to cryptocurrency alternative investments. While the crypto market typically is extremely volatile, it has attracted those seeking high-risk, high-reward opportunities outside traditional financial markets.

Real Assets and Real Estate

Investing in tangible assets such as real estate has long been considered an alternative investment strategy. Real estate crowdfunding platforms may allow investors to pool funds to invest in real estate projects, providing exposure to the property market with potentially lower investment amounts or direct property management responsibilities.

There are also more commonly recognizable ways of investing in real estate. Investors can gain exposure to real estate by flipping houses, where they purchase a property, renovate it, and resell it at a higher price. Additionally, they may purchase a property and find tenant(s) to lease the property as a landlord.

Whether participating in real estate crowdfunding, house flipping, or residential or commercial leasing, real estate can be an alternative investment asset class.

Commodities

Commodity investing is when investors purchase raw materials used in the production of other products, such as precious metals, energy resources, like oil or natural gas, or agricultural products, like wheat. Since these elements are considered essential for human existence, their demand is typically inelastic, meaning that a customer’s demand for the product remains unchanged despite price fluctuations. Investing in these raw materials can provide another way to invest in alternatives.

Collectibles

Collectibles are items purchased with the goal of long-term appreciation, namely the ability to sell at a price higher than the original purchase price. Typically, either out of production, or only a limited quantity was manufactured, certain collectibles are highly sought after by collectors. Examples of collectibles include Rolex watches, exclusive production bottles of wine, limited editing sports trading cards, classic cars, and other limited supply items expected to grow in value.

Benefits and Risks of Alternative Investments

Alternative investing can provide benefits to investors, making it an appealing investment opportunity in which many investors choose to participate.

Access

Alternative investments can offer access to asset classes that were either previously restricted or inaccessible. Equity crowdfunding enabled the average person to invest in startups and with the emergence of new technologies, cryptocurrency also became an option for alternative investing.

Diversification

Another advantage of alternative investments is their potential to enhance portfolio diversification. By allocating money across a range of asset classes, investors can help mitigate the impact of market volatility on their overall portfolio. Diversification can help mitigate risk across a variety of industries, locations, and growth stages.

Potential Returns

Alternative investments also potentially could have higher returns compared to traditional asset classes. However, the higher potential returns are typically accompanied by higher levels of risk, making it crucial for investors to carefully evaluate opportunities.

Risks

While alternative investments can present opportunities for investors, it’s essential to acknowledge the associated risks. Startups and other types of alternative investments, by nature, are high-risk endeavors, with a significant percentage facing failure. Investors should carefully assess their risk tolerance and conduct thorough due diligence before allocating funds to alternative assets.

Liquidity

Investments in alternatives, and especially early-stage startups, are inherently illiquid and investors should be prepared to hold their investment for a long time, until exit or failure. If liquidity is an important factor for an investor’s personal portfolio, they may want to avoid investing in alternatives.

Investment Updates

Because startups are not publicly traded, you will not receive the same type of updates you would for public stock investments. However, some startups will provide updates even though they’re not required, and there are no rules against requesting information.

Total loss of capital

At the end of the day, alternative investments require a high-risk tolerance. There are no guarantees that you will receive any return on investment, and it’s more likely that your original investment is completely lost.

Final Thoughts

Alternative investing can offer some unique benefits for investors but they are not without risk. As alternative investments become more popular and more available to different types of investors, they’re becoming more important to understand.

Startup investing, in particular, can offer a dynamic and participatory experience, allowing investors to contribute to innovative ventures. As the financial landscape continues to evolve, embracing alternative investments may become not only a means of diversification but also a way to engage with the transformative forces shaping our future. As with any investment strategy, careful consideration, due diligence, and a clear understanding of risk tolerance can be essential for navigating the ever-expanding world of alternative investments.

Are you ready to invest in alternative investments? Sign up for a MicroVentures account to invest in startups!

Want to learn more about investing in alternatives? Check out the following MicroVentures blogs to learn more:

• History of Alternative Investments
• Younger Investors are Turning to Alternatives
• Unlocking New Opportunities: Investing in Alternatives
• Navigating the Risks: Why Startups Fail

*****

The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.