5 Reasons Why NFTs Will Become Assets

Analysts expect NFT asset speculation to become a multi-billion dollar industry within the next 5 years.

Since the explosion of NFTs into the mainstream, there has been a significant amount of attention surrounding their potential in current technological applications.

NFTs saw their first claim to fame with the landmark sales of various pieces of digital artwork that sold for millions of dollars. This culminated into a market frenzy that saw traditional crypto asset speculators, tech enthusiasts and the greater investment community as a whole purchase and mint NFTs with the view to a profit.

During this time many have praised NFTs as being a new and innovative method of disintermediating content creation in traditional forms such as the reliance on streaming services and auction houses that profit take from artists and content creators, while critics have admonished NFTs for being worthless JPEGS that are horrendously overvalued by irrationally exuberant investors and an increasingly more panicked society looking for fringe capital appreciation vehicles.

While the greater NFT and crypto community has been looking right, Darkwood Capital has ventured to look left, and ask a question that no one has posed; Will NFTs eventually become formally recognized as securitized assets that can generate value and preserve capital in the same form as traditional financial instruments such as equities, debt, ETFs and mutual funds?

Darkwood Capital is bullish on the mass securitization of NFTs. Here are 5 reasons why we believe that NFTs will become assets:

1. Investment Speculation / Appreciation Potential

NFTs are operating within a nascent yet complex landscape. As mentioned, NFT sales have netted speculators enormous returns over a short period of time. If NFTs in their current form are being used as assets, it is likely that the formal management of NFTs will enable them to be systemically used by commercial financial institutions, hedge funds and perhaps retail investors.

A case study to refer to is that of cryptocurrency itself. The inception of Bitcoin and Ethereum provided numerous utilities and underlying applications such as for cryptography, privacy, decentralization and an alternative to state governed fiat dollars. Since its rise to prevalence in the mainstream however, there has been no greater use case for crypto than that of a new and exciting way for investors to generate alpha. 9 times out of 10 when the media engages in a frenzy surrounding a cryptocurrency, it is not due to a new fork of a blockchain for greater scalability or enhanced privacy protocols, it is that the price of the coin itself has skyrocketed, and everyone who did not buy got left in the proverbial dust.

2. Lower Volatility Index (VIX)

For the vast majority of crypto projects that have taken on their life as an asset, crypto investments have been subject to an incredulously high amount of volatility relative to more antiquated assets. As centralized finance, NGOs and governments take a greater interest in cryptocurrency, it is more than possible that cryptocurrency projects with more authoritative backing and regulation will significantly lower the associated risk and volatility of crypto investments.

A prominent example of this has been the offerings of Bitcoin and Ethereum ETFs in public markets and the recent offerings of cryptocurrency exposure to affluent clients through investment banks. These financial instruments have ostensibly passed all relevant regulatory requirements, and have therefore been vetted as safe enough for investors to add to their portfolio. This means that there is less volatility present in more tightly regulated offerings, and a trend that Darkwood believes will continue as cryptocurrency gains in popularity that will eventually disseminate into the NFT ecosystem.

3. Hedge Against Risk

Over the last three decades, interest rates offered by banks have declined to historical lows, forcing investors and private estates to take riskier moves in uncharted financial territories to outpace inflation and match benchmark indices. If executed correctly, NFTs can serve as a diversified hedge against inflation and traditional forms of monetary, currency and macroeconomic risk associated with traditional investments.

Furthermore, many cryptocurrency funds do not incur the same risk profile as traditional financial instruments, as active management and capital preservation are key components of actively managed funds.

4. Democratize Investing Opportunities

By virtue of existing securities law (which although differs significantly by region is still somewhat harmonized globally) investors of lower income and asset sizes are precluded from investing in funds that are managed more effectively, produce higher returns and provide better customer service.

NFTs are not yet considered a security due to their very recent inception as an emerging asset class, and therefore still provide the opportunity for investors of any income threshold to speculate on their underlying technology while receiving better care than they normally would at a large commercial bank with a less dedicated employee base.

While Darkwood Capital provides complimentary consulting services for our clients pertaining to a broad range of business areas, commercial banks are difficult to get hold of for even the most innocuous of requests. Notable examples of this include hidden fees, poor customer service and failure to live up to promises. We cover these issues in greater detail in our article, "The Shortcomings of Traditional Finance", which you can read here.

5. Already Used as Investment Vehicles

Numerous Hedge Funds and Investment Managers are providing investors a new experience with different NFT assets in a fiscally responsible and well governed way. We sincerely hope that more opportunities of this nature arise. By virtue of our company wide fascination and excitement about this space, we are hoping to see more NFT growth in the financial system along with any other industry that can benefit from NFTs.