Fortnite made +$2.4B selling digital costumes…
Talk about a demand for alternative assets!
Do you have enough exposure?
Time for a thread 👇👇👇
60/40 is dead.
Smart money knows this but few talk about it.
That is: 60% of your portfolio in Equities and 40% in Bonds.
But what happens when the risk-reward profile changes?
It gets replaced with 60/20/20 with the introduction of Alternatives!
Today, in <5 minutes, we’ll cover:
Why “digital alternatives” came to exist 👉 change of the old guard, technological advancements
Crypto 👉 Market update and increased adoption
NFTs 👉 What the heck are these things?
1.1/ Why “digital alternatives” came to exist 👉 Change of the old guard, technological advancements
You’d have to be living in a cave to miss the whole trend of cryptocurrencies and NFTs (non-fungible tokens), but why did they come about and why does it matter?
1.2/ 5 ASSET CLASSES
Depending on which business school textbook you crack open, you can traditionally find around 5 different asset classes:
Equities
Fixed Income/Bonds
Currencies
Commodities
Real Estate/ Real Assets (Infrastructure, Farm Land, etc)
1.3/ 1-3
Equities are typically higher risk, higher return when compared to fixed income and bonds that provide stability (generally) and cash flow.
Currency as an asset class involves making macroeconomic calls surrounding relative interest rate policy and GDP growth rates.
1.4/ 4&5
Commodities are cyclical in nature and tend to expand and contract with the overall economy.
Real estate and real assets are historically great protection against inflation (if prices go up, so does the value of real assets).
1.5/ THE GOOD NEWS
ALL these asset classes are now available to regular investors. There is no excuse not to be diversifying.
The idea is to have the right combination of these assets, and this is what the smart money do in order to generate uncorrelated returns.
1.6/ WHY?
Why do we want uncorrelated returns? Because you want to capture returns through all parts of the economic cycle. Different asset classes shine at different times.
Conversely, different asset classes suck at different times.
1.7/
These buckets served well as traditional means to allocate capital towards efficient means of (physical) production.
But what about now? When so much of that “production” has moved online.
1.8/ ENTER CRYPTO & NFTs
Cryptocurrencies are not like traditional currencies because they are not issued by a central bank that can control the monetary supply and interest rates.
It is at the center of the Decentralized Finance movement that is disintermediating banks.
1.9/ NFTs
When you break them down, NFTs are like real assets, except they are not exactly “real.”
These two assets are different and are at the intersection of an asset class revolution and the shift to a digital-first economy. Every Investment Advisor NEEDS TO PAY ATTENTION.
2.1/ Crypto 👉 Market update & increased adoption metrics
The market commentary surrounding BTC & ETH has been characterized as “broadening strength”. This is a terrific indicator. When the “breadth” of a market rally widens, it is indicating overall strength and staying power.
2.2/ MORE COMFORTABLE
This is due to institutions beginning to get more comfortable with the underlying technology.
In early adoption stages there are trailblazers, then when iteration of ideas occurs, the kinks start to get worked out. Shots on net!
2.3/ BRRRRR....
People are now paying attention to this in terms of both institutionalized adoption and as a hedge against inflation, which we know is coming with a massive amount of money printing, as we talked about in my previous newsletters.
2.4/ To me...
BTC & ETH are a store of value, a means of transaction, and building blocks to the new digital economy.
Ideas and constructs are allowed to be different things to different people.
What you can’t really debate is the widespread use and acceptance of this asset.
2.5/ FUNDS!
+$3B in assets from institutions in Canada have flown into Bitcoin closed-end funds and ETFs in order for Investment Advisors to gain exposure in an equity-like vehicle.
2.6/ ENERGY...
Bitcoin currently consumes 0.55% of electricity with +40% being carbon-neutral.
As one of my favourite Bitcoiners said on CNBC:
“Larry Fink better drop the dollar then, cause the dollar is way worse for the environment than bitcoin is.” -@APompliano
3.1/ NFTs 👉 What the heck are these things?
Mentions of NFTs by executives are skyrocketing in 2021.
When you try to google what is an NFT (Non-fungible token), you get some next-level mumbo jumbo.
So let’s just call it what it is:
Unique digital certificate. Much better.
3.2/ AUTHENTIC
Just like when you buy shares in a stock, you get a unique certificate that verifies its authenticity.
NFTs however, exist only in the digital world - so you don’t have to worry about storing it for a price, or worry about the condition deteriorating over time.
3.3/ DIGITAL GOODS!
But when it comes to desirability for differentiation or status signaling, think about how Fortnite made $2.4B in 2018 alone selling digital costumes. So the market for digital goods exists!
3.4/ IMAGINE...
A world where you are provided base customizability in your house and avatar & you pay for upgrades.
In this world, you also own unique digital assets like skins. Unique digital assets can also have utility beyond just aesthetic. This sounds like the metaverse!
4/ GRIT NEWSLETTER
Want more?
Every week I write a newsletter to +28k investors, including hedge funds, billionaires, institutions & retail investors.
SUBSCRIBE (it's Free!) 👇👇👇
gritcapital.substack.com/welcome
Share this Scrolly Tale with your friends.
A Scrolly Tale is a new way to read Twitter threads with a more visually immersive experience.
Discover more beautiful Scrolly Tales like this.