Do NFTs Deserve a Spot in Your Portfolio?

Non-fungible tokens are unique cryptographic tokens that live on the blockchain. Whereas Bitcoin and other cryptocurrency tokens are interchangeable, NFTs are one-of-a-kind and contain encoded properties. Like other cryptocurrencies, they live on an immutable blockchain and provide a permanent record of ownership.

NFTs have emerged as the first digitally-native medium for art and collectibles. Since their launch in 2014, NFT trading volume surpassed $3 billion in Q3 2021, driven by a handful of megabrands, including Crypto Punks, Board Ape Yacht Club (BAYC), Art Blocks and Cool Cats, among others. And the prices of these assets have soared in recent months.

While NFT collectibles are in vogue today, the same technology can represent just about any asset. For example, NFTs are widely used to represent unique in-game items and characters. They could also represent real-world assets, like fractional real estate, lowering transaction costs and eliminating intermediaries.

The market for non-fungible tokens remains in the early stages, but several emerging platforms cater to investors. For institutional investors, the Bitwise Blue-Chip NFT Index Fund tracks the most valuable NFT collections in the arts and collectibles sector with a $25,000 minimum investment and a hefty 3% expense ratio.

 

BAYC’s floor price has soared over the past year. Source: CoinGecko

Of course, retail investors can acquire their own NFT collectibles for anywhere between $1,000 and $100,000. Services like Drops even enable NFT owners to obtain stablecoin loans using their NFT as collateral. Investors can deploy these funds to yield farming operations and effectively generate a yield on NFT assets over time.

Meanwhile, QuantumRE facilitates Home Equity Agreements whereby homeowners sell a fraction of their equity via blockchain-backed NFTs that investors can purchase and trade in a secondary market. When the homeowner sells or refinances their Home Equity Agreement at the end of a 10-year term, investors receive their pro-rata share of the payoff.

Many investors have dabbled in cryptocurrencies, such as Bitcoin or Ethereum, but they haven’t allocated much of their portfolio to other crypto projects. While many of these crypto projects are high risk and early stage, they offer the potential for high returns (e.g., NFTs) and attractive income (e.g., DeFi). And they could also help diversify a portfolio.

Given their volatility, these investments should remain firmly in the speculative portion of a portfolio. However, converting conventional financial products – such as fractional real estate into NFT and crypto products may be a different story. These projects could hold the same assets as existing financial products with less overhead cost and greater accessibility.

Investors should keep an eye on these trends over the coming quarters as the market matures. While NFT collectibles remain extremely volatile and uncertain, the NFT vehicle is likely to remain and could become a staple of future financial portfolios. And there are a growing number of startups looking to apply NFTs to new markets.

Non-fungible tokens have become extremely popular over the past few years. While it’s easy to dismiss high-priced digital collectibles as a fad, NFTs could play a wider role in the finance industry over time. As a result, investors should watch these trends as they could become a gateway to easier investment in private or alternative investments.

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