A California-based digital asset specialist purchased 2,500 barrels of new Kentucky whiskey by the end of 2020, betting that the barrels will increase in value by three to five times over the course of five years through the aging process.
Wave Financial’s Kentucky Whiskey 2020 Digital Fund is both a straightforward, $2.5 million investment into an alternative asset as well as a novel experiment in the burgeoning crypto asset space.
After a one-year lockup period completes, Wave Financial will issue digital “tokens,” representing shares in the fund, which investors will be able to trade on a cryptocurrency exchange while the barrels are being held in storage, creating a new market and adding a second tier of complexity to the investment.
“The tokenization is about putting the fractional ownership of the fund onto the blockchain in tokens,” said Benjamin Tsai, Wave Financial’s president and managing partner. “When one barrel gets sold, everybody is fractionally enjoying that capture of value.”
Blockchain is an essential technology for cryptocurrencies. In short, it is a novel, decentralized ledger system that verifies and records transactions.
In the physical world, Wave Financial will likely sell the barrels over a period, potentially across a few years, depending on Kentucky market conditions. When the barrels are sold, investors will exchange their tokens to Wave for their share of the return on the fund, though the fund may return some capital before all barrels are sold.
The group’s market research projects that a single barrel of new Kentucky whiskey will increase in value from around $1,000 to between $3,000 and $5,000, or more, after five years. Even including high costs associated with selling the liquor, the group projects returns of at least three times the initial investment.
When Wave Financial was searching for an investment that could be turned into a digital token, hard assets were the obvious choice. The reason they settled on whiskey is because of the investment case and the liquidity of the market for selling mature whiskey. However, there are some key risks involved in the investment, including the changing tastes of consumers.
Following the 2020 fundraising, Wave Financial is already planning for a 2021 version of the fund.
Read the full profile of the fund on Barron’s.