NFTs: the race is on to pick the winners

Whenever I start writing about crypto investments I have that sinking feeling. The last time I touched on the subject was back in April 2018, when cryptos were in the deep freeze and heading south. My purchase of some bitcoin trackers when the price was around $6,000 was almost perfectly timed — to lose money. 

Prices were coming off a high of about $16,000 and then proceeded to bottom out at around $3,000. As I write, bitcoin is coming off highs again — just after I dipped my toes back in the water.

A few weeks ago, I bought a very small number of shares in an Aquis-listed fund called NFT Investments, which listed at 5p a share, began falling immediately afterwards and is now trading at around 3.5p. 

That said, I’m not overly concerned about whether the launch was overhyped. I think what is much more interesting is what it says about the longer term story of “non-fungible tokens” (NFTs). 

This is likely to provoke much eye-rolling among FT readers and, of course, all the caveats apply: crypto markets are insanely volatile and NFTs are just a derivative of these. They also have their legal challenges over ownership and replicability. In the end, it might all amount to a row of beans — but I think not.

First, the basics. An NFT is a certificate of authenticity held on the blockchain, a digital ledger of transactions that cannot be hacked. These tokens may refer both to an actual item, such as an artwork, as well as its authentication. Cut through the jargon and they are just a piece of code with specific functionality and a unique identifier. An NFT is thus a kind of digital securitisation, an asset of a kind that cannot be exchanged for or replaced by another identical one (hence non-fungible).

NFTs could be easily applied to a real-world physical item such as a stamp or a work of art. But they are most commonly used with digital art and collectibles. The best-known example was a work sold in March by digital artist Mike Winkelmann (aka Beeple) at auction for $69.3m. 

Artists can create or “mint” a new work and then pair it with an NFT which acts as the ownership right. They can also choose to retain some control over the digital rights of their work by encoding this within the NFT. 

But NFTs aren’t just about art. The NBA’s Top Shot collectibles programme has also already brought in more than $400m in sales of NFTs related to specific video moments in NBA history. Then there is the barely believable world of digital horseracing.

Platforms such as Zed Run sell digitally created horses with unique algorithms. Owners pay an entry fee to race their steeds against others for a prize pool. You can even “breed” the NFT horses in Zed Run’s “stud farm”. One player recently sold a stable of digital racehorses for $252,000, according to the New York Times. Another made $125,000 for a single racehorse.

This is a volatile set of markets. According to Nonfungible.com, which tracks NFT marketplaces, the average price for NFTs went from $142 in October 2020 to $4,000 in February 2021, before falling back to $1,400 in March. If you thought this was all a bit — how can I put it? — bonkers, consider the fact that in the first quarter, the market value of 38 NFTs tracked by CoinMarketCap surged more than eightfold to $22.5bn.

There are many blockchain entrepreneurs and investors out there who prize digital creations and have a great deal of money to spend. Early investors in crypto have also benefited from the move by some institutions to buy into the concept of crypto as an asset class — one that is worth an allocation of, say, 1 per cent of their portfolio. 

I would also argue that NFTs represent a broad form of accessible, easy to trade securitisation which can be applied to virtually anything digital and physical. That helps explain why NFT Investments’ first transaction was to buy into Aeon International, a developer of supply chain technology for the luxury fashion industry. This sort of development can help combat luxury counterfeiting and strengthen product authentication.

Another Aquis-listed vehicle is Dispersion Holdings, where I have also bought a very small number of shares. It goes beyond NFTs to focus on decentralised finance — or “DeFi” in the jargon — which uses blockchain and cryptocurrencies to bypass intermediaries in financial services transactions. It also owns some shares in NFT Investments. 

In a similar segment there is another fund called KR1, which acts as a venture capitalist in blockchain-related businesses (I also own some shares in that). It’s worth dwelling a bit on KR1. Its shares were trading at between 15p and 20p when I first bought but peaked at over 200p in February. 

As I see it, its business model is to back new digital asset platforms; KR1 receives tokens as an element of its investment deal. This is nicely encapsulated by its latest move to back a money market platform called Equilibrium. In return, KR1 has received just under 600,000 tokens in Equilibrium. 

Another to look at is ETF issuer Van Eck, which recently brought out the VanEck Vectors Digital Assets Equity UCITS ETF (ticker DAGB). This pure-play ETF invests in companies focused on blockchain-based applications — those that generate “at least 50 per cent of their revenue in the digital assets industry”. It is early days for this easily tradeable ETF. It’s worth noting, though, that its second biggest holding is Galaxy Digital (8.5 per cent of the fund) which is a Canadian listed digital assets business that is in effect a crypto investment bank.

This trio are good examples of how token-based digital platforms are working in areas far removed from the art world NFTs that originally brought the trend to the world’s attention. Real money has already been made — KR1’s share price has gone up more than tenfold in over six months — and quite how this sector will mature I have no idea. But it isn’t going away and it isn’t a joke — though those thoroughbred digital horses certainly induce a smile.

David Stevenson is an active private investor and has interests in securities where mentioned. Email: adventurous@ft.com. Twitter: @advinvestor