Non-fungible tokens (NFTs) captured the world‘s imagination in 2021 as trading activity skyrocketed to over $17 billion. While crypto native investors piled into highly speculative NFT collectibles and artwork, most traditional investors shied away from such a volatile direct investment. Fortunately, 2023 presents growing opportunities to gain exposure to the NFT and Web3 space through indexed products, funds, and public equities rather than direct purchases.
In this beginner‘s guide, I‘ll compare the pros and cons of direct vs. indirect NFT investment and provide an overview of emerging indirect investment vehicles across indexes, ETFs, companies, and venture capital. My goal is to help demystify the dizzying array of new products offering indirect exposure so you can evaluate which options may be suitable.
Let‘s start by examining why indirect investment merits consideration for NFT curious investors.
Comparing Direct vs. Indirect NFT Investment
Directly purchasing NFTs can provide full control and upside price exposure, but also comes with downsides:
Direct NFT Investment
- Full asset control and ownership
- Highest risk/reward potential
- Complex security risks
- Highly speculative; most NFTs lose value
- Illiquid assets with limited buyers
- Requires deep market expertise
Indirect NFT Investment
- Diversification across NFT assets
- Downside protection through indexing
- Low minimums to participate
- Intraday liquidity through funds
- Leverage professional management
- Regulatory oversight on public products
While direct investment provides more control, indirect options offer easier access, diversification, liquidity, and oversight – at the cost of diluted exposure.
Indirect vehicles have attracted $285 million in net inflows year-to-date compared to outflows of $560 million for direct NFT funds according to CryptoCompare. As the market expands beyond early adopters, easy and protected access will be key to mainstream adoption.
Tracking the Broader NFT Market: Indexes
NFT indexes distill the performance of the overall NFT asset class into a single benchmark, providing important context on the market‘s direction. The methodology varies across indexes:
- Nansen – tracks over 70,000 NFTs across art, gaming, metaverse, and other categories. Uses market capitalization weighting.
- BLT – uses repeat sales analysis to address issues in valuing heterogeneous assets like artwork.
- Coinbase NFT – tracks floor prices of top 100 NFT collections, representing 95% of secondary trade volume.
While not investable, indexes help investors track the market and contextualize returns. They also provide benchmarks for tradable products like token funds and futures ETFs. As the market matures, indexes will bring greater transparency.
Getting Broad Exposure: NFT ETFs and Index Funds
Exchange-traded funds (ETFs) and index funds offer simple access to a rules-based basket of assets. While no direct NFT ETFs exist yet, products like Defiance‘s NFTZ provide indirect exposure through NFT-related stocks.
Crypto native platforms like Index Coop take a different approach. Their JPG index fund tokenizes the fund itself, acting as a tradeable index by investing in a basket of blue chip NFTs.
Let‘s compare the ETF and crypto index fund models:
|Intraday on NYSE
|Continuous on DEXs
While innovative, JPG carries risks like smart contract bugs and hacking. As the NFT market infrastructure improves, traditional ETFs may eventually offer direct exposure as well.
Investing in the NFT Ecosystem: Companies & VCs
Rather than owning NFTs themselves, some funds invest in companies building NFT platforms, marketplaces, and blockchain gaming ecosystems.
Publicly traded companies focused on NFT and blockchain gaming have seen a flurry of investor interest. In 2022, shares of Funko Pop are up 45% while GameStop is up over 100% amid its NFT marketplace pivot.
But the biggest bets are happening in private markets. Venture funding towards NFT startups hit $7.4 billion in Q1 2022, mostly from crypto specialist firms like Andreessen Horowitz and Paradigm.
VC funding share captured by NFT subsectors. Source: Pitchbook
Gaming accounted for almost 50% of funding given its natural use cases for digital assets and virtual worlds. Infrastructure is also attracting investment as platforms race to support scalability and interoperability.
While VC access is limited to elite investors, public gaming stocks and crypto funds offer retail exposure. As pipelines mature, many private NFT platforms will reach the public markets.
Conclusion: A Maturing Market
While still early days, the pathways for safe and regulated NFT investment are rapidly expanding beyond direct purchase of speculative JPGs.
As adoption moves beyond crypto natives, traditional funds and indexes will help democratize access for the curious but cautious investor. However, education and caution remain prudent given risks inherent to any emerging technology.
Within the decade, we may view NFTs as an accepted asset class interwoven into videogames, social platforms and the greater Web3 economy. But for now, the prudent speculator is wise to temper any FOMO with sensible risk management. The future promises to be bright but the route there is seldom smooth.