Venture capitalists are pouring millions into digital art, virtual lands and online collectibles, the new frontier for investors seeking big returns in crypto.
Digital objects known as non-fungible tokens burst into mainstream culture last year, quickly becoming a multi-billion dollar market ranging from computer-generated artwork to cartoon characters costing thousands of dollars. dollars.
Andreessen Horowitz and Paradigm, two of the biggest cryptocurrency venture fund managers, have started investing directly in NFTs, according to people familiar with the purchases. Several specialist fund managers have also raised tens of millions of dollars in new NFT funds.
Interest from professional investors reflects the belief that digital items will gain value as more people spend time in a new version of the internet curated by cryptocurrencies.
But NFTs, which can be even more volatile than the broader cryptocurrency market, also present many new risks for fund managers. Many traders expect the vast majority of the market to fall to zero, and the legal status of digital collectibles continues to evolve.
This week, turmoil in so-called stablecoins Terra and Tether has raised concerns about contagion to broader cryptocurrency markets, underscoring the speculative nature of digital assets.
Fundraising has been strong in recent months. 1confirmation, an early investor in the dominant OpenSea NFT marketplace, has raised $50 million for an NFT fund that could ultimately earn investors up to $100 million, according to regulatory filings.
Punk6529, a pseudonymous internet personality with over 350,000 Twitter followers, recently raised $75 million for a fund that buys blue-chip NFTs.
Some mainstream venture capitalists have also jumped in, buying into popular collections such as the Bored Ape Yacht Club, which have surged in price over the past year due to celebrity endorsements and social media hype.
“When we think about buying NFTs, it aligns with our investment strategy, which is to invest in things that have the potential to generate very many multiples of the fund,” said Ophelia Brown, managing partner of the equity fund. -risk Blossom Capital. .
Blossom, an early investor in payment startup Checkout.com, owns several Bored Apes and a CryptoPunk. The fund also considered acquiring an Azuki, a collectible with an entry price of around $20,000.
Brown said the investments don’t represent a “significant” part of Blossom’s first $85 million fund, but have the potential to grow much larger in size.
Andreessen and Paradigm declined to comment on details of the NFT investments. Both companies have made significant investments in start-ups that create NFTs. Last month, Andreessen led a $450 million investment in Yuga Labs, the company behind Bored Apes, which valued it at $4 billion.
Punk6529, who declined to give his birth name due to privacy concerns, said he decided to raise funds to provide a “NFT-native” outlet for the wave of big-money investors he is following. waiting to enter the market. He said NFTs would become essential to what he calls the “open metaverse,” a vast virtual playground where 3D avatars can mingle.
“That money is going to go into the space anyway,” Punk6529 said. “The alternative is that it will go through a few guys from Goldman Sachs.”
Some investors have privately wondered if such large funds could find enough profitable investments in today’s market. NFTs on the Ethereum blockchain had a total market value of $31.4 billion at the end of last year, with over 80% in cultural collectibles and profile picture projects such as Bored Apes , as estimated by 1confirmation.
Early buyers have already made stunning returns. The value of an NFT index developed by three university cryptocurrency researchers rose 295% from the start of 2018 to this week, even after a 50% decline since the start of this year.
An index tracking the five most valuable collections, including Bored Apes and CryptoPunks, has climbed 1,700% since 2018, according to the same researchers.
Cryptocurrency investors said it can still be difficult to judge the skill of NFT fund managers, as no one has developed a standard benchmark for the entire market.
“NFTs, as they currently stand, are really not an asset class to invest in,” said Aleh Tsyvinski, an economics professor at Yale University who helped build the NFT indices. NFT funds “buy the equivalent of different homes in the San Francisco area” in hopes of giving investors “exposure to the entire US housing market.”
Interest in NFT funds has only recently increased. Andrew Steinwold, managing partner of investment firm NFT Sfermion, tried unsuccessfully to raise money for a fund in the summer of 2020.
However, his fortunes quickly turned when wealthy cryptocurrency holders started turning to NFTs, and Sfermion debuted with a $5.3 million fund in January last year. “We were the only girl at the party,” Steinwold said.
Institutions such as endowments have still not shown much interest in NFT specialty funds. Instead, many are backed by big cryptocurrency investors and wealthy family offices, which often have a higher appetite for new risky assets.
Sfermion is preparing a series of funds that will only invest in NFTs in individual categories. The company has set a goal of $100 million for the first gaming-focused fund, two people briefed on the details said.
Steinwold said Sfermion aimed to hold NFTs for more than a year, but often sold the investments sooner due to market pressures.
“Ideally we would like to go further than that, but we are also aware of the larger market and how things are developing there,” he said. “We’re not going to say ‘no’ to outrageous short-term gain.”