NFT Investment Options (And Risks)

New investors are flocking to NFTs, but they don’t always know what they’re doing (of course, bad stuff happens). So, what are the risks when buying an NFT directly? How can investors mitigate those risks? Plus, there’s a new TradFi way to invest in NFTs, in the form of a new index fund offered by Bitwise.

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Show Highlights

Thieves Steal Gallery Owner’s Multimillion-Dollar NFT Collection: ‘All My Apes Gone”: ““I have been hacked. All my apes gone. This just sold please help me,” wrote gallery owner Todd Kramer, of New York’s Ross + Kramer Gallery, in a since-deleted tweet posted on December 30… A phishing scam had drained his Ethereum wallet of 15 NFTs valued at a total of $2.2 million, including four apes from the “Bored Ape Yacht Club” collection. The thief seemed to have sold off many of the pieces in Kramer’s collection, and Twitter users jeered at Kramer’s bad luck, pointing out that he had bet on an unregulated, decentralized system that would be unable to help him.” (ARTnews)

Bitwise Blue-Chip NFT Index Fund: “The Bitwise Blue-Chip NFT Index Fund is a simple and secure way to gain diversified exposure to an entirely new frontier in digital art and culture. The Fund seeks to track an index of the most valuable (as defined by market capitalization) and well-established NFT collections in the Arts and Collectibles sector. Collections considered for inclusion in the Fund are monitored for certain risks as set forth in the index, selected and weighted based on an adjusted floor price market capitalization, and rebalanced quarterly.” (Bitwise)

About The Show

Cryptogic is THE show for crypto investors who are focused on long term results. Follow Scott Hawksworth and Andy Hagans as they explore the investable world of blockchain technology, NFTs, Bitcoin, Ethererum, and other cryptocurrencies.

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Transcript

– [Scott] Hello, everyone, and welcome to another episode of “Cryptogic.” I’m your host, Scott Hawksworth, joined once again by Andy Hagans, co-founder of Cryptogic and the Alternative Investment Database. We are going to be talking NFTs today, and there’s a lot to talk about, too. I know that the markets have had some movement as well. So, Andy, how are you doing? 

How are you feeling? 

– [Andy] I’m feeling great. We actually got dumped on here in southwest Michigan. We got about a foot of snow in the last 36 hours. And yeah, so Bitcoin has been dumping, too, and Ethereum and, you know, all the major coins are dumping this week, which I always think is fun. I mean, you know, if you’re a long-term investor, you should be rooting for these coins to dump and the lower the better, right? 

Because it’s an opportunity to load up. So I’ve kind of…personally, I have dollar cost averaged in to most of my crypto positions aside…you know, sometimes you just take a flyer on something just for fun. So that’s kind of the exception. But I have a feeling there’s a lot of investors out there that, you know, put it in context, this is like a 20% dump from whatever, a month or two ago, which is, like, nothing in the context of… – When you look historically… – …the kind of bear markets that you can have in crypto. 

– Exactly. 

– Anyway, this is my public service announcement, that if you’re a long-term HODLer, that the dip is a good thing. 

– Buy the dip. 

– Yeah. 

– Buy the dip, right? 

– Pretty much. 

– Awesome. 

– We’re talking Bored Apes today, is that right? 

– Yeah. We’re talking Bored Apes today because we want to talk about NFTs and specifically, investing in them, the options that you have as well as the risks. And, Andy, you’re going to be covering a bit more of the TradFi side of things, and I’m going to be covering a bit of the DeFi side of things just to kind of give that information and really give an overview and some things to consider. 

Because I think whether you are new to this or have been doing this for a while, you know, there are potential pitfalls, and we’ll cover it in a bit, but there was kind of a big story about someone who got hacked and lost a very valuable Bored Ape NFT collection. And so covering, you know, the investment side of that and the risks, I think, is key. 

So… – They got hacked? So did their wallet get hacked? How does one get hacked? 

– Yeah. Your wallet gets hacked. So this individual, and I’m going to pull up his name, yeah, it was Todd Kramer, who was of New York’s Ross + Kramer Gallery, and he had a collection worth over $2 million, $2.2 million, of Bored Ape NFTs, and he had a hot wallet, which is connected to the internet, and it got hacked and his NFTs were stolen. 

And he, of course, went to Twitter to lament this, and he asked for OpenSea’s help because he was saying, “My NFTs were stolen,” and OpenSea actually decided to, you know, ban the sale of those specific NFTs on their platform because they were stolen. 

