The Perfect Pairing With Fine Wine Is ... Crypto? Cryptocurrencies and fine wine might seem like an unlikely duo, but their complementary dynamics make them an unbeatable combo for your portfolio.
By Anthony Zhang •
Opinions expressed by Entrepreneur contributors are their own.
Cryptocurrency is everything that fine wine is not.
It's new. It's sexy. It's revolutionary. With cryptos like Shiba Inu returning more than 90,000,000% over the past year (no, that is not a typo) it's hard to resist putting your life savings into crypto. Smart investors have come to realize, though, that the differences between these two investments make them the perfect pairing.
Fine wine vs. cryptocurrencies
Fine wine and cryptocurrency are the Shaq and Kobe of the investment world. While each has a unique skill set, when combined, they form a whole that's greater than the sum of its parts. Here are three examples of how this odd couple can bring equilibrium (and consistent returns) to your investment portfolio.
Volatility
It's no secret that cryptocurrency is volatile. Anyone familiar with the market has seen his or her favorite crypto hit a record price one day and plummet in value the next. According to Swissquote education manager Stefano Gianti, Bitcoin is 10.6 times more volatile than the euro and U.S. dollar over the short term.
It's also more volatile than: Nasdaq (2.9 times), the S&P 500 (4.7 times) and the Swiss Market Index (8.2 times).
High volatility makes it nearly impossible to build wealth through compound interest. Adding fine wine to a cryptocurrency portfolio generates stability since wine has roughly a third of the volatility of traditional equities. That way, investors can have the peace of mind that comes with consistent returns on investment.
Related: From NFTs to Fine Wine, We're Entering a Golden Age for Modern Collectors
Hedge against recessions
Traditionally, gold has been the go-to hedge against recessions. Today, Bitcoin is vying for that title. The idea is that Bitcoin will retain its value during turbulent economic times. While that may well happen, the truth is that Bitcoin has a positive correlation with the stock market. As a result, it does a poor job of withstanding economic hardship.
Just look at the returns on investment for cryptocurrencies in the first quarter of 2020: Ethereum at 2.83%, Litecoin at -5.35%, Cardano at -7.23%, XRP at -10% and Bitcoin at -10.9%.
The Covid-19 Recession had almost no effect on fine wine. In fact, the Vinovest 100, an index for tracking fine wine, grew 1.1% during that same span. This performance wasn't a fluke. Fine wine has outperformed benchmark equities during the Great Recession, the Dot-Com Bubble and beyond. Since fine wine and crypto have a negative correlation with each other (-0.6%), the combination makes the bad times more tolerable.
Returns on investment
We saved this one for last. Why? Because it's the lone exception to the rule.
Both cryptocurrency and fine wine have proven track records of long-term appreciation. Go back far enough, and any well-known cryptocurrency has staggering returns. Cryptocurrency has made hundreds of thousands of millionaires in recent years.
Fine wine has had remarkable success of its own. It consistently outperforms traditional investment options. According to Liv-ex, its Fine Wine 100 Index has appreciated 299.82% from July 30, 2001, to September 29, 2021.
Here's how its competition fared during the same span:
- S&P 500: 261.13%.
- Dow Jones: 221.62%.
- Crude oil: 211.25%.
For all their differences, it's satisfying to see that crypto and fine wine can unite on one thing.
Related: The Strong Case for Wine as an Alternative Investment
Crypto vs. crypto and fine wine
Fine wine and crypto do have their fair share of similarities. They're both driven by scarcity. Their finite supplies spur demand. The two also offer a hedge against inflation. It's why the tandem ranks among the most popular alternative assets.
Here's proof that fine wine and cryptocurrency can co-exist.
Even allocating 10% of a portfolio from crypto to fine wine can make a significant difference. Wine offers a stabilizing force that doesn't compromise Bitcoin's spectacular return on investment. It reduces portfolio volatility and the maximum drawdown while elevating the Sharpe ratio, a metric that measures the performance of one investment to a risk-free asset.
And in case you're wondering, yes, these results apply to other cryptocurrencies as well. Over a five-year span from September 2016 to September 2021, a portfolio of Bitcoin and Ethereum would go from a 184.3% to 168.3% annual return on investment if you allocate 10% of the funds to fine wine. However, the new portfolio would also have a dramatic drop in volatility (10.6% lower) and the maximum drawdown (4.29% lower). That way, investors can navigate the bumps in the market, not if, but when, they happen.
How to invest in fine wine and cryptocurrency
Let's say you only have fine wine or cryptocurrency in your portfolio. It makes sense to diversify your portfolio sooner rather than later. Anyone hoping to time the market is bound to fail. Immediate diversification provides the immediate benefits listed above.
Here are three paths to make fine wine and crypto coexist:
- Convert existing assets. Sell your existing assets, whether they are stocks, bonds, mutual funds, fine wine or crypto, to purchase new assets.
- Invest from cash reserves. Have money lying around your savings account or a rainy-day fund? Why not use some of it to invest in fine wine or crypto?
- Take out a loan. For HODLers who don't want to sell their crypto, this option is for you. You can take out a loan against your cryptocurrency for 50% to 100% of its value. As long as the cryptocurrency appreciates faster than the interest rate, you can repay the loan and diversify simultaneously without losing money or paying capital-gains tax.
The best portfolios are balanced portfolios. When it comes to investing in fine wine and cryptocurrency, each serves as the perfect counterbalance to the other, creating an equilibrium for any investment portfolio.
Related: How to Protect Your Money From Inflation in 2021
Just don't wait for the economic crash to find out what you've been missing.
