Navigating the future of NFT investing
As newer generations explore cryptocurrency and NFTs, investment managers and financial planners should watch the market closely for signs of adoption. Investment firms must begin planning to integrate these assets, ultimately enabling further personalization of client portfolios, says Nageswar Cherukupalli, SVP and head of Infosys.
Most investment management firms stay away from decentralized finance (DeFi)-based opportunities, namely cryptocurrency and non-fungible tokens (NFT), but many of the younger generation (millennials and gen Y) clients are showing great interest in exploring these asset classes. Two separate surveys found that one in two millennials owns cryptocurrencies, while nearly half of millionaire millennials deal in NFTs. Is this a signal that investment management companies should pay close attention to this area and its applicability in financial planning? This article explores which blockchain derivative namely NFT – a unique digital token representing a physical or digital asset that acts as an irrevocable digital certificate of ownership and authenticity – can mean for these companies and their customers.
These are still early days in the life of non-fungible tokens (NFTs), but there is a steady buzz around this topic. Let’s explore the trends driving interest today:
Democratization of finance
There is a widespread view that decentralized finance or blockchain heralds the democratization of finance by enabling users to bypass banks and central intermediaries in their financial transactions. Believers see it as a way to give the unbanked access to finance and thus promote inclusion. Such expectations are premature, not least because they are based on the use of cryptocurrency by the masses, when in fact it is only 10% of cryptocurrency (bitcoin) creators (miners) control 90% of bitcoin. Currently, bitcoin or Ethereum transactions are more expensive and not efficient compared to Fiat currency, making them unsuitable for daily use.
That said, a microcosm of a democratic financial universe exists in decentralized finance. The DeFi market, which runs on “dapps” (decentralized apps) and protocols, leverages blockchain and cryptocurrency to offer various financial services, ranging from simple banking to sophisticated asset trading. DeFi embodies democratized finance, where transactions occur between peers without involving a central authority or intermediary. The “locked value” in DeFi is estimated at $43 billion, of which NFTs are a part. Still small, but shallow enough for investment firms to track their progress.
See more: How NFT ticketing will promote Web3 mass adoption
A new asset class
NFT artworks, such as Pak’s “The Merge” and Beeple’s “Every Day,” fetched outrageous sums in the tens of millions of dollars. But excited apart, NFTs gain traction, with sales in 2021 of $22 billion and total sales transactions reached 1.1 million by the end of January 2022.
The potential of NFT as an asset class lies in its finitude – an NFT is unique and non-fungible, and its quantity is limited. Its appeal as an item of value is enhanced by authenticity and verifiability. Today, NFTs are mainly associated with digital properties, such as digital art, video or music. But what should interest the investor community is that NFTs have already been used to fulfill real asset contracts. In 2017, serial entrepreneur and TechCrunch founder Michael Arrington bought a Kiev apartment on a real estate platform, using Ethereum and smart contracts to settle the transaction. Four years later, he auctioned the flat on the same platform, but as a property-backed NFT – the world’s first.
Any asset, be it a house, a car, a painting or a collectible, can be “tokenized” and transacted outside of traditional transaction channels. When adding up all the digital assets that can be bought or sold as NFTs, it’s conceivable that an investor would have tens of thousands of asset classes to choose from instead of just 15 or 20. With a much larger canvas, financial planners and investment managers can customize customer portfolios like never before and specialize in new niches to differentiate their business.
See more: How collectibles-backed NFTs help brands
A new business opportunity
In addition, NFT users represent an entirely new customer segment for investment management companies. Traditional methods of raising capital present several challenges, including difficulties in securing bank financing or private investment and strict regulations that must be adhered to. In comparison, offering tokenized equity shares on a blockchain platform provides flexibility, ease and economy of fundraising. With interested investors engaging directly with the company, the share price is determined by market forces rather than sponsoring entities.
This is why more businesses, especially startups, are taking the initial coin offering (ICO) route to raise money. Among cryptocurrency companies, NEO (unofficially known as China’s Ethereum), Stratis, Alias and Ethereum have had successful ICOs. But examples exist even in other industries – a few years ago, Quadrant Biosciences took its shares and raised $13 million. Cryptocurrency companies seek the help of financial advisors to guide their (crypto) wealth management departments. Investment management companies should consider finding ways to participate in these opportunities or risk being left behind by specialist digital currency management companies, blockchain-based platforms, NFT marketplaces and the like over time.
Associated with intangible digital assets and highly speculative transactions, NFTs still need to earn a place in the portfolio of traditional investment management firms. But investment managers and financial planners should watch the market for signs of adoption among the next generation of retail and corporate clients. While a few wealthy owners currently hold NFTs, their decentralized nature means they are, in theory at least, highly accessible to anyone. Investment companies should start planning now so they are prepared for it.
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