How Blockchain is Changing the Alternative Investing Landscape

November 10, 2021

These days, if you’ve spent any time in alternative investment (or even regular investment, for that matter) it seems like all anyone can talk about is cryptocurrency. And hey, there’s a lot to be excited about. After all, China recently took a progressive investment step by calling bitcoin an investment alternative, a sign that the world’s largest market may pivot toward cryptocurrency.

But the real technology to be excited about is the innovation behind cryptocurrency: blockchain.

Here’s a quick review of blockchain, alternative investing, and how blockchain is changing the field of alternative investing for the better.

What is Alternative Investing?

Alternative investment is a broad category covering a fairly simple concept. Basically, an alternative investment is any type of investment that doesn’t fall into one of the three conventional investment categories:

  1. Stocks
  2. Bonds
  3. Cash

In other words, anything that isn’t stocks, bonds, or cash is technically an alternative investment. That’s a lot of area to cover —anything from fine art to hedge funds to private equity to real estate to gold can be considered an alternative investment.

However, alternative investments generally have a few key features in common: they’re not as liquid as their conventional counterparts, they’re far more complex than their conventional counterparts, and they’re riskier than their conventional counterparts (in part because they’re also less regulated).

What is Blockchain?

This brings us to blockchain, the technology behind cryptocurrency.

According to IBM, blockchain is a shared, immutable ledger that facilitates the recording of transactions and tracking of assets. The basic concept is simpler than it sounds. At its core, a blockchain is a type of database, but it works differently than most conventional databases.

Unlike most other databases, blockchain works like a sequential list. It’s made up of chunks of information (blocks) which each get a timestamp and hash when they’re entered into the blockchain, thus chaining them to the blocks before and after them. Anyone who can access the ledger can verify the transactions.

The brilliance of blockchain is that It’s more than just a simple list. Each block’s timestamp and hash connects it to the blocks before and after it, which means every block is linked to every other block and every user verifies every block. In order to tamper with a single block, you would have to hack the entire chain to make the stamps and hashes match, and new blocks are being added all the time.

How Cryptocurrency Compares to Traditional Investments

Without blockchain, cryptocurrency could not exist.

A cryptocurrency is a type of digital currency not issued by any national government or linked to any national currency. Every cryptocurrency is secured through cryptography and blockchain technology, making counterfeit and double-spending nearly impossible. Each secure payment is recorded as a transaction in blockchain for security.

What separates cryptocurrency from traditional currency is that many cryptocurrencies limit how many new coins can be minted. This means that unlike traditional national currencies, a national bank cannot create inflationary pressure in the crypto market by flooding it with new currency.

Why Blockchain Alternative Investing Looks Different

While cryptocurrency will likely have an outsized impact on the future of currency as we move to an increasingly digital world, blockchain’s greatest impact will be on the larger world of alternative investing. It all comes back to the unique challenges of alternative investing—and the unique strengths of blockchain.

As alternative investors know, one of the biggest selling points (and biggest headaches) of alternative investments is their uniqueness. For example, let’s say you wanted to stop selling digital coins and instead sell a 1933 Saint-Gaudens Double Eagle $20 gold coin. You’d have a hard time finding a buyer or even determining its value, since there are only 13 such coins in existence.

Because of this, and because alternative investments don’t trade on the stock market, establishing provenance and value is critical to safe (and useful) investments. Then there’s the process of establishing and finalizing a sale, a headache in its own right.

This is where blockchain can simplify—and empower—alternative investments.

Smart Contracts

Take smart contracts, for example, one of the most powerful applications of blockchain technology.

A smart contract is a type of self-executing contract where the terms of agreement between buyer and seller are written into lines of code, which then exists within the distributed blockchain network. The computer code controls the execution of actions, and once an action is made and the code executes, the record is irreversible.

This provides a more secure way for disparate parties to negotiate and agree to contracts—like alternative investment sale contracts, which require a high degree of trust between buyer and seller. Thanks to blockchain, trust is irrelevant—the system itself ensures that trust isn’t required to complete the transaction.

Reduced Fraud Concerns

This is also why blockchain has powerful implications as a tool to combat fraud, especially in the art market, where provenance and transaction history are vital to the value of a work.

Thanks to blockchain’s transparent and immutable ledger system, you don’t need to trust another party’s record of a transaction. It already exists in the blockchain network, verified by users across the world. That way, there’s an easy record of an item’s transaction history, and that record is all but impossible to hack. This is part of why non-fungible tokens have taken off as a tool of digital artists.

Ready to Build Your Alternatives Portfolio?

For investors with an eye toward the future, blockchain alternative investing is here to stay. The question is how you’ll build your investment portfolio to set you up for success in the future—in blockchain and in other forms of alternative investing.

Here at Masterworks, we help you take advantage of blue-chip art, one of the most exciting and profitable forms of alternative investing. After all, blue-chip art has outperformed the S&P 500 by 180% from 2000–2018. And now you don’t need to be a millionaire to participate—on our platform, members can purchase shares in authenticated multi-million-dollar art starting at just $20 per share and collect dividends when we make a sale. Ready to make your portfolio work harder? Fill out your membership application today to learn more.

Masterworks is a fintech company democratizing the art market. Our investors are able to fractionally invest in $1mn+ works of art by some of the world's most famous and sought-after artists.