Should You Invest In Alternative Or Contrarian Financial Assets?

The definition of contrarian investing is a style whereby the investor purchases assets that are performing poorly and sells them when they are doing well. Strictly speaking, contrarian investments are not investments that are lesser known, or up-and-coming like cryptocurrency or laggards in equities markets. A true contrarian investor goes against market trends by buying on the dip and selling on the peak. For example, if bank stocks experience declines a contrarian investor will buy them on the way down, helping to mitigate their losses and turn things around.

The rise of contrarian investment practices gained ground after the global financial crisis of 2008/9. At the time, central banks proved ineffective at propping up the economy, and monetary policy had all but lost clout with investors. As such, major corrections took place in equities markets and traders flocked to gold as a safe-haven asset in 2009, 2010 and 2011. For example, at the height of the equities market bubble in 2008, the price of gold was just $869.75. Gold was priced so low owing to huge capital investments in equities markets. Money typically flows into stocks, or gold/bonds. At the time, stock markets were roaring and due for a correction.

Gold Demand Rises with Increasing Geopolitical Uncertainty

By 2009, the gold price rose to $1087.50, up 25.04% year on year, and by 2010 the gold price skyrocketed to $1,420.25, up 30.6% year on year. This indicates the impact of rising uncertainty in the economy. As it turned out, central bank policy was highly effective at correcting market disequilibrium. Massive quantitative easing (interest rate cuts and bond buying stimulus) flooded markets with liquidity. This accelerated the velocity flow of money through the US economy, while central banks around the world followed suit. After several years of excessive dovish monetary policy, the Fed has racked up $4.5 trillion worth of assets and will begin unwinding them towards the end of 2017. Interest rates are currently trending higher, with the Fed FOMC raising the federal funds rate in the region of 1.00% – 1.25%, with a further 25-basis point rate hike slated for Wednesday, December 13, 2017.

In the interim, several interesting investment opportunities have come to the fore. These include the meteoric rise of cryptocurrency. Bitcoin, Litecoin and Ethereum have gained in popularity, notably in 2016 and 2017. While these are not necessarily contrarian investment practices – they are now mainstream options for traders, alternative trading options are available in the form of increased exposure to digital currency in financial portfolios. The typical asset allocation in a financial portfolio would include a mix of equities (short-term and long-term investments) commodities, indices and currency pairs. Now, investors and traders are including cryptocurrency as part of their financial portfolio.

The explosive growth of BTC in 2017 is virtually unheard of with financial assets. The digital currency move from around $900 at the start of the year to over $4700 recently. This fivefold gain indicates how much interest currently exists in digital currencies. The areas of strongest trading activity for Bitcoin include Japan, the Philippines, South Korea and China. Increasing tensions with North Korea over its ballistic missile program have resulted in huge gains for Bitcoin, allowing it to assume a faux ‘safe-haven’ investment status alongside traditional safe havens like gold.

Alternative Investments in Digital Currency Trading

Trading experts at ECN Capital foresee a tremendous surge in derivatives markets for Bitcoin trading. Currently, this burgeoning market is waiting to blossom, but interest in cryptocurrency remains strong. This is evident across the board, including niche markets like South Africa which recently experienced a large surge in Bitcoin trading in mid-August. The fork in Bitcoin saw it splitting into two distinct cryptocurrencies: Bitcoincash (BCH) and Bitcoin (BTC).

According to Yuval Feingold, a trading expert at ECN Capital, "the explosive growth in digital currency trading is less about Bitcoin, Litecoin, Ethereum for any other specific digital currency. It’s the technology that is driving user interest. Blockchain technology is decentralized, peer to peer algorithmic code. It is ‘uncrackable’, and not subject to any central points of failure. It also allows for anonymous transactions, complete transparency and is not subject to central bank intervention. It is an exciting way to transfer payments from one party to the next, at minimal cost, with no hiccups, and no middlemen required. It puts banks on short notice. We are seeing strong demand for BTC trading, and already this currency is hovering around $4,600 per unit. If our analysis is correct, it could spike towards $6,000 by 2018 and upwards of $25,000 by 2022."

Alternative investments go against the grain. It is important to invest in multiple assets to safeguard the value of a portfolio. BTC, ETH, LTC and others are highly attractive to investors, and they have explosive growth potential. A caveat is in order: regulation may curtail growth prospects and standardize market practices.

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