With billions of dollars pouring into the NFT space, people are trying to capitalize on the frenzy any way they can – so no one should be surprised that the first NFT-oriented exchange-traded fund (ETF) debuted at the beginning of December.

According to Chainalysis, buyers spent $26.9 billion worth of cryptocurrency on NFTs in 2021.

That’s a lot of money in a sector few had heard of until this year.

NFTs, for those still learning about crypto, are “non-fungible tokens.” Each token is unique and represents ownership of some object, which can exist in either the digital or the physical world.

Most NFTs so far have been works of digital art, usually created in themed “collections.” NFTs trade on their own marketplaces, such as OpenSea, priced in units of Ethereum (ETH). Prices can range from a few dollars to millions.

The record of the transaction is stored on a blockchain, typically on the Ethereum network.

That brings us to the launch of the Defiance Digital Revolution ETF (NFTZ), which seeks to provide a conventional way to invest in the NFT craze. Because it’s an ETF, investors can buy it easily through most brokerages.

The NFTZ ETF is intended for those who want exposure to this hot investing trend but with less risk and less hassle.

It’s a great idea on paper, but that doesn’t always mean something is worth your hard-earned money…

The Case for an NFT ETF

First of all, I need to point out that just as with many things crypto, the path to the greatest gains is buying the asset directly. If you want exposure to Bitcoin (BTC), buy Bitcoin. If you want exposure to NFTs, buy NFTs.

But buying NFTs presents a level of risk higher than that of buying cryptocurrencies. First, you still have the risk of owning and using crypto since you need a coin like Ethereum to buy an NFT.

You also need to familiarize yourself with the NFT markets to know which ones truly have value and will appreciate and which ones are mere money grabs. If you’re still learning about cryptocurrencies, diving into the world of NFTs can be somewhat overwhelming.

This is the rationale behind creating an NFT-based ETF. It’s a no-fuss way to get exposure to a hot new investing trend. But NFTZ is a far from perfect way to get that exposure. It’s made up of about 34 companies, most of them crypto-based. But while most are crypto-oriented, none is a pure play on NFTs.

This phenomenon is so new that the top NFT companies are young startups – they’re not publicly traded. And it’s not clear how soon even the biggest NFT companies will go public.

Case in point: OpenSea, the largest NFT marketplace and an ideal component for an NFT ETF.

But when OpenSea CFO Brian Roberts said to Bloomberg earlier this month, “When you have a company growing as fast as this one, you’d be foolish not to think about it going public,” the OpenSea community lashed out.

“Sucks to hear @opensea is selling out and doing an IPO,” a user posted on Twitter.

Roberts responded by saying that no OpenSea IPO was in the works and promised the company “would look to involve the community.”

The fact is, the Defiance NFT ETF includes a lot of companies with only a peripheral connection to the world of NFTs…

What Do You Put in an NFT ETF in 2021?

The full list of NFTZ holdings is on the Defiance website, but I created a handy chart of the top holdings (every company that makes up at least 2% of the fund’s total assets) that you can look at here.

I also included the nature of each company’s business, as well as my assessment of how much exposure to NFTs each has. The best bets are highlighted.

Check it out:

Click to enlarge
One thing you’ll notice in the list is a lot of Bitcoin miners. But Bitcoin has very little presence in the NFT universe, hence my “negligible” ratings in the “NFT exposure” column.

NFTZ also companies like Block Inc. (SQ) and Robinhood Markets Inc. (HOOD) that could gain only a marginal benefit from selling the crypto needed to buy NFTs. These companies really aren’t at the core of the NFT economy, though.

Sylvia Jablonski, chief investment officer for Defiance ETFs, told Bloomberg that NFTZ “is a great way for investors to gain access to not only the fast-growth blockchain technology aspect of the digital world, but companies involved in the renaissance of NFTs.”

That’s a nice spin. But the reality, at least for now, is that NFTZ isn’t all that great of a way to get exposure to the NFT boom. In practice, this ETF will be more reflective of the fortunes of the general cryptocurrency sector.

That’s not necessarily a bad thing, but investors should know what they’re buying.

Over time, more equities will become available with better exposure to the NFT markets. For that matter, several of the current holdings are likely to become better “NFT stocks.”

The exchanges, in particular, are looking at ways to reap the benefits of the NFT universe. Coinbase Global Inc. (COIN), for instance, is developing its own NFT marketplace.

I suggest investors hold off on buying NFTZ for now.

Put it on your watchlist and monitor the holdings for signs that the fund is living up to its promise of providing real exposure to the NFT economy.

In the meantime, if you want to dip your toes into the NFT waters, consider investing directly in the “best bet” stocks I highlighted in my chart. For now, they will give you the best exposure to NFTs you can get via the stock market.

Here’s a quick take on each…

6 Stocks That Give You Exposure to the Profit Potential of NFTs

  1. Silvergate Capital Corp. (SI): Silvergate is a bank that provides financial services to the crypto industry. While it has no direct involvement in NFTs, its role as a key piece of the infrastructure of the crypto economy means it benefits from any trend that drives more crypto activity and adoption.


  1. PLBY Group (PLBY): PLBY is the new name for the venerable Playboy corporate empire. It’s an NFTZ holding because it partnered with NFT platform Nifty Gateway in April (which caused PLBY stock to surge 80%). PLBY plans to create NFTs from both new artwork as well as its vast collection of original artwork, photography, cartoons, and multimedia. PLBY’s $9 million collection of NFT “Rabbitars” sold out within hours.


  1. Coinbase Global (COIN): Coinbase is a primary onramp for United States crypto investors. It already has added an NFT viewer to its Coinbase wallet browser extension. But the bigger deal is the planned NFT marketplace that would compete directly with OpenSea.


  1. eBay Inc. (EBAY): The popular online marketplace started allowing the sale of NFTs on its platform in May. EBay’s advantage is that customers can buy NFTs using PayPal or a credit card as opposed to needing cryptocurrency. If NFTs keep booming, eBay has its foot in the door.


  1. DeFi Technologies Inc. (DEFTF): Despite its name, DeFi Technologies is in the business of providing crypto-based exchange-traded products that trade on European exchanges. It offers ETPs based on DeFi platforms like Ethereum, Cardano (ADA), and Solana (SOL) that also happen to be NFT platforms. It’s also an investor in the Blocto token project, a blockchain wallet hub that helps users access and manage digital assets such as NFTs.


  1. DraftKings Inc. (DKNG): This sports fantasy and betting company launched its own NFT marketplace earlier this year. Sports has already proven to be fertile ground for NFTs; NBA Top Shot has done more than $800 million in sales since its inception in July 2020. DraftKings’ total revenue in 2020 was $644 million, so a successful NFT business would add needle-moving revenue.

If you’re interested in learning more about pure-play NFTs, Chief Crypto Strategist Nick Black recently shared his buying strategy and the one thing he looks for in every NFT project.

You definitely need to read this before you make your first purchase!

Take care,

David Zeiler
Advisory Board Member, American Institute for Crypto Investors


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