Bet on the infrastructure, marketplaces, and other beneficiaries of the NFT boom
Since you’re reading this I’ll just go ahead and assume that you’ve heard enough about NFTs to believe they’re worth your attention and at least some allocation in your portfolio. Now, you could just go ahead and buy some actual NFTs. It’s definitely the most straightforward path to financial exposure. It’s by no means your only option though.
In fact, if you want to invest in the NFT technology and don’t care about the cool artwork, community, game utility, or many other benefits that can come along with being an NFT owner, I believe you have several options that are far better than buying individual NFTs. Just keep in mind that I’m not a financial advisor and that you need to do your own research before investing.
Why you probably shouldn’t buy NFTs
Trying to pick the “winners” in any financial market has always been difficult. That’s why most experts recommend index funds or similar types of investment vehicles that give you broad exposure when investing in stocks, commodities, and even cryptocurrencies.
Because of how small and unregulated the NFT market still is, it’s arguably much easier to have an edge over other investors, but it takes a lot of research and/or the right connections.
The immaturity of the NFT market also means that you’re largely investing in completely new projects and teams. It’s as early-stage as it gets. Without any track record, you have no quantifiable metrics to base your investment on.
Sure, you can look for great teams, exciting mission statements, and unique roadmaps, but even projects that check all these boxes are by no means guaranteed to be good investments. Some even turn out to be outright scams.
Unfortunately, you’ll find plenty of NFT price charts like this, the exact type we want to avoid
Furthermore, many of the most valuable NFT projects are less about utility and more about art, culture, and branding. I have yet to find a reliable formula for predicting which of these types of projects will win and I’d be very skeptical of anyone claiming they’ve found it.
Another challenge of investing in NFTs is the illiquid nature of the market. It’s a well-known characteristic of the art and collectibles markets, and arguably a much smaller issue with NFTs because everything is online. That being said, it can still be difficult or even impossible to get out of your position when you want to. You may be forced to lower your sale price or wait hours or days before a buyer shows up.
What’s more, you’d need to own quite a few NFTs in a given project to be able to ladder in or out of a position. There’s no “taking 20% off the table” if you only own one or two NFTs in a given project.
Okay, rant over. If you weren’t already aware of all these challenges I think you get my point by now. If you’re approaching NFTs as an investor, I generally think it’s much better to allocate your funds to the infrastructure, companies, and services that benefit from the NFT boom regardless of which individual projects perform the best.
Luckily for us, we can invest in the NFT market without owning a single NFT.
Investment idea #1: Blockchains
NFTs are created on top of blockchains whose native currencies are used for minting and trading of NFTs. The popularity of NFTs is thus increasing the activity on these blockchains and the need for their currencies.
The most popular of these blockchains, Ethereum, even has a mechanism that reduces the supply of ether ($ETH), its native currency, whenever a transaction is made. This could contribute to its value appreciation over time.
After Ethereum, the most popular blockchains for NFTs are Solana ($SOL), Tezos ($XTZ), WAX ($WAXP), Binance Smart Chain ($BNB), Terra ($LUNA), Avalanche ($AVAX), Flow ($FLOW), and Cardano ($ADA). I’ve personally been invested in most of these for a long time and continue to see them as great investments.
Ethereum ($ETH) is up 530% while Solana ($SOL) has increased more than 100x in value this year
Investment idea #2: Blockchain scaling solutions
Because of the way Ethereum is built, scaling solutions are being created on top of it to manage transactions in a faster and cheaper way. These solutions are also increasingly being used for NFTs.
Some of the most popular include Polygon ($MATIC), Immutable X ($IMX), and Arbitrum. Polygon is already integrated with OpenSea, the largest of all NFT marketplaces, Immutable X is being used by TikTok, and new NFT marketplaces keep getting built on top of these solutions.
Investment idea #3: NFT marketplaces
NFT marketplaces are perhaps the most obvious beneficiaries of the NFT boom, typically profiting from every transaction made on their platform by taking a small commission. There are two ways to invest in NFT marketplaces.
NFT marketplace tokens
Some NFT marketplaces have their own cryptocurrency tokens. They’re used for governance, rewards, and transactions. If the popularity of these marketplaces and the use of their currencies increase, their value might do the same.
- SuperRare ($RARE) is a premium marketplace for NFT art from top artists in the space.
- Rarible ($RARI) rewards its buyers and sellers with RARI every time they make a transaction on the platform.
- Binance ($BNB) is both a cryptocurrency exchange and an NFT marketplace, and it has its own native cryptocurrency.
- FTX ($FTT) is another cryptocurrency trading platform that recently launched its own NFT marketplace.
FTX and SuperRare are two of the NFT marketplaces that have their own cryptocurrency tokens
NFT marketplace stocks
A few publicly traded companies have gotten into the NFT space by building their own marketplaces. They’re at very different stages of development and with different approaches and ambitions, but definitely worth a closer look if you’re interested in this investment thesis.
- Coinbase ($COIN) recently announced the upcoming launch of their own NFT marketplace, leveraging their massive user base of cryptocurrency enthusiasts.
- DraftKings ($DKNG) launched their own NFT marketplace in August this year, naturally focusing on sports-related NFTs for now.
- eBay ($EBAY) is also dipping its toes into the NFT world by allowing users to buy and sell certain NFTs on their platform.
