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Alternative Investments – Cryptocurrency, P2P Lending etc.
Asset Classes within the Financial Markets
Alternative Investments – Cryptocurrency, Peer to Peer Lending etc.
For many years now Investors, Traders and Brokers have explored alternative investments to profit from.
Starting with valuables of the wealthy such as fine art, jewellery, stamps, trinkets, treasures, wines & whiskies to the super rich with yachts, planes and islands!
In recent years alternative investments have also started to include new money transactional investments such as Cryptocurrency and Peer to Peer Lending.
A cryptocurrency is defined as a digital or virtual currency that is secured by cryptography, which claims to be nearly impossible to counterfeit or double-spend. The majority of cryptocurrencies are termed as decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers ensuring the integrity of transactional data.
Some of the cryptography used in cryptocurrency today was originally developed for military applications. At one point, the government wanted to put controls on cryptography similar to the legal restrictions on weapons, but the right for civilians to use cryptography was secured on grounds of freedom of speech.
Cryptocurrencies are differentiated from other currency types as they are not generally issued by any central authority, rendering them immune to government interference or manipulation in theory.
Cryptocurrencies are systems that allow for the secure payments online which are denominated in terms of virtual “tokens,” which are represented by ledger entries internal to the system. “Crypto” refers to the various encryption algorithms and cryptographic techniques that safeguard these entries, such as elliptical curve encryption, public-private key pairs, and hashing functions.
Central to the appeal and functionality of Bitcoin and other cryptocurrencies is blockchain technology, which is used to keep an online ledger of all the transactions that have ever been conducted, thus providing a data structure for this ledger that is quite secure and is shared and agreed upon by the entire network of individual node, or computer maintaining a copy of the ledger. Every new block generated must be verified by each node before being confirmed, making it almost impossible to forge transaction histories.
Types of Cryptocurrency
The first blockchain-based cryptocurrency was Bitcoin, which still remains the most popular and most valuable. Today, there are thousands of alternate cryptocurrencies with various functions and specifications. Some of these are clones or forks of Bitcoin, while others are new currencies that were built from scratch.
Bitcoin was launched in 2009 by an individual or group known by the pseudonym “Satoshi Nakamoto.” As at the end of 2019, there were over 18 million bitcoins in circulation with a total market value of around $146 billion.
Some of the competing cryptocurrencies spawned by Bitcoin’s success, known as “altcoins,” include Litecoin, Peercoin, and Namecoin, as well as Ethereum, Cardano, and EOS. In addition to these there are more privacy-oriented coins, such as Dash, Monero, or ZCash, which are far more difficult to trace than the others.
Today, the aggregate value of all the cryptocurrencies in existence is around $250 billion—Bitcoin currently represents more than 68% of the total value.
What’s to like?
- Cryptocurrencies hold the promise of making it easier to transfer funds directly between two parties, without the need for a trusted third party like a bank or credit card company. These are achieved by using a combination of public keys (user’s wallet) and private keys (owner only for signature) and proof of work or proof of stake incentive systems.
- Many experts believe that blockchain and related technology will disrupt many industries, including finance and law.
- Cryptocurrencies have been praised for their portability, divisibility, inflation resistance, and transparency.
What’s not to like?
- Cryptocurrencies face criticism for a number of reasons, including their use for illegal activities (money laundering and tax evasion) and vulnerabilities of the infrastructure underlying them.
- Since market prices for cryptocurrencies are based on supply and demand, the rate at which a cryptocurrency can be exchanged for another currency can fluctuate widely, since the design of many cryptocurrencies ensures a high degree of scarcity.
- Bitcoin has experienced some rapid surges and collapses in value, climbing as high as $19,000 per Bitcoin in Dec. of 2017 before dropping to around $7,000 in the following months. Cryptocurrencies are thus considered by some economists to be a short-lived fad or speculative bubble.
- There is concern that cryptocurrencies like Bitcoin are not rooted in any material goods. Some research, however, has identified that the cost of producing a Bitcoin, which requires an increasingly large amount of energy, is directly related to its market price.
Peer to Peer (P2P) Lending
Peer-to-peer (P2P) lending platforms exist to bring together people looking to invest money with prospective borrowers who are looking for a loan. They perform the role of an intermediary, assisting in the matching of two parties and the transfer of money between them. Because there’s no traditional financial institution acting as a middleman, and therefore none of the overheads associated with banking, the lenders and borrowers could both benefit from more favourable interest rates – usually between 3% and 7%. P2P Lending Platforms are approved and regulated by the financial authorities across the world – most recently China where they were previously unregulated causing well publicised issues.
