Bitcoin is one of the most talked about investment trends of the past year. Powered by blockchain, Bitcoin and other cryptocurrencies offer an alternative to making purchases through the traditional banking system. Another type of high-profile investment involves non-fungible tokens or NFTs, which use blockchain to create unique and presumably high-value digital assets, such as an artwork.

While it can be tempting to join the crowd and purchase crypto currencies or NFTs, you should be careful to understand the nature of these assets, as well as the risks associated with these types of investments. Currently, only a small percentage of crypto related transactions are for legitimate business purposes, partially because it is not yet widely accepted by many businesses or financial institutions. It’s not surprising that cybercriminals who encrypt computers with ransomware want to be paid in cryptocurrencies, thanks to the fact that they are virtually untraceable.

Environmentally minded investors should also be aware that blockchain-based transactions require incredible amounts of computing power, adding to demand on world’s energy production. A recent New York Times study found that cryptocurrencies consume as much electricity as the entire state of Washington.

LINK: https://www.nytimes.com/interactive/2021/09/03/climate/bitcoin-carbon-footprint-electricity.html

Because the market for digital assets remains relatively small, many investors may not realise that the risks are substantial. Recent history has shown us that cryptocurrencies are highly volatile, and subject to investor manipulation. So, even if your friends are talking about Bitcoin, you should invest with your eyes open, understand the risks associated, the lack of liquidity and recognise that it doesn’t tick your ESG box.

Understand your investments

Digital assets are far from the only types of trendy investments today. The COVID-19 pandemic has led to a boom in technology stocks, including devices and applications that allow people to manage their lives from home, rather than go into an office, a retail store or a doctor’s office. Rather than investing in a market leader, such as Amazon, Alphabet or Apple, we have seen retails investors purchase stocks of smaller and less well-known technology companies, from start-ups to regional players. Ensure you understand the nature of the company’s product or service, target market and competition before you make your acquisition. This has especially been the case with meme stocks and target companies entering the stock market via a SPAC.

Another challenge facing the world and has become a hot topic, is climate change. For investors, that might mean looking at companies that focus on solar energy, electric cars, batteries, coastal engineering, or a host of other markets. Along with start-ups and early-stage companies, many of the global oil and gas multinationals are also significant players in the alternative energy markets. Rather than simply saying “no” to the fossil fuel leaders, you may want to take a nuanced approach to making environmentally oriented investments.

Before investing in an ESG company, NFTs, a SPAC related company or any other type of trendy asset, it is essential you do your homework first. Your advisor or an outside financial professional can help you make sense of the risks, as well as the potential upside, and see how it might affect your portfolio. As investor interest remains “hot” on these types of assets, it is critical to listen to many points of views and invest carefully!

Samy Dwek is founder and CEO of White Knight Consulting LLC and The Family Office Doctor, Delray Beach firms that provide professional guidance and outsourced chief financial officer, chief operating officer services to high-net-worth individuals and families.