NFT Hype Sparks a Rush by Finance Pros to Mimic Hot Market
Cryptocurrencies had a breakout moment in 2021, and NFTs were some of the biggest stars. Now, as with any new and hot investing trend, financial pros are hoping to capitalize on the craze with products promising a way to piggyback on the market.
NFTs, short for non-fungible tokens, exploded across the worlds of music, art, sports and more, created by celebrities ranging from K-pop group BTS to former first lady Melania Trump. The value of such tokens — essentially digital certificates of authenticity — stems from their inability to be replicated, thanks to an algorithm that creates a barcode for an individual virtual work.
Because NFTs will be a key component of the so-called metaverse that tech leaders like Mark Zuckerberg view as the future of the internet, buying up tokens early means the potential for big gains later on. That’s led to a flood of cash into the rapidly expanding industry, with some NFTs selling for hundreds of thousands or even millions of dollars (although there have been big flops, too). In 2021 alone, at least $27 billion of cryptocurrency was sent to two types of Ethereum smart contracts that are associated with NFTs, according to crypto research-and-forensics specialist Chainalysis.
What about investors who are intrigued by NFTs but aren’t ready to jump directly into the market? There are a growing number of options.
In traditional finance, firms use indexes to diversify a client’s money, spreading out risk by betting on, say, 100 companies instead of just one. To capture the NFT boom, some firms that usually provide exchange-traded funds filled with stocks or bonds are now offering NFT versions. But it’s a much riskier proposition.
The challenges are numerous, especially because the world of NFTs is so new and fast-moving. Capturing the entire ecosystem in one index is a fraught task, because the market is so illiquid. Plus, what was once a highly valued NFT collection could quickly fall out of favor.