Investment idea #4: NFT stocks
In addition to the marketplaces mentioned above, we have a few more options for investing in stocks with NFT exposure. Here are some of the best ones at the moment.
- Funko ($FNKO) has really embraced the NFT technology with their Digital Pop! series. They’re utilizing the WAX blockchain mentioned earlier.
- Mattel ($MAT) is another toy company that’s realized the potential of NFTs and launched its own digital collectibles.
- Cloudflare ($NET) is one of the leaders when it comes to NFT video streaming with their addition of NFT support.
- Twitter ($TWTR) has always been the go-to social media channel for people in the NFT space and has a strong focus on cryptocurrency in general. They recently teased a feature that lets users connect their NFT wallets and verify their NFT avatars, and I won’t be surprised if they roll out a lot more features to utilize the technology and please their users.
Some of FUNKO’s NFT collectibles
You can easily find more publicly-traded NFT companies by doing a little research yourself. Check out this list by Pace E. LaVia, for instance. I’m personally keeping a close eye on tech and entertainment companies like Disney ($DIS), Nintendo ($NTDOF), Snap ($SNAP), Pinterest ($PINS), and of course Meta (formerly Facebook, $FB).
Investment idea #5: Virtual metaverse land
Speaking of Facebook — sorry, Meta! — and its focus on the metaverse, this could be another way to bet on the continued surge in the popularity of NFTs. A large portion of the NFT market has been driven by the so-called avatar projects, and many of these have at least a plan for how they’re going to expand into the metaverse. They’re creating 3D versions of their avatars, building places for community meetups, and working on their own games.
The popularity of these NFT avatar projects could therefore lead to further and faster adoption of immersive metaverse experiences, with virtual worlds like Decentraland ($MANA), The Sandbox ($SAND), and Somnium Space ($CUBE) as the beneficiaries. You can invest in these by buying land to resell or rent out to builders, or by buying the virtual worlds’ own native tokens.
Land in The Sandbox has been a tremendous investment over the past few months
Investment idea #6: NFT fractions
Some DAOs (Decentralized Autonomous Organizations) have been created as “NFT funds” that own a portfolio of high-value NFTs. You can own a fraction of these portfolios by buying one of the DAO’s NFTs or by buying the tokens that are paid out to the NFT holders.
Some popular examples include Mutant Cats and Head DAO, each owning a collection of Bored Ape Yacht Club, Cool Cats, CryptoPunks, CyberKongz, Fidenzas, and more. They each have a collection of NFT avatars and pay out $FISH and $HEAD tokens to their holders. These tokens also represent ownership of the DAO’s portfolio and can be purchased on Fractional.art.
Buying a single NFT in one of these DAOs obviously reintroduces some of the challenges we want to avoid, but they do give us a lot more diversification than a regular NFT would. Buying the DAO’s tokens may be an even better option, but I encourage you to read up on the different DAOs’ structures and rules for ownership, voting rights, etc., before investing in any of them.
Investment idea #7: NFT tokens
Just like the aforementioned DAOs, some NFT projects have essentially created their own cryptocurrencies. They’re typically created as so-called utility tokens, meaning that they’re not meant to be “money” or passive income for the NFT holders to whom they’re distributed. Rather, they have some specific utility within the NFT project’s ecosystem, such as breeding new NFTs, evolving or upgrading an existing one, or playing games. This utility is what gives these tokens value.
Now, in order to invest in a utility token, we need to pick a certain project to bet on, one of the most difficult parts of NFT investing. However, it does give us a way to invest in projects in a more fungible way. Instead of owning one NFT worth $10,000, for instance, you could buy its associated token and later be able to sell small portions of it rather than having to sell your entire position (i.e., the one NFT you own).
Perhaps the most well-known of this kind are CyberKongz’ $BANANA and Anonymice’s $CHEETH tokens. Many other projects have their own tokens though, and some of the big ones have put out some teasers as well. Keep an eye on Bored Ape Yacht Club and Cool Cats’ upcoming token launches. They might be good ways to get into these projects without having to pay tens or hundreds of thousands of dollars for a single NFT, although they’re obviously highly speculative and with absolutely no guarantee of value appreciation.
Many people believe that the NFT technology is going to revolutionize entire industries and impact our daily lives in countless ways we haven’t even thought of yet. This makes the investment case for NFTs pretty clear. Buying individual NFTs may not be the best approach for an investor though.
One alternative option is to invest in the cryptocurrencies of the underlying blockchains or blockchain scaling solutions on which NFTs are created. You can also invest in the NFT marketplaces that are experiencing massive growth regardless of which NFT projects perform the best. Some of these have their own cryptocurrency tokens and some are listed on the US stock exchange along with other companies with NFT exposure.
A more indirect way to invest in NFTs is by buying the land or tokens of the virtual worlds in which many NFTs will be used. Decentraland, The Sandbox, and Somnium Space are some of your best options here.
Lastly, fractionalization and utility tokens provide a way for you to invest in some of the leading NFT projects without having to buy the NFTs themselves.
Now, while these options may reduce some of the risk associated with trying to pick winning NFT projects, please keep in mind that they’re all still highly speculative. Don’t invest more than you can afford to lose. But if you do decide to invest, I’d love to see in the comments how you go about it!
This article was originally published on Medium.