– So but OpenSea didn’t get hacked or anything. He just lost his and then they got listed for sale there because they’re the, you know, major… – Because the person who stole it, they’re like…they want to sell those NFTs and… – So this is kind of like if eBay said, “We’re not going to allow you to sell your stolen Rolex on our platform,” or something. 

– Exactly. Exactly. And I mean, and this guy, he got a lot of criticism, too, from the community because it was like, why didn’t you have this…you know, you have this collection that is worth over $2 million and you have it connected to your hot wallet that’s connected to the internet, able to be hacked. Why didn’t you have, you know, a cold wallet which would be, you know, actual hardware? 

You know, whether he wrote down his key or whatever on a piece of paper. Why would you leave this connected to the internet? And, you know, there are so many best practices when it comes to security, whether you’re talking crypto or, you know, an NFT, and just having it connected to the internet in an age where hackers will target value where it resides is not the smartest thing to do. 

– Yeah. And, you know, it’s just one of these news stories and they pop up from time to time about stolen Bitcoin, stolen this or that crypto or NFT, and the more they happen, I think it probably turns off a lot of people and scares some people away from investing in the space. I mean, by the way, investing in art, I think if you invest in, like, traditional art, there’s lots of scams in traditional art, with, you know, forgeries… – Of course. 

– …all kinds of thing, you know, people getting ripped off in the traditional art world. So I think people get scared out of that. So maybe this is just a corollary in the digital world, you know, a new story that may scare some people out of buying an NFT. 

– I think so. And I mean, even when you are…you know, let’s say you’re an investor and you’re saying, “You know what, I want to get it on this NFT. You know, I want to find out what this is all about and I want to get one. You know, “Bored Apes, wow, those are so cool. I saw Steph Curry has one on his Twitter profile. I want to get that. Eminem got one…” – Who is Steph Curry? 

– Steph Curry? He’s a basketball player. 

– Okay. I was like, “Is that a man or a woman?” 

– He’s a basketball player for the Golden State Warriors. 

– Okay. Okay. 

– So, basically… – Sports. 

– Sports. Exactly. Sports. Or Eminem? Are you familiar with Eminem? He’s a music… – I’m familiar. I’ve seen the movie. 

I’ve seen the movie. 

– You’ve seen the movie “8 Mile.” So Eminem has one as well. And so maybe you’re investors… – Well, hold on a sec, though. 

– Yeah. 

– I mean, I think a lot of these people that you’re naming, or even a lot of people who are into NFTs, into the OpenSea thing, I don’t know that I even call them investors. You know, like, a lot of them just think this is fun or they’re buying them for status or kind of like in the art world. You know, most people who buy art aren’t buying it to flip, they’re buying it because they enjoy art and they want to hang it on the wall. 

So obviously, some of the celebrities buying these and then, you know, putting them as their Twitter profile… – They’re just flexing. 

– Yeah. But I don’t know that that’s exactly investment because they’re not necessarily buying it to flip. So that’s already kind of an interesting topic, is, you know, when you’re thinking about investing in NFT, it’s a little different than if you want to collect NFTs, right? 

– I think so. I think that’s a really good point, and I think investors maybe are cognizant of the fact that, hey, well, because these celebrities, you know, they’re just kind of doing it as a status symbol, there can be value there because clearly, there is desire for these. There is…you know, we’ve talked about it in previous episodes, that idea of status, and clearly, then that creates an investment opportunity. 

And so I would say investors interested in that, saying, “Hey, I want to get some gains on this,” they want to get into it. And then I think that’s where it kind of ties into our whole discussion today where, okay, what are the risks to that? Because you were talking about, you know, art galleries, and frauds, and fakes, and all this, that exists with NFTs. 

When you go on OpenSea, you can find that there are, you know, “Bored Apes NFTs” that are listed that are not from the Bored Ape Yacht Club. And when you look at it, you can kind of look at these telltale signs… – So they’re like fake Jordans? 

– Yeah. Basically. And one of the big signs, one of the number one signs, and this is especially for, you know, an investor who’s wanting to get in and trying to look for that value, look at the price of the NFT. Because if that NFT is too cheap to be true, that’s usually accurate. It’s not real. You know, you can’t just get in for a Bored Ape NFT for, you know, 100 bucks, that’s just not going to happen. 

– So does OpenSea not police these? 

