Call it a case of pandemic boredom: many people have more time on their hands, as lockdowns have taken everything from socializing to vacations off the table. That’s led to an increase in household savings, particularly among those who’ve been lucky enough to keep working.
That combination has led to an influx of money into some highly speculative (and in some cases bizarre) assets. Here are four that have taken off as COVID-19 has dragged on.
1. Special purpose acquisition companies (SPACs)
A special purpose acquisition company (SPAC) is a different spin on an initial public offering (IPO), which is a company’s journey from a private business to one that trades on the TSX, NYSE or any other stock exchange. Simply put, a SPAC is money pooled together looking for a business to invest in; an IPO is a business looking for funding.
Under a typical IPO in Canada, the private firm hires an investment bank that assesses the value of the company and prepares it for a listing on a stock exchange. This includes preparing a prospectus that will be reviewed by provincial regulators like the British Columbia Securities Commission, marketing the IPO to an initial group of investors, and registering the stock on the market on which it will trade—the two main Canadian markets being the Toronto Stock Exchange and the TSX Venture Exchange.
Under a SPAC, a group of investors pool their money to form a company—but this firm is basically a shell: it exists solely to house the capital its creators collect from the initial investors in the SPAC. They then use these funds to purchase a private company—either a recent start-up or one with an established business. Then they list the shares of the SPAC, which is now essentially the acquired company, on an exchange.
This makes the whole process of an IPO faster, by months and sometimes years.
An interesting point about SPACs is that they’re very popular in the U.S.—which is why we’ve heard a lot about them in recent months—but much less so in Canada. Bloomberg reported in February that Canaccord Genuity, an investment bank specializing in SPACs, managed SPAC IPOs valued at C$1.53 billion in 2019, but that number dropped by more than half, to C$718.9 million, in 2020.
That’s the mirror image of what’s happening south of the border, where SPACs raised US$83.4 billion through their IPOs in 2020, according to figures from SPAC Research. And this year’s figure topped last year’s, hitting US$87.9 billion by mid-March.
However, there are some downsides to the SPAC approach for investors:
All your trust is in the managers: Because SPACs purchase private companies, and in some cases start-ups, there’s no way for you as a SPAC shareholder to assign a value to these firms, because their financial results aren’t made public. What’s more, SPAC managers don’t have to reveal which company, or even which sector, they’re targeting as part of the SPAC’s IPO.
This means you’re counting on SPAC management to make the right assessment. That’s a departure from buying established, publicly traded companies on your own, where you can access their annual and quarterly reports and value their shares through commonly used metrics like price-to-earnings ratios. In addition, these managers may have a significant conflict of interest and have their own interests in mind, not those of the investors.
Volatility can be high: Buying into an initial SPAC offering may be low risk and a good cash alternative, as you get paid to wait until the acquisition completes. However, once the acquisition is final, volatility can become quite high. SPACs are usually focused on buying firms in industries like technology and biopharmaceuticals—and in Canada, cannabis—where competition is high and unsuccessful start-ups can see their value drop to zero.
2. Non-fungible tokens (NFTs)
NFTs are where alternative investments get very alternative. They’re hard to wrap your head around because they allow you to hold an ownership right to a unit of data stored on a digital ledger that certifies that the asset is unique and not interchangeable.
NFTs can be used to represent assets such as digital art, photos, videos, digital sports cards and even tweets – virtually any type of digital file. (Twitter founder Jack Dorsey, for example, recently sold his first-ever tweet, posted in 2006, as an NFT for $2.9 million, following a bidding war. Yes, $2.9 million.)
This can give artists another way to monetize their work, which is a plus—especially with many struggling due to the pandemic. The standout example is the digital artist known as Beeple, who recently sold an NFT of a digital collage he created for US$69 million.
The obvious problem here is that unlike physical art (more on that below), online artwork is impossible to protect from copying. You can download any image from the Internet, for example, or copy any piece of text (including Dorsey’s tweet), and there’s little the owner can do about it.
But the idea behind NFTs isn’t so much to give the owner a right to the art, as to create a market for NFTs in which buyers and sellers can bid up (or down) the value of each individual NFT. That’s similar to cryptocurrencies like Bitcoin, in that these currencies aren’t primarily meant to displace national currencies; their main function is to represent a market for investors to participate in.
That’s not the only similarity: NFTs, like cryptocurrencies, use blockchain as the digital ledger to record purchases and sales.
A key question is whether NFTs’ value will hold up once the economy opens and consumers have other spending options available. At this point, there’s no way to know that for sure, which adds to the already high level of uncertainty surrounding these assets.
3. Art—the regular way
NFTs aren’t the only art-related investment that’s taken off. Physical art has attracted a lot of new investors, too.
That’s the opposite of what many people thought would happen back in March 2020, when the onset of the pandemic put the brakes on in-person auctions. But the business didn’t idle for long, as big auction houses like Sotheby’s hastened their shift online.
The result was an unexpected jump in art investing, particularly among new buyers: according to The Art Newspaper, sales at Sotheby’s were US$5 billion in 2020, up from US$4.8 billion in 2019. More importantly, the auction house also saw a 27% jump in the number of new buyers in 2020, compared to 2019.
Major challenges to art investing are the fact that you’ll have to conduct research or engage an expert to discern the value of any piece you’re considering. And unlike stocks, art needs to be carefully stored and is illiquid—if you need to convert it to cash, you first have to find a buyer willing to pay the price you’re asking. Stocks, on the other hand, can be sold with the click of a mouse.
4. Sports cards
Perhaps in no other place have we seen the impact of cooped-up investors and rising savings play out more dramatically than in sports cards. According to figures from eBay quoted by Sports Collectors Daily, sales of soccer cards soared 1,586% in 2020. Basketball card sales spiked 373%, and the number of hockey cards changing hands jumped 258%.
Making money in sports cards is tough—you have to research individual players, the company that makes the card (which has a strong bearing on its value), and be prepared to store cards for the long term. And as with art, a lack of liquidity is also a challenge here.
Looking for investment income? Consider looking elsewhere
The key takeaway here is that, unless you’re investing with money you can afford to lose or you really love sports cards, you’re better off sticking to proven assets like bonds, mutual funds, exchange-traded funds (ETFs) and shares* of established companies.
Not only will these assets offer a better chance at steady returns, they may also pay dividends—something you may never get from SPACs, NFTs, art or sports cards.
Your BlueShore advisor can recommend investments options right for your circumstances, goals, and risk profile. They’ll build a clear financial plan that helps you achieve your goals while protecting your money (and providing peace of mind, too).
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