Differences between fungible and non-fungible tokens
On one hand, ‘non-fungible’ is a term that you could use to describe things like your furniture, a piece of rock or a piece of art. There is the uniqueness part of it but NFTs also bestow special rights to that item. These special rights are to represent ownership of these items. They let us tokenise things like art, collectibles, cars and even real estate. They can only have one official owner at a time and is secured by a blockchain. This means that no one can modify the record of ownership or copy/paste a new NFT into existence (but this does not prevent people from doing so!). On the other hand, ‘fungible’ items, can be exchanged because their value defines them rather than their unique properties. For example, Ethereum (ETH) tokens or US dollars are fungible because 1 ETH / 1 USD is exchangeable for another 1 ETH / 1 USD.
NFTs have potential for many purposes
NFTs are not just pictures of apes that sell for thousands of dollars. We believe that this blockchain enabled technology has the power to give back control and ownership to creators/artists, community and the man-in-the-street.
- Individual creator/artist - When artists previously sold a piece of art or a digital item, that one transaction would be their only source of monetary transaction. Smart contracts in blockchains now enable the original creator/artist to automatically incorporate a royalty fee for every subsequent sale of that item.
- Community - The power of megatech social media platforms where they exert control will wane. If you have friends who tried to rise to the place of an “influencer” in these communities, you would hear stories of how they pay these platforms in time and money even though it’s their content. NFT blockchain platforms are designed to be governed by the community of users. While many have just started out and could be currently majority owned by crypto funds that have seeded the platform, we see this diminishing over time.
- Man-in-the-street - Investing into collectibles and art has been a high barrier to entry. With NFTs, tokenisation has enabled their entry into rare art. For example, Picasso’s Fillette au béret painting has been tokenised into the blockchain by Sygnum bank (in collaboration with Artemundi) in July 2021. This marks the first time the ownership rights of a Picasso, or any artwork, are being registered onto the public blockchain by a regulated bank. This enables investors to purchase and trade “shares” in the artwork called Art Security Tokens (ASTs) in initial denominations of CHF 5,000.
What is the link between crypto, NFTs and the metaverse?
Crypto coins/tokens are digital assets that are issued and transferred electronically. They have an ascribed value, provide a means of exchange and can function as a unit of account. Some of the prominent crypto are Bitcoin, Ethereum and stable coins.
Presently, NFTs are being transacted in digital marketplaces with crypto as the medium of payment and the Ethereum blockchain as the decentralised ledger of choice. NFTs are generally required to create identity, become part of community, and immerse in virtual social experiences. Individuals can sell or buy items in the metaverse and transfer them through the internet.
Digital assets are the currency required to engage in the virtual metaverse. It is anticipated that the number of users joining the metaverse will rise as the technology stack catches up with the end vision similar to the “Ready Player One” movie by Stephen Spielberg. However, we are clearly not there yet.
The rapid rise in NFTs is a side effect of the megatrend of digitalisation, decentralisation and giving power back to the people. Given the emerging status of NFTs as a collectible and asset format, there are companies that investors can build an exposure to.
The most immediate beneficiaries are companies whose main business is selling content or branded goods. This can be an immediate boost to revenue. NFTs can also drive accelerated transactions in the secondary market resulting in higher royalties for these companies (if the royalty element is embedded in smart contracts). These companies include video games, toy & games and branded goods. The second tier beneficiaries are platforms that enable the creation, minting, staking, and trading of NFTs in the secondary market. These could be social media, gaming and even traditional brokerage companies.
Companies that are negatively affected by this NFT theme are generally the intermediaries/middle men that have disconnected the content creators with their consumers. The most obvious entities at risk are the mega tech walled gardens where their giant ecosystems have forced both consumers and creators to congregate and effectively sign away their copyrights and allow their data to be monetised via ad targeting. These megatech companies clearly see the risks of decentralisation that will pressure revenues. We see that they are trying to hedge their position by creating their own crypto, e-wallets and even creating their own metaverse.
Investing in the Metaverse
The metaverse is still in its infancy and it will take many years if not decades to approach its ultimate status. In the meantime, we need billions of dollars of investments to build the infrastructure and overcome the technological burdens that still prevent the metaverse from being fully deployed. Many companies have been attracted by the huge revenues opportunity and have been investing to position themselves as the future leaders in the metaverse. A prominent example is Meta that has doubled down its bets on virtual and augmented reality experiences and products. That said, the revenues opportunity is still far away from us while costs are already negatively impacting profitability and companies’ valuation. For this reason, our preferred way to get exposure to the metaverse is through sub-themes and single stocks within our digital disruption theme. These companies have an optionality on the metaverse, which means that, their businesses will benefit from other drivers, but the metaverse might become a larger part of their business model in the future.
Another way to get exposure to the rise of the metaverse is through NFTs, as just described. Indeed, the number of virtual experiences in our everyday life is set to broaden, and, with that, the demand and value of non-fungible tokens. However, investors should be aware of the difficulties of objectively valuing a digital asset, which might give way to speculation for certain assets.