Non-fungible tokens (NFTs) took the world by storm in 2021, with trading volume surging to over $17 billion. While the hype has settled, NFTs continue to gain traction across industries from art to gaming to finance. As this new digital asset class matures, investors are eager to get exposure through indirect means rather than purchasing individual NFTs.
This guide will explore the rapidly evolving world of NFT investing in 2024 and beyond through indexes, funds, and other investment vehicles. We’ll analyze the opportunities and risks, share tips from experts, and equip you to navigate this exciting new frontier.
Tracking the Market: NFT Indexes
Indexes serve an important purpose in investment analysis by capturing the performance of a broader market versus individual assets. As the NFT market grows, indexes help investors answer questions like:
- How has the NFT market performed over time?
- Which NFT categories are hot or cooling off?
- How do NFTs correlate to other asset classes like crypto or equities?
Here are a few key indexes that shed light on the NFT marketplace:
Nansen NFT Indexes
Founded in 2021, Nansen has quickly become a leader in blockchain analytics. They offer six NFT indexes categorized by sector, including a broad market composite, blue chips, metaverse, sports, and more.
Nansen‘s indexes capture critical metrics like:
- Trading volume
- Market capitalization
- Number of traders
- Asset concentration
- Social media buzz
These datasets provide a transparent view into both short and long-term NFT market trends. While Nansen‘s tools cater more toward professionals than individual investors, their indexes offer valuable macro-level insights.
Nansen NFT Index composition
BLT NFT Index
The BLT NFT Index launched in 2022 from a team of academic researchers and quant analysts. They take a data science approach to index creation by analyzing over 30 million NFT transactions.
A key challenge BLT addresses is that NFTs are heterogeneous assets, making consistent price tracking complex. By utilizing repeat sales methods, the index smooths out this noise. It also captures important factors like liquidity and market sentiment.
While the history is still limited, BLT allows both individual and institutional investors to benchmark NFT investments against a broader market. As seen below, the index already shows substantial volatility, reinforcing that NFTs remain highly speculative.
BLT NFT Index Performance. Sharp ups and downs over 2022.
Additional Metrics for Deeper Analysis
NFT indexes provide helpful top-down snapshots but have limitations in capturing nuances across different collections and categories. Thankfully, blockchain data offers transparency to dig deeper as an analyst.
Here are some additional metrics I analyze to evaluate NFT market health:
Trading Activity
Analyzing volume trends within specific collections and categories reveals rising and falling momentum. Tracking daily transaction data can uncover investor preference shifts towards different NFT types over time.
Sales Velocity & Flips
By cohorting NFTs by creation dates, we can view sale rates and timing for flips. Higher velocity and fast flips signal speculation while lower levels indicate buy-and-hold behavior.
Bid-Ask Spreads
Observing the difference between bid and ask prices in NFT marketplaces provides a proxy for market efficiency and liquidity. Wider spreads generally mean higher risks for investors.
Whale Concentration
Due to the transparency of blockchains, we can analyze the distribution of NFT ownership across addresses. Higher concentration levels increase manipulation risks and price volatility.
Social Engagement
While on-chain signals reveal much, analyzing collector engagement on Twitter, Discord and elsewhere provides a qualitative backdrop. Surging followers and chat volume tend to foreshadow price rises.
As indexes mature, they may fuel the creation of NFT exchange-traded funds (ETFs). For now, these tools help investors contextualize returns and make smarter decisions.
NFT Investment Vehicles
Beyond direct NFT speculation, investors in 2024 have more options to gain diversified exposure through funds and structured products. While the space remains nascent, the vehicles span traditional finance, crypto native platforms, and venture capital.
Public Equity ETFs
In early 2022, several issuers like Defiance and Invesco launched equity ETFs focused on the “metaverse” and companies driving NFT adoption. However, these funds hold public stocks across tech, crypto, gaming, e-commerce, and other areas rather than investing in NFTs themselves.
For example, the $65M Defiance NFTZ ETF contains shares of household names like Apple, Nvidia, Roblox, and Cloudflare. These picks represent the infrastructure and tools supporting broader crypto and NFT growth. NFTZ offers liquid, regulated exposure but has no direct correlation to NFT prices.
In 2024, investors can utilize these indirect equity plays but should understand their limitations. Future product approvals may open access to funds holding cryptocurrencies, futures, or tokens directly linked to NFT valuations.
Crypto Indexes and Structured Products
Within the decentralized finance (DeFi) landscape, crypto-native platforms like Index Coop enable purely on-chain exposure to NFT indexes. Products like their JPG index hold the largest blue chip NFTs through fractionalized vaults and tokens.
Structured as an ERC-20 token, JPG offers an accessible way to capture top collection appreciation. It also incorporates lending, liquidity rewards, and other yield enhancement strategies. However, decentralized products carry smart contract risks, technical barriers to entry, and volatile crypto assets as holdings.
Securities lawyers expect more institutional versions of crypto NFT funds by 2025-2026 if regulatory guidance emerges. But for now, these vehicles best suit risk-tolerant accredited investors already active in blockchain markets.
NFT Venture Capital
NFTs captured $44 billion in VC investment across 750 deals in the past year. Most of this capital flows into infrastructure, protocols, and applications rather than purchase of art or collectibles.