P2P lending can be an attractive option to those who are looking to boost their investment portfolio and are ready to take a small amount of risk to do so. With interest rates on savings and cash ISAs currently struggling to beat inflation, investing in this way could enable you to protect the value of your money, and P2P lending can be less volatile and less complex than investing in stocks and shares as the risk is spread amongst peers.
How does peer-to-peer lending work for the lender?
The peer-to-peer lending process begins when you sign up to a P2P platform and invest the amount you wish lend. Some of the best-known P2P platforms are Funding Circle, Peerform, Upstart, Beehive, Prosper, Lufax, Dianrong, LendingClub, LendingCrowd, Lending Works, RateSetter, Streetshares and Zopa.
You will then need to begin making lending offers to borrowers looking for a loan. Before your offer is made you need to decide how long you wish to offer your money for, which is usually over a fixed period of years. As a rule of thumb, the longer you’re willing to invest your money for, the higher the potential returns.
Once your money has been transferred to your peer-to-peer account, there are typically two ways to start lending it out: some P2P platforms will automatically make lending offers to borrowers that match your loan terms on your behalf, while others will require you to do it manually. While individually managing each loan gives you the most control, it can be more time-consuming — doing it automatically speeds up the process and ensures your money is always invested.
Once you’ve been matched with a borrower (or multiple borrowers) and the loan has been disbursed, you’ll begin to earn interest. Depending on your platform, you’ll be presented with management options for what you want to do with your earnings. The best platforms will offer an automatic re-lending service, where the repayments in your account are automatically offered for lending once again, maximising your returns.
There will often be an option allowing you to draw a regular income from your repayments, usually on a weekly or monthly basis. You may also get a choice over whether you want to withdraw the full repayments or just the interest you’ve accrued. This can usually be set up automatically, or with the option to manage your earnings completely manually – again giving you full control, but at the cost of time and convenience.
How does P2P lending work for the borrower?
Should you be looking to borrow through P2P lending, the process begins when you apply to a P2P platform for a loan. Most companies will require you to fill out a quote request and provide some proof of identity, then they will carry out a credit check to gauge your credit history.
Based on the results of the check, you’ll be quoted a provisional interest rate (APR), as well as a breakdown of your prospective loan that includes important details like the amount, duration, monthly cost and total amount payable.
The application will be referred to an underwriter who will make the final decision on whether you’re accepted. A more in-depth credit check may be carried out and you will need to meet the platform’s own creditworthiness checks too. If you’re approved, you’ll then be made a loan offer and matched with a lender (or multiple lenders) who is willing to provide funds that match your quoted criteria. You can then choose to accept or decline the offer.
Though the loan amount will be coming from lending ‘peers’, the platform will act as an intermediary and you won’t be dealing directly with any other parties. Once the loan has been paid, you will make regular repayments through the platform, which will pass them onto the lenders.
What is the future of P2P lending?
Since its establishment in 2005, peer-to-peer lending has seen nothing but growth, and that trend looks set to continue.
- Europe grew by 52% to £3.8bn with the UK representing 57% of the overall marketplace
- APAC (excluding China) grew by 69% to £2.8bn
- China accounts for over 90% of the overall volume in P2P lending
- The Americas grew by 73% to £25.9bn with the US representing 98% of the overall marketplace
- The Middle East grew by over 800% to £556M
- Africa grew by 102% to £60M
Growth figures 2017 to 2018. Data provided by Cambridge Judge Business School
There are quite a few reasons for the success of P2P lending: banks and building societies’ inability to offer favourable rates to savers, people looking for more opportunities to diversify their investments, and increasing confidence in online financial services and peer-to-peer networks. Recent reports show that less than 10% of the population has used a P2P lending platform identifying that the sector is nowhere near reaching its full potential.
It’s worth remembering that P2P lending is a relatively young industry that hasn’t been exposed to the full stress test that other lending institutions have been subject to over the decades. However, while new risks, like banks releasing more funds for loans through government schemes (CBILs), rising interest rates and regulatory pressures, may prove to be tough challenges that need to be overcome, the future for peer-to-peer lending looks very bright indeed.
