Non-fungible tokens (NFTs) are the latest hot topic within the crypto world, with the token-art market booming in 2021.
Headline grabbing developments, such as an NFT art piece fetching almost €60m at Christie’s this year, have left investors asking whether it will become an institutionally valuable trading asset.
While many question the volatility and legitimacy of NFTs, there are several trends in place which could potentially shift things from the realm of collectors to collective investments.
What is an NFT?
First and foremost, what are we talking about when we discuss NFTs?
An NFT is a certificate of authenticity held on blockchain, a digital ledger of transactions that cannot be hacked, or replaced by another identical one (hence non-fungible). Unlike a fungible item, such as a pound coin, which is completely interchangeable.
These tokens may refer to an actual item, such as an artwork, as well as its authentication. NFTs can be applied to real life physical items, from art to more recently – gold and even property.
Are NFTs investable assets?
Questions remain around whether there will be an institutional adoption of NFTs as investable assets. Dr Nick Almond, a senior academic with a background in biophysics, set up a blockchain start-up designed to improve governance across the crypto space, called finance.vote.
Cryptocurrencies are notoriously volatile, Dr Almond said, and as NFTs are merely a derivative of these, replete with their own legal challenges over ownership and replicability, some institutional investors are naturally sceptical.
But, Dr Almond is among those stressing it is about the longer-term story of the evolving relationship we have with the digital world. This has implications for our interaction within it, and what will be deemed scarce and valuable.
He has spent the last five years designing token ecosystems, which entails the creation of an incentive alignment through game-theoretic mechanisms – thereby creating the scenario where people want these tokens.
Dr Almond said 99% of tokens currently in the crypto space do not have a base utility value, unlike Bitcoin for example, which has a permissionless utility, allowing someone to transfer A to B anywhere in the world. But he said this is set to change.
According to Dr Almond, one of the next disruptive moments could come from these digital assets, which could be driven by a shift within the world of decentralised finance (DeFi) and digital assets to take the market mainstream.
Dr Almond said: ‘One minute it’ll be [digital assets], very underground and niche, and then suddenly, something will become massive. One of these DeFi outfits might become adopted by financial institutions and suddenly, it all rapidly changes in a very huge way.’
Dr Almond said the process of NFTs becoming finite, whereby it will be valuable trading assets, is fully underway. For some, buying NFTs is like owning the first pages of digital history, proof of ownership over the first relic of a cultural moment; while for others, they will one day prove to have a valuable base utility.
Among the gaps within the NFT space which concerns institutionalised investors, is the lack of a robust legal infrastructure to safeguard transactions, Almond goes on to explain.
One company addressing this gap is a London headquartered company founded in 2017 called Mattereum that is working to develop the legal infrastructure required to eliminate the transaction risk for the on-chain trade of global physical assets.
Fund manager stance
Senior fund managers, such as Citywire AAA-rated portfolio manager Jack Neele of Robeco, are waiting for NFTs to be a little more institutionalised. He told Citywire Selector: ‘From an investment perspective it’s really hard because we invest in public equities, but I do think it reflects the importance of the digital world.
‘It is still very immature, but I think the fact that things which have been made digitally, now have value in the real world and have been validated, I expect a lot more innovation in that front over the next three to five years from an investment perspective, but it is currently very difficult for us.’
How to access them?
NFT-focused funds currently in operation include Metapurse, which was behind the €60m Beeple Christie’s Auction purchase earlier this year. Another fund called KR1 acts as a venture capitalist in blockchain-related businesses, while NFTs are being minted and traded on NFX.org.
Beyond NFTs there is Dispersion Holdings, a DeFi Aquis-listed vehicle that uses blockchain and cryptocurrencies to bypass intermediaries in financial services transactions.
Dr Almond said another key development which could move it from ‘hobbyist token digital art’ to something more institutional is the emergence of the DAO – a decentralized autonomous organisation.
An example of which is a group called PleasrDAO, which bought an NFT minted by whistle-blower Edward Snowden for more than €4m. This was not as ‘fan-art’,
‘This is a large part of what I spent the last five but to carve out a niche in ‘decentralised art ownership’. years obsessing on, because it’s a new kind of organizational structure. From a governance perspective these decentralised organisations have the potential to be very disruptive,’ Dr Almond said.