NFT index tokens: A new way to bet on a risky asset class

This article is part of Crypto Insights, a segment by major crypto exchange Bybit that dives into the latest and most pertinent issues in the crypto space.

Written by Nathan Thompson

If you thought the cryptocurrency market was complicated, you should take a gander at non-fungible tokens (NFTs). Apart from a few prototypes, the NFT market didn’t form until 2017 and didn’t see much volume until 2020, making it the newest asset class in the world.

Some may lump NFTs in with crypto assets like Bitcoin and Ether, but data shows that the NFT market is not highly correlated with crypto or the stock market. In fact, Nansen’s NFT-500 index (which tracks the top 500 NFT collections) has taken a somewhat different trajectory than other risk assets.

Image credit: rokastenys / 123RF

While the S&P 500 is down 20% year to date (YTD), and Bitcoin is down nearly 60%, the NFT-500 index shows a YTD decline of 67% in US dollar terms. However, at certain times in the year, it has outperformed other crypto assets. Some investors see high-quality NFT projects as a good store of value and a way of diversifying their portfolios.

Despite NFTs as a whole doing remarkably well given the general sell-off in the markets, the recent crypto crash has caused most NFT assets to shed value compared to their all-time highs.

In fact, the Wall Street Journal reported that there was an oversupply of NFTs due to falling interest from investors. There were apparently five NFTs for every market participant and “as of the end of April, there have been 9.2 million NFTs sold, which were bought by 1.8 million people.”

All this volatility is to be expected when dealing with a new asset class with about as much history as the mayfly. But when you dig into the technology and culture behind NFTs, there is something of substance there. Let me explain.

First, NFTs are not just JPEGs — they are certificates of ownership that live on a blockchain and can be applied to any asset from copyrights to land deeds.

The various perks and utilities of owning NFTs are the beginning use cases for this emerging technology. The ability to program royalty payments into NFTs means that every sale automatically sends payments to the original creator in perpetuity, which revolutionizes how artists receive and share royalties.

For example, American actor Rob McElhenney is creating a TV writing studio where intellectual property (IP) royalties are divvied up via NFTs. And director Kevin Smith announced that he would be releasing his new film exclusively to owners of his NFT collection.

It’s true that value on the internet consists of communities and networks of engaged people. And no one has leveraged a highly valuable community more than NFT juggernaut Bored Ape Yacht Club (BAYC). By consistently providing value to its holders and winning collaborations with major brands and celebrities, BAYC has become an incredibly valuable IP. Indeed, creators Yuga Labs ran a seed funding round earlier this year that valued the company at US$4 billion.

NFTs are also more relatable and engaging than the abstract tools of, say, decentralized finance. People intuitively understand club memberships and collectibles.