– They don’t. They don’t because it is their platform. That’s why it was such a big deal that they kind of said, “Well, we’re not going to allow the resale of stolen NFTs.” I think they don’t also because they have such a massive platform. How can you police every single NFT out there? 

You just can’t. I was poking around the other day and I was looking at bundles for free NFTs. And all OpenSea said, I looked at this one bundle because I was like, “Oh, this seems interesting,” is they had a little warning and they were like, “We have not vetted this,” so, you know, at your own risk, but they weren’t going to take steps to shut that account down and say, “Okay, we’re going to tackle every single, you know, fraudulent NFT out there.” 

– Yeah. You know, I mean, the thing is a lot of these sites, I mean, think back to Web 2.0, where when they all started, they were like, “It’s not our responsibility to police content, to moderate content.” And then they have that network effect and they get bigger and bigger, and then over time, you know, that leads to different kinds of problems and then maybe their incentive changes. 

So, you know, how OpenSea is dealing right now, I mean, I imagine that they’re scaling like crazy, right, in terms of, like, user base and traffic. 

– Oh, absolutely. 

– So yeah, I wonder how long that will be their attitude. So it sounds like maybe this situation that just happened with the theft is something that they’re treating a little bit differently or have they always prohibited stolen NFTs from being listed? 

– I think they’re treating it a little differently because when you think of any of these platforms, whether it’s, you know, Web 2.0 in Twitter or, like, YouTube, for example, they kind of…in the beginning, they have this sort of, you know, hands-off approach to it and then what happens is as these platforms grow, then you have a lot of attention. 

So if a celebrity or someone who has a huge following on the platform or there’s a lot of value, then that kind of creates sort of a PR problem for them because OpenSea doesn’t want to kind of have this huge story that goes around and now people are saying, “Oh, is that even safe to buy anything on OpenSea’s platform?” 

So I think they kind of respond if the spotlight, so to speak, burns bright enough, you know. 

– Right. Yeah, no, that makes sense. And I think you’re right, that a lot of it is PR-driven. I mean, even back to these Web 2.0 companies that we’ve talked about in recent episodes, your Facebooks or your Twitters, you know, they’re entirely reactive to media cycles and, you know, hype cycles and all that sort of thing. 

So obviously, that would be the case here. So can you walk me through, what exactly happened with this guy’s Bored Ape? How did it get stolen exactly? 

– So basically, he was hacked and his keys to his hot wallet, which I mean, I don’t know specifically which one he had, you know, I use MetaMask, but they got in there, they got the keys to the NFT, and they took it, locked him out, and then they can now list that NFT for sale. 

And so if you’re locked out of your wallet because you got hacked and they have those keys, you’re SOL. 

– It’s almost like a stolen Picasso. You can’t go sell it at Sotheby’s or at Christie’s, but you could probably take it to Russia and sell it in the black market to a Russian gangster or something, right? 

So that’s probably what’s going to happen. This NFT might get owned by a Russian gangster or something like that? 

– Potentially. Potentially. But then there’ve been situations where an NFT was stolen and sold and then the person who bought it didn’t realize it was stolen. And depending, you know, there could be a reversal there or wanting some kind of compensation. 

This is where the sort of Wild West style of things, this decentralized nature of it all, kind of comes into play and kind of runs into this centralized nature of it all because if you’re a victim of this or you purchase a stolen NFT that you didn’t know was stolen, you thought it was a great deal and you’re really happy, kind of two people lose there. And then they look to that third party, that authority, to say, “Well, this was stolen because I was hacked, and now, you got to fix this.” 

And then I think there’s these two schools where there’s this idea of, well, that’s kind of on you because you had your NFT just in your hot wallet there, not secure, you didn’t have a cold wallet, you didn’t take the proper precautions. Just kind of the same way as, you know, people kind of laugh about there’s still that guy digging through the dump for his hard drive with Bitcoin on it or it’s the USB drive with just, you know, millions of dollars in Bitcoin and he’s… – Well, you know, I got to say, Scott, I mean, if NFTs are property, right, it’s a token that represents some sort of property or asset or it could be something else, so if it’s a real…if it’s an asset that exists and someone hacks it and steals it, that’s theft. 

And that’s… – Oh, it’s absolutely theft. Yeah. 

– And that’s covered by all sorts of law, right, whether domestic law or potentially even international law. So this idea that because this is a new technology, it won’t be…you know, it’s not subject to existing laws. You know, obviously, it is, right? So now, if you bought it unknowingly, I guess I don’t know where that leaves you. 

