As cryptocurrencies whipsaw investors, NFTs could emerge as a HODL of digital value

By: Tom Kennedy (tom.kennedy@liquidavatar.com)

Precis

Cryptocurrencies just endured an intense, if somewhat typical couple of weeks of booms and plunges. NFTs came along for the ride in the spotlight. The question becomes, will NFTs play a role as a safe haven HODL amongst the digital asset classes?

It is important for me to admit I have no expertise in cryptocurrencies. In fact, the more I learn the more it becomes apparent that intelligent, well-researched individuals and teams are reaching expert conclusions that often contradict each other. Non-fungible tokens are a part of the same ecosystem, representing a digital asset in the owner’s wallet. NFTs, like fine wines and collectibles in the physical world, are far less liquid than say Bitcoin, but are positioned to be a meaningful part of the Alternative Investments portion of a diversified digital portfolio.

Figure 1: Alternative Investment Pyramid

Source: FT Partners

In addition, alternative investments are creating opportunities, which allow investors of different sizes to participate, instead of just the super rich or sophisticated traders. As the pool of investable NFT assets continues to grow, creators and investors of all sizes will be able to diversify their portfolios as they manager their digital assets.

When Crypto Whipsaws NFTs share the spotlight — but not the same price swings.

In the past two weeks there have been big moves both up and down in bitcoin, the flagship cryptocurrency, and all other coins experienced similarly high volatility. As a recap of recent news, Elon Musk’s Tesla announced they had invested treasury cash into bitcoin, causing the price to go up. Then, Tesla reversed course, indicating the environmental concerns from bitcoin computations were not in line with Tesla’s practices. Bitcoin’s price fell.

Amplifying volatility this week were numerous announcements of hedge fund interest in bitcoin (bullish) followed by central bank challenges and geopolitical risks (bearish). There were literally episodes of panic selling and confident buying in the same days. In sum, bitcoin went from ~US$65,000 in April to under $32,000 last week and back up to ~$36,000 all in a few days. At the same time as crypto’s most recent rollercoaster, NFTs got lots of renewed press — which I will claim is positive for exposure and thus value.

Over time, I believe NFTs will become a key part of a digital investor’s alternative asset portfolio. In addition to portfolio diversification, the royalty structure within an NFT lends itself to the yields produced by many traditional alternative investments. All the while the NFT represents rights to intellectual property ownership.

Great example: NFTs could be the basis of the next pop culture “franchises.” Franchises mean ongoing value creation.

This week, media entrepreneur Gary Vaynerchuk predicted that NFTs may be the basis of the next pop culture franchise, the same way playing cards were to Pokemon, books were to Harry Potter, and movies with special effects were to Star Wars.

As non-fungible tokens continue to evolve in use cases and adoption, it is clear that they will form an important component of Alternative Assets for the next era of investors, retail and institutions alike. Just like with traditional collectibles, NFTs will represent a meaningful store of value in a digital portfolio that balances out the volatility and risk profiles of other more accessible or liquid asset classes. History repeats itself with new music.

© 2021 Thomas Kennedy. All rights reserved. See Disclosure Statement

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