Typical Jobs in Alternative Investments
- Chief Technology Officer (CTO)
- Chief Investment Officer (CIO)
- Cryptocurrency Trader
- Investment Broker
- Portfolio Manager
- Investment Manager
- Compliance Manager
- Data Analyst
- Data Scientist
- Research Analyst
- Product Manager
- Finance Manager
- DevOps Engineer
- Security Architect
- Technical Writer
- Loan Originator
- Sales Manager
- Marketing Manager
- Collections Officer
These are just a few examples of alternative investment jobs and positions we recruit for within Cryptocurrency and Peer to Peer (P2P) Lending; other positions are available.
To see our latest alternative investment jobs and vacancies, please click here
Find out more about Asset Classes in the Financial Markets
Typical investments: Bonds, debentures, gilt-edge bonds
Risk profile: Low
Fixed-interest investments — sometimes known as fixed-rate securities — are an asset class that sees investors loan their money to a company or government in exchange for a security, in the form of a bond or similar product, that pays an agreed rate of interest. This rate remains the same throughout the duration of the investment. When the investment matures, you’ll also be paid back the original amount you put in.
Read more about Fixed Income here
Typical investments: Purchase of equity in a company listed on the stock exchange
Risk profile: Medium to high
When you buy shares — also known as equities — you are buying a small portion of ownership in a company. Each share represents a unit of ownership, so the company value is divided by the number of shares to give the share price. Shares are traded on the stock market, where the daily value of each company’s shares are listed.
There are a number of factors, such as if the company does well or undergoes a merger, that can cause the value of a business to increase and boost the worth of each share. On the other hand, if the company does badly, the shareholders can face a drop in the worth of their shares.
Find out more about Equities here
Typical investments: Physical currency, bank accounts, savings accounts, cash ISAs
Risk profile: Low
Cash is the asset class that you’re probably most familiar with, as we use it on a daily basis to pay for goods and services. The asset class for cash includes physical currency, the balances of savings and current accounts, cash ISAs, premium bonds, and money market funds.
Read more about Cash Equivalents here.
Futures are derivative financial contracts that obligate the parties to transact an asset at a predetermined future date and price. Here, the buyer must purchase or the seller must sell the underlying asset at the set price, regardless of the current market price at the expiration date.
Underlying assets include physical commodities or other financial instruments. Futures contracts detail the quantity of the underlying asset and are standardised to facilitate trading on a futures exchange. Futures can be used for hedging or trade speculation.
Typical investments: Oil, coffee, gold
Risk profile: High
Commodities are raw materials that are bought and sold on global markets where supply and demand, as well as other global issues, dictates the price. They can include fuels like oil and gas; precious metals like platinum, gold and silver; agricultural products like wheat, coffee, and dairy products; industrial metals like copper, iron, and steel; as well as many other things. A lot like shares, commodity markets regularly rise and fall, but they tend to be much more volatile.
Find out more about Commodities here
Typical investments: Buying your own home or a holiday home, investing in buy-to-let and commercial projects.
Risk profile: Medium
Investing in property can take many forms, such as buying your own home or getting involved in commercial property, like offices, warehouses, and retail space. There are opportunities to invest in both small and large-scale projects, ranging from a single buy-to-let to joining an investment fund that owns large-scale commercial sites.
Find out more about Real Estate here
Typical investments: Cryptocurrency, Art and antiques, wine, watches, peer-to-peer lending
Risk profile: Low to high depending on investment
Aside from the main five asset classes, there are other areas that you can invest in to really add diversity to your portfolio, though it’s worth remembering that each will have its own levels of risk and reward that you should research.
Although these fall outside of the traditional asset classes, many alternative types have been traded in for a very long time. Art, antiques, stamps, watches, wine, and jewellery are all examples of valuables that have been traded for centuries. On the other hand, there are many new asset classes that have only emerged in the last few years, such as cryptocurrencies and peer-to-peer lending, demonstrating just how diverse the investments marketplace can be.
To find out more about alternative investments here
FINCO Search is a specialist headhunter and recruitment agency to the global wealth management, private banking, financial markets and compliance sectors.
With offices in London and Stevenage we provide a full UK and International service across executive finance, wealth and asset management, compliance and private banking.
FINCO Search is experienced across all alternative investment markets. Our consultants have successfully managed mandates for C-suite roles, traders, brokers and technical personnel in the European and US markets.
If you are interested in finding out how we can assist you in finding your next opportunity in the global alternative investment space, or are growing your sales or trading team and looking to onboard alternative investment specialists across any front, middle or back office position, then please call us now.
We are here to help, speak to one of our experienced recruitment consultants now on +44 (0) 203 927 5080.
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