You know, if you pay 5 cents on the dollar for something, you know, if somebody says, “Hey, Andy, I’ll sell you this 1975 Porsche 911 for $500,” and, you know, I’m going to guess that maybe it’s stolen, right? 

So, you know, maybe that’s on the buyer if it was just very clearly, you know, a hot item. But I think that’s just all going to come down to what jurisdiction is it, you know, “recovered” in. 

– And, again, there’s that philosophy, you know, if I went to a rough neighborhood and I just had my new iPhone out, and I’ve got my Beats headphones, and I’ve got all this fancy stuff, and I’m just walking around at 3:00 in the morning, you know, and I happen to get mugged, a lot of people might say, “Well, dude, what were you doing?” 

– Well, yeah, it’s not your fault, but you weren’t being prudent maybe. 

– Right. So I think, then, when we kind of tie it back to, okay, what are your options for NFT investment and what are the risks, I think if you do go for, “Hey, I want to directly invest in NFTs, I want to own some, I want to go on OpenSea, I want to buy some Bored Apes, I want to, you know, buy some Mutant Apes,” whatever you want to do, you have to be smart with how you are securing those assets. 

You have to be smart with keeping track of your passwords, making sure that you are considering as your portfolio grows in value, that makes you a bigger target for a hacker. They aren’t going after someone who’s got, you know, 100 bucks in an NFT, they’re going after millions. And where there is incentive, there creates opportunity for them. 

So you have to be aware of that. But okay, that’s the direct side. Andy, I know that there is a TradFi way to get into NFTs and I’m just curious if you could kind of break down what that is. 

– Yeah. And I mean, you know, conceptually, this is no different than cryptocurrency, you know, where you can buy it, you can transfer it to your own wallet, you can have a cold wallet, you know, all kinds of ways to do that, but a lot of people are too lazy for that, right? And they’re just going to buy crypto on an exchange… – It’s a process to do that, to maintain that. So a lot of people are saying, “Well, I will kind of allow this centralized authority to kind of manage that for me and make it easier for me,” right? 

– Right. And quite frankly, I’m okay with whatever a person decides to do. It depends on what their goals are, right? Like, I really have two hats. When I am transacting in crypto, on the one side, I put on my investor hat and I do that in a very specific way with very specific goals in a very specific system. Then on the other hand, you know, there’s, like, the technologist side, where…I mean, that’s kind of maybe a bit of a pompous word, I’m not really a technologist, but the part of me that wants to play with this stuff and play with DeFi. 

That’s, like, a different process, right? And so I think it depends. What are your goals? And so when I’m playing with DeFi, you know, I have a very different attitude versus, you know, with the real nest egg that’s in crypto. I use different systems and platforms for that. So I think that’s step one, is if you’re just a pure investor and you’re saying, “Well, I’m interested in the investment thesis behind NFTs and I’d like to get some skin in the game,” but number one, you might say, “I don’t know anything about art. 

I don’t know how to judge a Bored Ape from a Punk from a Mutant Ape, let alone, which Bored Ape do I buy,” or whatever. And by the way, the same thing happens in the investable art world, right? We have some people who spend millions on art and they just love specific pieces and they happen maybe to make money along the way, and then there are other people that could care less about the actual art, you know, they’re just using it as that investable asset. 

And so some of those people in, like, the traditional art world will put their money into a fund. Those have kind of gotten a bad name over the years, I think, because they have pretty high expense loads that I think, you know, over time, the expenses just eat so much into the returns. But they still exist, and honestly, I hear radio ads for them. So, you know, obviously, some people are investing. 

– Andy, just to jump in, just kind of because you were talking about, you know, people who maybe they don’t really know much about art but they want to get into it from an investment standpoint, that’s like with collectibles. There’s people out there that say, “You know what, I actually don’t know much about comics or trading cards, but hey, I want to have this as part of my portfolio. What should I buy?” 

Right? 

– Right. Yeah, no, absolutely. And so in terms of NFTs, Bitwise, and honestly, Bitwise, they have been a real leader in terms of launching index funds in the crypto space and sort of allowing investors to invest in these things indirectly through these more traditional, you know, financial instruments. 

And so I think this is really interesting. I’ll just read you, this is right from their webpage. So, “The Bitwise Blue-Chip NFT Index Fund is a simple and secure way to gain diversified exposure to…” yada, yada, yada, “…tracks an index of the most valuable (as defined by market cap) and well-established NFT collections in the arts and collectibles sector.” 

