Navigating the Future of NFT Investments

As newer generations explore cryptocurrency and NFTs, investment managers and financial planners should watch the market closely for signs of adoption. Investment companies need to start planning to integrate these assets, eventually enabling further personalization of client portfolios, says Nageswar Cherukupalli, SVP and head of Infosys.

Most investment management firms are staying away from decentralized finance (DeFi)-based opportunities, namely cryptocurrency and non-fungible tokens (NFTs), but many of the younger generation (millennials and gen Y) customers are showing keen interest in exploring these asset classes. Two separate surveysOpens a new window found that one in two millennials own cryptocurrencies, while nearly half of the millionaire millennials dabble in NFTs. Is this a signal that investment management firms should closely watch this space and its applicability in financial planning? This article explores what one blockchain derivative, namely, the NFT – a unique digital token representing a physical or digital item of value that works as an irrevocable digital certificate of ownership and authenticity – could mean to these firms 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 thereby promote inclusion. Such expectations are premature, not least because they are premised on the use of cryptocurrency by the masses, when in fact, just 10%Opens a new window

That being 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 reason enough for investment companies 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 amounting to tens of millions of dollars. But excited apart, NFTs are gaining traction, with sales in 2021 crossing $22 billionOpens a new window

The potential of NFT as an asset class lies in its finiteness – 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 predominantly 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-world asset deals. In 2017, serial entrepreneur and TechCrunch founder, Michael Arrington, bought a Kyiv apartment on a real-estate platform, using Ethereum and smart contracts to settle the transaction. Four years later, he auctioned the apartment on the same platform but as a real estate-backed NFT – the world’s first.

Any asset, be it a house, automobile, painting, or collector’s item, can be “tokenized” and traded outside traditional transaction channels. When one adds all the digital assets that can be bought or sold as NFTs, it is conceivable that an investor will have tens of thousands of asset classes to choose from rather than just 15 or 20. With a much bigger canvas, financial planners and investment managers can personalize client portfolios like never before and specialize in new niches to differentiate their business.

See More: How Collectible-backed NFTs Helping Brands

A New Business Opportunity

Additionally, NFT adopters represent a brand-new customer segment for investment management firms. Traditional capital raising methods present several challenges, including difficulty securing bank funding or private investment and stringent regulations that must be complied with. In comparison, offering tokenized equity shares on a blockchain platform brings flexibility, ease and economy to fundraising. With interested investors engaging directly with the company, the stock price is determined by market forces rather than sponsoring entities.

This is why several businesses, especially startups, are taking the initial coin offering (ICO) route to raise funds. 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 tokenized its shares and raised $13 million. Cryptocurrency companies seek financial advisors’ help guiding their (crypto) wealth management divisions. Investment management firms should consider the viability of finding ways to participate in these opportunities or risk being left behind by specialist digital currency asset 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 next-gen individual and business customers. While a few wealthy owners currently hold NFTs, their decentralized character means they are, at least in theory, highly accessible to all. Investment companies should start planning now so they are prepared for that eventuality.

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