Should Crypto investors hedge risk with fine wine?

Cryptocurrencies are giving investors a roller-coaster ride, can wine investment off-set their risk?

With thrilling rises and unpredictably huge plunges in price, cryptocurrencies are not for the faint-hearted. Bitcoin has lost 58 per cent of its share value in the last year and Ethereum suffered losses of 63 per cent year-to-date. In comparison, fine wines have seen average growth of 22% in the last year and top performers have delivered triple digit growth.

How do cryptocurrencies and fine wine assets differ?

As investments go, crypto and wine are polar opposites. Cryptocurrencies are still very much in their infancy with Bitcoin the first to be launched in 2016. They are purely digital, and can be held as an investment or used to pay for online purchases without going through a bank, where accepted. Values are highly volatile, and major players have seen losses of over sixty per cent this year.

Supply is a major factor. There is no barrier to entry at the moment, so anyone can produce a digital currency. The number of new crypto currencies has doubled this year with over 1,000 created each month in 2022 and now 12,000 in circulation. Whilst, the key players have tightly managed currency units, they can create more. Currently, the manufacture of crypto currencies is highly energy consumptive.

In contrast, the origins of fine wine dates back to Roman times with a mature, well- established global secondary market. Wine is a tangible, stable asset with no direct correlation to financial markets. A key fundamental is the finite supply made each vintage which reduces over time as the quality improves, supporting strong long-term price growth. Values remain robust in periods of economic pressure and prices are proven to rise with inflation. The fine wine industry is making significant investment in green initiatives to reduce carbon emissions.

What are the market conditions like for crypto investors in 2022?

This year has seen the tectonic shiftings of a very young industry. Crypto prices have been hit by a liquidity crisis among investors and lenders which caused failure of key industry facilitators such as Celsius and Voyager Digital. This went on to cause the collapse of Terra USD / Luna and its associated stable coin, Terra USD. As a result, there is currently significant consolidation happening in the sector.

Cryptocurrencies had been used by some investors as a hedge to rising inflation, however 2022’s performance has destroyed that case, largely due the US Dollar strength and its current appeal to investors as a safe security.

First movers in crypto may have made incredible gains, but equally could have lost much of that reward. It’s an embryonic market now suffering growing pains that has regulators looking to implement ways to protect investors.

Top ten cryptocurrencies in 2022:

Source: Forbes Advisor, October 2022

IMPORTANT NOTE: Cryptocurrencies are unregulated with no consumer protection with a high risk of losing money rapidly.

Institutional investors are still growing their interests in the sector, as the landscape evolves. The US Government released its first iteration for future regulation of crypto and digital assets in September 2022. The Securities & Exchange Commission and Commodity Futures Trading Commission are now looking to set in place official rules to protect investors and reduce illegal activity in this area. The UK Government voted on the 26th October 2022, to bring cryptocurrencies into the scope of regulated financial services in the UK.

How does wine investment performance compare to cryptocurrencies?

Fine wine investments have a proven track record of stability and growth. On trend, fine wine assets have outperformed, equities, gold, property and cryptocurrencies in the last year.

In 2022 to the end of the third quarter, fine wine has seen average growth of 14.1%. The top performing regional index in 2022, the Liv-ex Burgundy 150, recorded 27.6% YTD at the end of September and the Liv-ex Champagne 50 was up 50.4% in the last year.

Fine wine compared to cryptocurrencies:

Source: Cryptocurrency: Coinmarketcap, Wine: Liv-ex.com data at 30.09.22

Individual wines are delivering even higher returns to investors.  Top performer, Salon Le Mesnil sur Oger 2004 has seen its price rise 42.1% YTD and 84.7% over the last year. The 2004 vintage is up 137.2% in twelve months.

Top wine performers in Quarter 3, 2022

Source: Liv-ex Q3 Report, October 2022

Should crypto investors hedge their bets with fine wine?

Fine wine has proven its ability to maintain growth during highly challenging economic conditions and periods of rising inflation during the height of the pandemic and in the current environment with war in Ukraine. It delivers low-risk growth that naturally off-sets negative movements in more volatile components of an investment portfolio and particularly for those investors in digital assets. So yes, it would appear to be a good strategy.

For more information on the current market conditions, top performing wines and investment trends this year, see our Q3 2022 Market Report and speak to a member of our expert team on 0203 384 2262.