The digital print of the U.S. Constitution grew an estimated 35% in value by the time Ken Griffin made the winning bid, surely ushering in more NFT interest.
Stock market breadth is broadening, and individual stock record closes have risen to a five-year high. But underneath the bullishness is a ruffling. The number of stocks trading above their 50-day moving average is just above 50% for the major averages. Even though individual stocks are doing well, that is a sign of a loss of momentum.
The psychology of “there is no alternative” — or TINA — to stocks as growth investments remains strong in markets. It would take a considerable amount of liquidity to be withdrawn by the Federal Reserve to change that psychology. But a contender for a high-returning new alternative is the non-fungible token, or NFT. In the past week the digital artifacts received tremendous attention when a rockstar of finance, Citadel hedge fund manager Ken Griffin, and a star of TV, actor and rapper Ice Cube, jumped into the NFT marketplace. The NFT market stands at a total of $7 billion market cap, and legacy auction houses like Sotheby’s and Christie’s have launched their own NFT marketplaces to take advantage of this growing class of collectible asset.
Sotheby’s recently hosted ConstitutionDAO, an internet-based group consisting of 17,000 donors that wanted to purchase a digital print of the U.S. Constitution. The DAO raised funds via Juicebox, an Ethereum-based community fundraising tool. In exchange for ETH donations, individuals received PEOPLE, an ERC-20 token that would have granted owners governance powers in the ConstitutionDAO, which would have managed an LLC that actually owned the document.
Griffin, competing against ConstitutionDAO, won the bid for the digital Constitution print for $43.2 million. The additional cost associated with insurance, storage, auction fees and transport, among other overhead, prevented the DAO from bidding higher. The estimated return of Griffin’s NFT trade is about 35% from the time the auction opened in February, double that of Citadel’s flagship fund Wellington that is up 18.5% year to date.
A macro consequence of Griffin’s bidding success is that NFT’s are being seen as an alternative to bonds and certificates of deposit. Contemporary art — art of the 20th and 21st century — returned 7.5% since 1985 and beat average returns of corporate and Treasury bonds over that period at 6%.
Yet, NFT returns are based on auctions, especially buzzy ones. The artist Beeple saw his “Everydays: The First 5000 Days” sell for $69 million through a Christie’s auction that began on Feb. 25 with a starting bid of $100.
Companies like DraftKings, Cloudflare and EBay, however, do not go through an auction but instead entered the NFT market by launching on the Ethereum network. That has driven up the price of Ethereum but caused great divergence in stock prices.
In NFTs, the concept of “yield farming” — lending out crypto to tech startups — is improving liquidity in NFTs by expanding mining in the decentralized finance space.
Griffin is the first wildebeest crossing the crocodile infested river and that likely will drive more hedge funds to get in on the action. Levered entities like Citadel could start trading and thereby transfer the illiquidity risk of NFTs to other levered players. For markets, this means that NFTs could deliver high returns that beat inflation.
The expected returns of NFTs, which range from 30% to 300%, indicate there remains enough upside return potential to compensate for negative real yields in bonds and negative real earnings yield in stocks. Griffin’s NFT trade just set the stage for a next wave of crypto interest.
Ben Emons discusses “Where Macro Meets Crypto” in a column for Forkast.News. He is also a portfolio manager, strategist and published author. He currently advises hedge funds and major institutions as a macro strategist. Previously he served in portfolio management roles at PIMCO and Nuveen Investments as well as in derivatives trading at ABN AMRO Bank. He holds a master’s degree from the University of Southern California, a master’s in economics from the University of Amsterdam, and certification in financial engineering from Columbia University.
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