As with any new asset class, asset owners are likely to be cautious – and non-fungible tokens (NFT) are no exception. But while investors may not jump on the bandwagon immediately, the technology is likely to offer investment opportunities in other ways.
An NFT is a unique unit created on a blockchain to represent a digital asset, which ensures irrefutable ownership to buyers. Technically, anyone can turn any digital file into an NFT and sell them on an NFT market.
The appeal is that while the digital file can be duplicated, the NFT of that file cannot.
“NFTs are by definition of non-fungible.. The more unique a token is the higher the value – the same with artwork,” Laszlo Peter, head of blockchain services for Asia Pacific at KPMG Australia said.
“Let’s say for collectibles, if you know that they’re moving 100 baseball card or action figures issued… so they are truly non-fungible and they will go up in price because it is about supply and demand. And the higher the demand, the higher the price.”
Interest in NFTs peaked in mid-February, with $19.9 million in volume sold on February 19.
Companies, musicians, and entrepreneurs were releasing NFTs with wild abandon. Rock band Kings of Leon released their album as an NFT, chief executive of Twitter Jack Dorsey sold his debut tweet for $2.9 million, and a video clip of a Lebron James dunk was sold for $208,000 by NBA Top Shot, a blockchain-based platform backed by the NBA.
Then on March 11, the artwork known as Everydays: the First 5000 Days, a compilation of digital art created by Mike Winkelmann, known professionally as Beeple, was sold to a cryptocurrency entrepreneur for $69.3 million, driving interest further.
When asked if there were any institutional investors among the bidders, a Christie’s spokeswoman told AsianInvestor “the bidders came from all sorts of backgrounds”.
Demand and prices for NFTs have already plunged 70% from their peak in February. The average price for an NFT fell at the beginning of April to $1,250 from $4,000, according to CNN.
A portfolio manager at a single family office told AsianInvestor that the NFTs for collectibles such as overpriced artworks and sports icon videos are likely to be a fad, but start-ups involved in the development of NFTs are viable investment options for institutional investors.
Benjamin Usinger co-lead for blockchain and crypto advisory services at KPMG China agreed, saying “More common is investment in underlying platforms and enablers, and technology providers. That investment is already happening, from venture capitalists or selected institutions on the larger platforms.”
He was, however, more optimistic about investors buying NFTs. “Banks have been investing into art and collectibles, obviously always a very niche alternative segments, but it still exists. To the same extent, we should expect to see investments in NFTs,” he said.
Already, the secondary market for NFTs is booming. Total sales in the secondary market grew from $628,000 in December to $9 million in mid-April, according to nonfungible.com, which tracks market data.
However, Usinger said that it is still early days and it is difficult to predict how the industry will evolve. “The secondary market will be an interesting one that I will be watching. Will these artworks generate a secondary market? Or will the sellers, supported or encouraged by the first sale, start selling the same thing many times only to dilute the value of those early show NFTs? And that’s the dynamic that we haven’t seen as yet.”
Jennifer Cheng, who runs NewChic Capital, the venture and private equity arm of her family’s office, declined to comment on whether her company invests directly in NFTs but said that she has exposure “through funds and funds of funds”.
She is also Limited Partner to Orichal Partners, a cryptocurrency investment and blockchain advisory “with direct access to… blockchain companies and early-stage digital tokens,” according to the company’s LinkedIn page.
Cheng told AsianInvestor that she is attracted not solely to NFTs but to blockchain and cryptocurrency in general.
“There’s so many use cases across different industries that allow you to decentralise information, store data and also in a way that respects the ownership and the privacy of whoever’s providing the information,” said the Hong-Kong based investor.
There is a necessity in the world for blockchain, she said. “I don’t see it as a speculative thing. I just see it as something that had to come about.”
That meant that blockchain companies have the potential for growth, which in turn meant potentially promising returns.
“I approach it as I would any other asset class. One thing I like to do is to benchmark my performance. When I make direct investments, as well as investments as a secondary portfolio, I ask, ‘Aside from the fancy verbiage, is this a viable business opportunity? Does it stand alone without including fancy words like blockchain and crypto in there? Does it have merit?’”
“Because at the end of the day, like any business, it needs to be solving a universal problem and make an impact,” she said. “So all of those fundamentals need to be present.”
The process of creating NFTs is the same as the tokenisation of real assets such as real estate, private equity funds or wholesale bonds which have emerged in Asia in recent years.
However, while the main draws for tokenisation are the liquidity as well as the fractionalisation of underlying assets, NFT’s appeal has more to do with the unique identifiability of the token, which gives it potential to increase in value over time.
“It’s an interesting development that we are moving into uniquely identifiable tokens… Those are part of the elements that make it very interesting or attractive,” said Usinger.
“So thinking, for example of a piece of art or, for example, jewelry or other assets, where we might actually have an increase in value, depending on who was the previous owner, and [because] I can prove that this previous owner existed.”
He used the example of the Volkswagen Golf owned by the former Pope Benedict that was sold for $244,000 in 2005 on eBay, 20 times what the seller originlly paid for it “purely because the proof of ownership was valuable to its buyer. So I think those are some of the elements that really cause excitement,” Usinger said.
Asset owners have been cautious about digital assets, opting to invest in companies involved in the underlying technology instead.
NFTs present unique challenges to institutional investors too, specifically to do with “how to value them, how to store or custodise them and how to prove the underlying asset is linked to the NFT, rather than just a link on a private server,” Peter said.
“Occasionally you want to rebalance your portfolio and maybe sell some or buy some new assets, and you have to keep them in safe custody,” he explained. “These complexities of liquidity, storage and operational considerations around the asset are the ones that will probably keep some fund managers up at night when investing in tokenised assets.”