Money Smart Athlete Blog

Should athletes invest in cryptoassets?

By Demetris Constantinou, Contributor

Athletes’ careers can span anywhere from five to twenty years, making the pursuit of other streams of wealth amongst the most important aspects of an athlete’s road to financial freedom. It is therefore important for athletes, and their wealth managers, to be well informed of the investment assets that are available, as well as the risks and benefits accompanied by each group of assets.

Cryptoassets sound intriguing, can be very confusing, and pose risks which every individual needs to be aware of, before getting into this space. In a nutshell, cryptoassets are digital assets and are therefore not tangible in any way or form. Such digital assets operate independent of any banks, governments, or central agencies in general, causing them to be “decentralized” in nature. Rather than using centralized mediators, cryptoassets use public ledgers, driven by certain technologies, such as the blockchain technology, which allow the formation, verification, and safe execution of transactions between parties.

There are several types of cryptoassets out there, some of which are more popular and embraced than others. For the purpose of this article, we will focus on the ones we believe are perceived as the main cryptoassets right now: Cryptocurrencies, Security Tokens and Non-Fungible Tokens (“NFTs”). Specifically, we will try and convey the purpose of each of these cryptoassets as well as the risks and benefits associated with each of them.

Cryptocurrencies are the most mainstream type of cryptoassets, and everyone has at least heard of them. Just as the name suggests, cryptocurrency is a digital currency which acts as a medium of exchange or a store of value. People can use cryptocurrencies in exchange for goods or services or as a means to store their wealth, in anticipation of growth of the value of certain cryptocurrencies. Cryptocurrencies have also been used for speculative purposes where people trade them according to their belief of what their price will be in the future.

As such, cryptocurrencies are acquired by different people for various reasons, depending on everyone’s goals and agenda. The clear benefit of owning cryptocurrencies is the endless growth potential as well as the possibility of growing one’s wealth in a short period of time, compared to more conventional assets. In a simple example, over the past 10 years, Bitcoin (“BTC”), the most valuable cryptocurrency, grew by an approximate factor of 8,463, meaning that if you invested $5 in 2012, you would have $42,315 as of the time this article was being written. Such stellar returns are unheard of in today’s markets and certainly raise a lot of eyebrows in the space of wealth and asset management. Having said that, cryptocurrencies pose several risks which should be considered, before deciding to enter the cryptocurrency space.

Cryptocurrencies don’t have any intrinsic value and as such, the most prevalent risk is the risk of losing all your money, should the markets decide that cryptocurrencies are no longer an attractive asset. The possibility of this happening is rather low but the ambiguity around the value of cryptocurrencies causes huge volatility in their price which consequently leads to uncertainty for the investor. Uncertainty is amongst the least desired characteristics in an athlete’s portfolio and should always be minimized depending on the athlete’s risk-profile and investment strategy. Furthermore, another main risk surrounding cryptocurrencies is the lack of regulations and the possibility of harsh regulations against the industry in the future. Such possibility is everything but remote and could have adverse effects on the value of cryptocurrencies, causing one’s portfolio to suffer as a result of uncontrollable external factors.

Moving on, another rather popular cryptoasset is security tokens. Such tokens are offered during the process of Initial Coin Offering (“ICO”) which allows people and businesses to raise money to fund their business ideas. In practice, security tokens are the equivalent of “shares” in newly formed startups. Instead of going through the conventional public offering or Kickstarter route, new businesses use ICO as a form of crowdfunding to deploy some capital that will get them started.

The pros and cons of security tokens are straight forward, as they mimic the pros and cons of investing in a newly formed company. On the benefit side, if you own security tokens in a company that takes off, the value of those tokens will increase exponentially, causing you to earn abnormally high returns on your investment. On the contrary, the possibility that the business will not succeed is rather high and as such, the investor is at risk of losing all their money, given that the security tokens will be worth nothing. Furthermore, the ICO space is ill-regulated, giving room to scammers to pose as newly formed businesses and steal people’s money through ICOs on fictional companies. As such, extreme caution and thorough due diligence is recommended when acquiring security tokens through an ICO.

The final and most recent type of cryptoasset worth discussing is NFTs. While NFTs have been around since 2014, they have made their breakthrough in 2021 and are currently amongst the hottest topics in the space of cryptoassets. In the most simplistic terms, NFTs are like digital trademarks which verify the ownership of any object -tangible or intangible-. Rather than using lawyers and the government as mediators, NFTs exist on ledgers, such as the blockchain, which verify and record their ownership. Given their “non fungible” nature, NFTs are unique and can’t be altered or exchanged making this the main premise of their value. NFTs can be very valuable to athletes, not necessarily as a form of investment, but rather as a form of building their brand and expanding their fanbase. Simply put, athletes can create NFTs of their moments and sell them out to their fans, creating another form of connection between the athlete and the fans while at the same time profiting from such exchanges. Nevertheless, while NFTs sound extremely promising, they’re a newly discovered cryptoasset with a highly undeveloped regulatory framework. As such, the embracement of NFTs will likely be followed by aggressive regulations that could potentially set constraints to their use, as well as to someone’s ability to monetize off of them.

Given the volatility and uncertainty surrounding cryptoassets, as well as the evolving regulatory framework, most financial advisors do not recommend that cryptoassets comprise a large portion of an athlete’s portfolio. To be precise, financial advisors recommend that cryptoassets comprise anywhere from 1% to 7% of an investor’s portfolio, depending on one’s risk-return profile. Having cryptoassets comprise a small share of your overall portfolio ticks a lot of boxes. Specifically, the opportunity cost of passing on cryptoassets is too high and therefore, even a small amount of investment can lead to high returns without posing a great risk to your overall portfolio. Furthermore, the performance of cryptoassets has not been correlated with the performance of any other conventional asset, financial or not, making it a great way of diversifying an athlete’s portfolio.

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