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. However, 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 investments generally have fewer regulations from the U.S. Securities and Exchange Commission (SEC) and are 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 seven products to explore:

1. Cryptocurrency

2. Non-Fungible Tokens

3. Real Estate

4. Commodities

5. Collectibles

6. Peer-to-Peer Lending

7. Crowd Funding 

1. Cryptocurrency

Cryptocurrency, often called crypto, is any digital or virtual currency that uses cryptography to ensure secure transactions. Unlike traditional currencies with 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 it is 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. Due to the halving feature written into the code, the maximum number of bitcoins that can be issued – mined – is 21 million. Bitcoin inventors designed this cryptocurrency essentially as digital gold and capped the maximum supply to mimic the finite quantity of physical gold. As of early 2024, about 19.6 million Bitcoins are in circulation. One coin costs roughly $73,000, but you can purchase fractions of one coin because of its digital nature.

• Ethereum. Ethereum is the second-largest cryptocurrency in terms of 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 as of April 2024, one coin is roughly $3,000. If you don’t want to purchase a whole Ethereum token or don’t have enough money in your account for an entire coin, you can buy a fraction of one.

• XRP. XRP 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 significantly cheaper to purchase, roughly $0.52 per coin. As of April 2024, Ripple has a circulating supply of 55.24 billion XRP tokens out of 100 billion. 

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. 

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 also support them). An NFT is created or “minted” from digital objects that represent both tangible and intangible items, including:

• Collectibles

• Music

• Designer Sneakers

• Graphic Art

• GIFs

• 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 receives a digital file and exclusive ownership rights. NFTs are not investments, so make sure you understand the value of the underlying asset 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. Although buying property is costly, 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. We recommend finding a credit union near you if you want a financial institution to finance your investment property. 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 income stream, 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 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 reselling it for more than you purchased. 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 skills necessary to be successful at flipping, you can often get a better return on your investment than just owning a rental property. 

4. Commodities

Commodities are raw materials 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 returns. Commodities move based on their particular market conditions. That can make them attractive trades when you’re looking to diversify your portfolio. 

Common commodities include:

• Corn

• Wheat

• Soybeans

• Oil

• Natural Gas

• Cattle

• Cotton

• Lumber

• Gold

There are several ways to invest in commodities, including purchasing physical goods (like gold) or exchange-traded funds (ETFs) that track specific commodity indexes. You can also buy stocks of commodity-related businesses such as oil and gas producers or miners of precious metals. Commodities can be pretty volatile, so understanding the risks you’re taking before investing is essential. 

5. Collectibles

Collectibles are any items worth more now than when they were initially sold. Investing in collectibles means purchasing and maintaining physical items with the hope that the value of the assets will appreciate 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 an actual return on your investment in collectibles, having the skill and experience necessary to maintain the items is crucial. 

Collectibles include a wide range of physical items, like:

• Fine Art

• Baseball Cards

• Stamps

• Coins

• Rare Wines

• Vintage Cars

When investing in collectibles, it’s important to understand how to vet dealers and discern between genuine and fake items. 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 others, cutting out financial institutions as the middlemen. For many investors, this can be a great way to earn a passive income while helping others reach their 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 cannot make payments. Additionally, P2P loans are not insured by the federal government, which means that investors will be left empty-handed if 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 significant risks with investing in a company through crowdfunding. If the company fails, you lose part of all your money. A business capitalized through equity crowdfunding runs a greater risk of failure than one 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 doing due diligence on any investment you’re considering. 

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, you must do your due diligence before diving headfirst into alternative investments.