So I’m looking right now at their index constituents. And so these are market cap-weighted. So the Bored Ape Yacht Club is 32% of the index, CryptoPunks is 29%, then it drops down, Mutant Ape Yacht Club is 12% of the index. And then they have VeeFriends, Cool Cats, Autoglyphs, CyberKongz, Meebits, Fidenza, Chromie Squiggle. 

I don’t even know what Chromie Squiggle is. And so those are all, you know, in that 5% down to 2% range of the index. That’s just interesting. This is such a traditional approach to just taking a sector, a liquid investable asset class, and saying, “Let’s create a market cap-weighted index and then launch an index fund that tracks that index.” 

Now, this index fund, I would say, you know, not every investor can invest in this, it’s for accredited investors only. Minimum investment is $25,000. So it’s actually, for this kind of a private fund, that’s a 506(c) fund, $25,000 is actually a pretty low minimum investment. 

– Yeah. That is pretty low. Yeah. 

– Yeah. The interesting thing to TradFi a product like this, like a market cap-weighted index fund, is that to the extent that this is successful, it’s going to bring, you know, more liquidity and interest into the index constituents. And so I don’t know that this index, I don’t believe that they’re buying any NFTs directly, but if you can kind of think that through, let’s say someone did launch an index fund that actually was buying some NFTs directly, it would almost become a self-sustaining cycle where that would bring liquidity into the space. 

And then because it’s market-cap-weighted, it could drive the price upwards. But I think this is just pegged to an actual index. But nevertheless, I think even the fact that this index fund now exists, right, will kind of bring a shift in some investors’ minds to where they say, “Oh, NFTs are an investable asset class.” 

Of course, they already were, but not really in this TradFi world with a TradFi instrument. Now, the expense ratio, let me look here, so it’s 3% ER. So, you know, that’s a significant drag on performance, but on the other hand, this asset class is so volatile. You know, if it posts 50% or 100% returns year over year, you might say, “You know, what? A 3% ER?” 

– “I can take that drag.” 

– Yeah, yeah. And I think a lot of people would. And frankly, it’s also what you’re paying to avoid the security risk that you talked about. And there’s also the risk of, you know, concentration risk or investment selection risk of, you know, how do I even know which Mutant Ape is going to appreciate the most. So this is just an index approach. 

And frankly, I kind of like it. You know, as far as the old TradFi versus DeFi arguments go, I’m just going to shrug at that whole thing and I’m going to say, you know, use whatever instrument makes sense for you and for your goals and for your, you know, time horizon and risk tolerance and all that sort of thing. So I think this is a niche product, but I’m glad that it exists, and I could see some people investing in this. 

And if they want exposure to this asset class, you know, this might be a good way to go for some investors. 

– Right. And it kind of circles back to what you were saying about, you know, whether you’re using Coinbase or something else versus, you know, going direct and having that wallet, maybe there’s investors out there, not maybe, definitely there are, that want to get this exposure but maybe they don’t have the time or inclination to mess with all of that. And, you know, if you get something wrong, oh, if you get something wrong and you’re locked out of your wallet because you forgot your phrase and, you know, you can’t get in there, you lost that password, you wrote it on a sheet of paper and your toddler threw it out or colored on it, whatever, you know, maybe that’s not the ideal way to go in for you, right? 

– Right. Yeah. No, exactly. And like I said, even in my own situation, I kind of segment that between, you know, stuff that I’m playing with, money that I’m playing with, technologies that I’m playing with, versus I have another bucket that’s, you know, more that long-term investment portfolio. 

You know, so to the extent that if I were on OpenSea and I wanted to learn about it, I’d go look for something cheap and just probably play around and kind of learn how the system works. And I really think for all of these DeFi apps, that’s the way to start, is start with a small amount of money. 

You know, see what it feels like to get screwed by gas fees and this, that, and the other thing, and, like, make those mistakes with that smaller bankroll, you know, kind of like, playing poker for $1 a chip instead of $100 a chip and… – Right. Don’t go in saying, “Well, I just got this great deal on this Bored Ape. You know, I spent 10k. I think it’s going to be awesome.” 

And it’s like, “Well, it’s fake.” 

– You have a fake Ape. I hate to tell it to you, but your Ape is fake. 

– Right. All right, Andy. Well, thank you so much for joining me again and kind of bringing your TradFi perspective. I think it’s an exciting product and it’s going to be interesting to see how this all shakes out as we move forward in 2022. 

– Thanks, Scott.