Investors' Note: Three Markets That are Too Opaque To Be Good Investments
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2018 is remembered as the worst year for investors in a century. Deutsche Bank noted that 90% of the 17 asset classes tracked posted negative returns, or at least, no improvement from the previous year. A major reason behind this is that central banks worldwide have begun to implement quantitative tightening (QT) after supporting economic expansion through quantitative easing (QE) following the 2008 financial crisis.
Interest went up across markets, leading to an abrupt spike in the performance of the assets. This shift has pushed investors to look to alternative or (somewhat esoteric) markets that still held promise to deliver good returns. Unfortunately, art, crypto and virtual reality (VR), which are among the markets hailed as surefire investments, are equally beset by deep problems. Whether it’s regulatory shortfalls (art), excessive volatility (cryptocurrencies) and continuous failure to develop broad appeal (VR), investors should be weary before taking a plunge in these waters.
Bitcoin fans felt relieve after the cryptocurrency surged by more than 15% recently and surpassed $5000. However, this level is far below the record $20,000-mark of December 2017 – a year when more than $700 million was pumped into the coin. Still, president of wealth management firm Creative Planning Peter Mallouk believes it’s yet another bubble ready to burst. Not denying the possibility of a few impressive sparks here and there, he warns that cryptocurrency is “not a real investment. It’s speculation.”
Mallouk may be onto something, as history shows. In December 2013, Bitcoin reached $1200 before crashing to $171 shortly thereafter. It took three years for the coin to bounce back and touch its high-water mark. And volatility is only set to rise with the increasing number of nonperforming crypto projects crippling the cryptosphere.
According to DeadCoins and Coinopsy, 934 cryptocurrencies failed in 2018, many of whom were scams, although they had raised more than $100 million in their ICO campaigns. Although Investing.com has been tracking 2500+ coins, the lack of investor will to research and filter out dependable bids has further worsened the scope of opportunities and will show in shrinking numbers by the end of 2019.
Considering the immense amounts of money being pumped into cryptocurrencies, the Securities and Exchange Commission (SEC) has stated to approve crypto instruments only when concrete evidence about the impossibility for manipulation is attached to the application. But SEC’s guidelines are way too demanding for the notoriously unpredictable the crypto industry to be able to create a more robust investment environment.
The industry’s fate hangs in the balance. Although Blockchain, the underlying technology, could be disruptive, the lack of technical expertise needed to create platforms remains a major challenge before genuine breakthrough.
The Arts Business
In 2015, Business Insider’s fabled post ‘Investing in Arts is a terrible idea’ was decried as unfair by the art community. But four years after the article scrutinized the sector’s murky investment environment as a playground for the global 1%, it is as relevant today as it was then – in no small measure after French billionaire Patrick Drahi surprised markets in June when he announced a $3.7 billion deal to acquire storied auction house Sotheby’s.
But heading into the art world, Drahi may find out he got more than he bargained for. Sotheby’s is the target of an ongoing lawsuit involving Russian billionaire Dmitry Rybolovlev and Swiss art dealer Yves Bouvier. The lawsuit involves the Russian accusing Bouvier of overcharging him on 38 art works, to the tune of $1 billion. Sotheby’s was involved in 14 of these sales, including for Gustave Klimt’s Water Snakes II, Picasso’s Man Sitting at the Glass and Leonardo’s Salvator Mundi – and stands accused of colluding with Bouvier to inflate the value of artworks. In parallel to the ongoing suit against Bouvier, Rybolovlev is seeking to recover $380 million in damages from the auction house.
Although Sotheby’s aimed to have the case thrown out, a court ruled earlier in June that the lawsuit can continue. The feud is dragging the art industry’s already notorious reputation further down. The worst damage comes in form of newly de-classified correspondence between Yves Bouvier and Samuel Valette, Sotheby’s vice-chairman for private sales worldwide, which seems to prove that Bouvier sold the Salvator Mundi to the billionaire for a hefty markup of over 50% 24 hours after buying it. That such fraud is possible speaks to the lack of regulation in the market. Incidents like these tend to have an impact across industries, leaving potential investors faced with uncertainty and mistrust.
However, it’s not just the Sotheby’s lawsuit that has been raising doubts over the transparency of the industry. Not holding any intrinsic value for the general investor, the arts and culture market is a risky bid, and investors have been revising portfolios in recent years. Be it the lack of appropriate regulations in or the unavailability of reliable resources to compare prices and strike predictions, buyers have started to rethink their exposures. Moreover, concerns about preying money launderers or the market’s turbid architecture have led to other uncanny quarrels.
In contrast to Microsoft HoloLens, which has become increasingly popular, several California companies that raised millions of dollars for VR projects have shut down. Be it uninspired content or the technology not maturing enough, VR has been overhyped and investors have awakened to it.
The greatest hit to the industry came from Canadian entertainment technology company IMAX Corp. that pulled back from its pilot program of developing movie-based VR games. The program was launched with a bang in 6 locations had $250,000 being pumped in each of the created centers.
No surprise then that funding for AR/VR startups fell sharply by 46% to $809.9 million in 2018, compared to 2017. The plunge resulted from disregarding the consumer’s readiness for highly interactive devices. While there was never any compelling content to complement the power of VR, most devices are clunky and uncomfortable to wear. In fact, entrepreneurs underestimated the adoption time required to open VR to the mainstream as devices remain prohibitively expensive.
It’s a truism that unchecked hype and excess opacity worsens the game. Although exploring and experimenting are essential for landing upon a trustworthy stock, investors must be careful not to drown in the noise. Lawsuits as well as sudden booms and busts are an indication that something is amiss in the industry.