Andreessen Horowitz (a16z), Paradigm, and other leading firms run dedicated crypto funds while mainstream groups like Sequoia get hyper-focused with offerings like an NFT-gaming fund.
But limited partners face high minimums, lock-up periods, complex due diligence, and no liquidity. For working with reputable VCs, investors should plan to commit at least $100K – $250K for early-stage project access.
Evaluating NFT Investments
Given the range of options today, conducting due diligence is critical before allocation. Start with a framework across a few key dimensions:
Market Exposure
- Does the investment provide direct NFT exposure or indirect equity/infrastructure plays?
- How does it capture market breadth and risks – single assets vs. indexes?
Team & Governance
The crypto industry remains rife with risks from incompetence to outright fraud. Thus, evaluating team quality and alignment forms a key step.
- Founder Profiles: Analyze background, credentials, networks, and track records of key leaders involved. Where have they worked and studied previously? Who has invested in them?
- Technical Audits: For crypto native platforms, external audits help identify smart contract, tokenomics and governance vulnerabilities. Stay clear of groups lacking transparency.
- Incentive Alignment: Ensure the managers have “skin in the game” through personal token holdings that vest over time. Misalignments may promote bad behavior.
Historical ROI Analysis
Viewing past returns of an investment manager provides hints of their fund and risk management abilities. Techniques like cohort indexing that groups similar collections can uncover outperformance drivers. Relatedly, analyzing on-chain investor behavior through clustering and classification models sheds light on portfolio construction approaches.
Lock-ups & Liquidity
- Are assets liquid or restricted for periods? Can investors easily exit positions?
- How efficient and cost-effective is trading in secondary markets? Analyze bid-ask spreads, sale velocities, and market depth.
Risks & Compliance
- What jurisdictional, regulatory, technical and manipulation risks exist? Review audit reports.
- Does proper oversight and auditing exist? How are assets secured? Examine custody and insurance safeguards.
Conducting analysis across these areas provides a baseline for comparing the flooded landscape of new NFT investment options.
Sector Spotlights
While NFTs permeate every industry, a few key sectors warrant deeper analysis by investors today.
Gaming NFTs
The play-to-earn model has exploded in sectors like RPGs, racing, and card battlers. Top examples like Axie Infinity generate billions in NFT trading volume from in-game assets like characters, land plots and weapons.
Leading NFT Games by Market Cap
| Game | Genre | Market Cap | Unique Users |
|---|---|---|---|
| Axie Infinity | Monster Battler | $1.3B | 1.5M+ |
| Illuvium | Auto Battler | $436M | 100K+ |
| Guild of Guardians | RPG | $98M | 150K |
Critics debate the sustainability of play-to-earn economics once subsidies like token rewards decline. Monitoring adoption metrics like DAUs/MAUs and player churn provides clues.
Scholarship programs also enhance access for players unable to afford upfront NFT purchases. VCs and guilds fund accounts to share revenue in return. Their growth expands TAM beyond hardcore crypto users.
Metaverse NFTs
As virtual worlds like Decentraland mature, developers build innovator ecosystems owned and traded by users as NFTs. 2021 sales of virtual land and wearables surged to $500M but dropped significantly in 2022.
Early metaverse pioneers compare the space to the early dot-com days – high volatility with most projects destined to fail. But virtual real estate and identity may disrupt industries like social, events, gaming, and e-commerce long term.
Deloitte estimates consumer metaverse spend to reach $40B by 2026. As standards and interoperability improve in areas like identity and teleportability, investor interest may reaccelerate.
Music NFTs
Iconic artists like Eminem and Justin Bieber popularized music NFTs as profile pictures and collectibles.
But more impactful use cases tie rights directly into smart contracts coded alongside the media files themselves. These dynamics better align artists and fans by:
- Automating royalty payouts
- Trading exclusives like backstage passes
- Unlocking experiences across virtual/physical worlds
As streaming models struggle economically for middle class artists, NFT innovation provides a path to regain value.
Challenges & The Road Ahead
Despite promising growth, regulatory uncertainty, high fraud risks, and mass speculation could severely hamper NFTs as an asset class. Education and infrastructure remain lacking for casual investors.
However, by applying sound evaluation criteria, allocation sizing, and a prudent time horizon, NFTs offer asymmetric return potential as this novel tech permeates business and culture.
Areas like interoperability, scaling, compliance, and reliability should mature to underpin more transparent and liquid NFT investment products ahead. As animal spirits subside, expect investors to shift from hype-driven bets to fundamental value.
Conclusion: An Evolving Asset Class Now Indirectly Accessible
While direct speculation dominates today, NFT indexes, funds and structurers enable broader investor access with reduced volatility and risk. Each product has tradeoffs across regulation, liquidity, and market exposure that determine suitability for different profiles.
As with any emerging tech, restraint remains vital to balance higher return potential against adoption uncertainties. But no serious investor can ignore how NFT innovation disrupts digital ownership, access passes, creative incentives and community engagement across industries.
Those attracted to participating have no shortage of tailored options beyond individual picks. Follow the investment checklist herein as a starting point and size positions prudently. Expect flux but know that increased choice benefits investors in this decentralized Wild West.
