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09 December 2021

Alternative choices: Comparing fine wine and cryptocurrency

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Posted in: Wine Investment

Tagged: Alternative Investment

Cryptocurrency might be grabbing the headlines, but fine wine’s stability and intrinsic value as a physical asset give it added advantages.

Cryptocurrency has exploded in popularity in recent times. These virtual coins have transformed the global monetary landscape and captured the imaginations of thousands of investors who are seemingly getting money for… well, nothing. Almost everyone has a story of a friend of a friend who’s hit it big on crypto, leaving many wondering if that’s where the smart money lies. With digital currencies like Shiba Inu returning more than 90,000,000% over the past year it’s easy to see the appeal.

Now, fine wine might not be quite on par with those eye-watering levels of returns, but it remains one of the most exciting alternative investments on the market, promising variety, solid returns, low volatility and a tangible asset you can physically enjoy. Can the same be said of crypto? Let’s see how they compare.

 

Volatility

One of the main reasons cryptocurrency has delivered such high returns is because it’s risky. According to Swissquote education manager Stefano Gianti, Bitcoin is 10.6 times more volatile than the euro and US dollar over the short term, and is also more volatile than Nasdaq (2.9 times), the S&P 500 (4.7 times) and the Swiss Market Index (8.2 times). 

This volatility can yield big gains, but it can also result in big swings in the value of your investments, meaning it is important to diversify with other alternative assets that offer more stability.

Fine wine has roughly a third of the volatility of traditional equities, and has a solid track record in weathering economic storms. For example, when the COVID-19 pandemic hit in early 2020, fine wine’s downturn was both shorter and less severe than many other assets, both conventional and alternative. At its 2020 low on 21 March, the Liv-ex 1000 had only declined by 4%. In Q1 2020, Cult Wine Investment’s selections were only marginally down by less than 1%. Bitcoin, however, dropped -10.9%.

 

Intrinsic value

Fine wine is the physical product of a thriving global industry that contributes to local economies, supports global trade and employs thousands of people. Cryptocurrency, by contrast, is extremely difficult to value, especially as such a small total value of the currency goes into evolving it. Without tangible yardsticks, it’s a real challenge to know when it’s fundamentally overbought or oversold, and when it’s good value or overpriced.

As such, a lot of the value of cryptocurrency is based on market sentiment, which adds to the asset’s volatility. Back in May, for example, Elon Musk tweeted that Tesla would no longer accept Bitcoin for car purchases, citing environmental concerns. The cryptocurrency nosedived 10% following his announcement. 

 

Regulation and assurances

There is a notorious lack of regulation in the cryptocurrency space, paving the way for market manipulation and any number of scams, from pump-and-dump schemes and rug pulls to traditional hacking and theft. It’s easy for fledgling crypto investors to fall foul of this.

There is a global effort among financial institutions to introduce more regulation in this area, but this will have impacts. Rules across different countries, for example, can play havoc with cross-border dealings, while impending stricter impositions will quash the attractive gains that entice so many to the crypto landscape in the first place.

It’s true that fine wine has also experienced cases of fraud over the years, but for the individual investor, the insurance and authenticity guarantee offered by reputable firms such as Cult Wines means they can be assured about their wine’s provenance and that their investment is safe.

 

Understanding the market

Fine wine and crypto do have similarities, namely that they’re both driven by scarcity. Their finite supplies spur demand, which pushes up the price. So far so good, but as mentioned above, the cryptocurrency market is difficult to navigate successfully without a solid understanding of its mechanics. Plus, those new to the landscape will have to spend a good amount of time following the market and should be prepared to act at a moment’s notice.

Fine wine investment, on the other hand, requires little prior knowledge for those enlisting a firm like Cult Wines, which takes care of all the nuts and bolts of investing. Many investors will grow an entire portfolio without ever getting to grips with winespeak such as En Primeur or terroir. But for those that are interested in learning more, fine wine is an accessible, fascinating topic based on human stories, flavours and culture. And there’s no urgency, either – as the fine wine market is resilient to global shocks and everyday events, investors can relax knowing their portfolio is growing without the need for constant intervention. It’s a far more leisurely pursuit.

 

The environment

The environment is becoming an increasingly key concern for savvy investors. The wine sector stands to be severely affected by the climate crisis, which is why the industry is swiftly mobilising to manage climate change and reduce its own impacts. Organic, sustainable and biodynamic viticulture is sweeping wine regions across the world.

Cryptocurrency, by contrast, has been lambasted for its enormous carbon footprint. Because there is a finite number of Bitcoins that can be mined (21 million), computers have to solve harder and harder algorithms in order to obtain them, and the special equipment and its intense processing power uses a huge amount of energy. According to the Cambridge Bitcoin Electricity Consumption Index, the energy used to produce Bitcoin alone is equivalent to the annual carbon footprint of Argentina.

 

Passion and interest

‘Passion’ might not be a key metric for results-focused investors, but it’s an unquestionable facet of fine wine. While cryptocurrency is comprised of intangible, cold and ever-changing numbers, wine brings joy. It complements the pleasures of human existence, bringing people together, delighting taste buds and enriching our understanding of the world. How wonderful that such a thing can also bring financial success.  

 

Real returns

It’s clear, then, that fine wine investment has a lot going for it, but the real question all would-be investors want to ask is: will it make me any money? The answer is a resounding yes.

The Liv-ex 1000 Index, the broadest measure of the market, has appreciated 315% (through 30 Nov 2021) since its inception at the beginning of 2004. And wine stacks up well against other real-asset investments. The latest Knight Frank Luxury Investment Index, for example, shows that in 2020 five of its nine asset classes had a negative return on investment. Not fine wine, though, which returned 13% for the year – the second-best performance only behind Hermès handbags.

And since more people than ever before are enjoying fine wine, demand will only increase in time, meaning investors can continue looking forward to low-stress high-returns that are sure to outlive whatever next big thing takes the zeitgeist by storm.