Digital Asset Generation

Investing is about to change forever.

The conventional approach to investing for retirement was 60% equities and 40% bonds. If your goal was 10% a year this mix got the job done in the 80s, 90s and 00s. Not anymore...

In the world of zero and negative interest rates, bonds return zero.

A recent report published by CIBC World Markets, estimates bonds will produce a compound annual return of just 0.6% over the next 10 years. If inflation averages close to 2% over that horizon, that’s a negative real return for a full decade, making returns from bonds as an asset class obsolete.

So what happens with the recommended 40% bond portfolio allocation? If we can’t get any yield from bonds, what do we replace our portfolio with?

As I see it, there are three go-forward realities:

  1. Lower expectations: Continue the 60/40 slip and lower expectations for annualized returns
  2. Double down on equities: Increase equity exposure to a 80/20 split or higher
  3. Alternative Assets: Increase exposure to alternative assets

Lowering expectations could be a reasonable option but most of us want to move forward with our investments not backwards, and I don’t see many choosing path 1 and accepting outright negative returns. Increasing equity exposure via path 2, may to some degree seem like a no-brainer especially in the early stages of a new bull market. However, as we’ve seen with recent carnage in the stock market, this path can quickly turn ugly.

The way I see it, it’s only a matter of time before investors seek more exposure into alternative asset classes via path 3, like gold, cryptocurrency, collectibles, and art. Part of what makes an alternative investment so attractive is a lack of correlation to traditional financial assets; the theory of investing in uncorrelated assets is what made the 60-40 investment strategy so standard in the first place.

Given the changing times, I’m going to dive into a multi-part series on the future of investing with a focus on digital assets like Bitcoin and digital art & collectibles.

The Future: Digital Asset Investing

Digital assets are a form of alternative assets. At the broadest level, alternative assets encompass any investments outside the realm of traditional asset classes such as cash, equities, and fixed income.

When people discuss alternative assets, diversifiers like infrastructure, real estate, commodities, currencies, and private equity usually come to the forefront. But we’re ignoring those to talk about the new kid on the block – digital assets.

What is a Digital Asset?
Digital assets can be broken down into two categories: fungible and non-fungible.

Fungible assets like Bitcoin are assets where two equal segments of the asset have equal value. For example, one Bitcoin is equal to one Bitcoin, and one ounce of gold is equal in value to any other ounce of gold. This makes "fungibility" completely essential to the concept of currency, whether they be crypto or otherwise.

Non-fungible assets are unique, digital items with blockchain-managed ownership. Examples include collectibles, game items, and digital art. The closest comparable in the physical world would be diamonds because no two diamonds hold the same value.

Three things are shifting the landscape in favour of digital assets

  1. Software is eating the world: The famous quote by Marc Andreessen sums up the state of the economy, now accelerated exponentially by COVID-19. The simple fact is we need money purpose built for a digital world – and Bitcoin has the potential to check all the boxes.
  2. Ballooning global debt: The coronavirus pandemic has pushed the U.S. federal budget deficit above US$3 trillion for the first 11 months of fiscal 2020, more than doubling the previous full-year record.
  3. Cultural shift towards fractional ownership: Alternative investments like fine art have traditionally been limited to high net worth individuals but software platforms are opening these investment opportunities to the masses via fractional ownership.

Future Topics

In this upcoming series on digital assets, I’ll focus on two assets that could reach mainstream adoption in the next 5 years. Here’s a little preview.

Bitcoin
We’ll discuss how Bitcoin can be both a medium of exchange and a reasonably stable store of value. We'll also cover some recent events that foreshadow mainstream adoption of Bitcoin in the not-so-distant future. In August, a public company converted $250 million of cash on their balance sheet and purchased 21,454 bitcoin. This was the first example of a major public company to use Bitcoin as the reserve asset on their balance sheet. Crazy times!

Digital Art & Collectibles
We’ll discuss how digital art is the next evolution of art. A future where collectors could cycle through different pieces of art on a single screen. These works could be sent to anyone in the world at the click of a button, are immune from damage, and authenticity & provenance are available for anyone to verify.

We’ll also discuss how digital collectibles are one of many amazing things that blockchains enable. What excites me the most about collectibles is that they represent a tangible item.

So here's the Hidden Lever
Every generation has an asset class and I believe ours will be digital assets.

Until next time,

Justin