Investment Case for NFTZ, The First NFT Focused ETF

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Blockchain, NFTs, DeFi, Crypto and the Metaverse. These may sound like a foreign language, but they are crucial elements in an emerging digital universe that investors ignore at their peril. More than $2 billion was spent on non-fungible tokens, or NFTs, during the first quarter of 2021,1 and Google trends data in September showed that interest in NFTs surpassed that in cryptocurrency.2

NFTs are being traded like any other conventional property; sold at Sotheby’s, Christies and directly to consumers via smart contracts. They have already revolutionized art, music and sports collectables; but their blockchain foundation has the potential to create an entire metaverse, a shared virtual environment with a decentralized infrastructure that could transform how we work, interact and live, rewarding both creators and participants alike.

NFTZ is testament to our vision of the revolutionary potential for growth in crypto and digital asset related securities, and our commitmen to offering exposure to the dynamic and disruptive NFT space. NFTZ seeks to track an index of a portfolio of publicly listed companies with relevant thematic exposure to the NFT, blockchain and cryptocurrency ecosystems.

A screenshot of EBAY selling Art NFTs

What is an NFT and why should investors care?

NFT stands for non-fungible token. Each token is a digital code representing a specific, unique item. Unlike Bitcoin or other currencies, NFTs are not inherently of equal value to another, and they can’t be traded or exchanged as equals. The vehicle that is used to create or “mint” NFTs’ identifying code is called blockchain, which is the foundation of all things crypto.

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Investors who get to grips with blockchain and NFTs may catch a glimpse of a future with transformed music, art and collectables industries; with a radically different economic structure; and with a fundamentally new construction of property rights. This disruptive potential suggests that investors might do well to seek some exposure to the NFT space. So let’s explore the basics…

Blockchain


Blockchain is a type of database in which information is stored electronically on a computer system. Blockchains are based on networks distributed across a large number of computers that utilize encryption techniques for security. Due to their decentralized structure, they are not controlled by governments or central authorities. Instead, they ensure the integrity of their transactional data via their technological standard that enables computers that don’t “know” each other to communicate and conduct transactions safely. Blockchain was first used to create cryptocurrencies like Bitcoin, but the technology can be used to create other crypto products, such as NFTs.

NFTs and Crypto


Crypto describes all manner of things safeguarded by the sophisticated encryption methods of blockchain and others. These include currencies such as Bitcoin, Ethereum (ETH), Litecoin (LTC), Stellar (XLM) and Dogecoin (DOGE); or NFTs. The common feature is that they are democratic and transparent. They are mined or minted in a decentralized, peer-verified process that bypasses traditional elites such as banks or multinational companies. NFTs are mostly minted from the Ethereum blockchain and sold on specialized marketplaces like Zora, Rarible, and Opensea.

How and why are NFTs used?

Humans’ desire for ownership is nothing new. Historically wars have been fought over land and natural resources, but possessions with little or no practical purpose are just as central to assert status, identity and individual passions.

Collectors of books, art, vinyl records or baseball cards express their enthusiasm and delight by owning such items. However in the digital world many things that people love, feel connected to, are proud of or simply want, exist in this digital space. In many cases, they are owned by the hosting platforms such as social media or subscription services. Even if a platform enables ownership – for example of a character in a game – the rights are restricted to within that game. You cannot auction the character on eBay.

An image of the FUNKO card packs

Story and Scarcity

NFTs allow people to own digital content that they value, independently of the media platform that helps them access it. The story of True Digital Ownership is the first benefit of NFTs. However, another no less crucial and perhaps even more fundamental aspect of NFTs is the element of scarcity, the Transformed Mechanics of Value, that it enables.

NFTs support more transparent, inclusive and open transfer and accrual of value than has been possible until now. Consider the traditional art world or music industry. The artist creates their work, but once sold to a curator or music label, it is relinquished to a network of intermediaries who control the market and its value and often benefit more than the original artist.

NFTs bring the creator into direct contact and relationship with the audience or collectors. Instead of an opaque dissemination process involving a tiny sliver of the population, artists can access the public directly. Fans can invest in projects they care about from the beginning, building a portfolio of NFTs that boast their loyalty and support. They can support budding artists who retain control over their art and its value.

Celebrities like Snoop Dogg and legendary skateboarder Tony Hawk have already released unique mementos, art, and experiences as NFTs, recognizing the value they offer. Jack Dorsey sold his first tweet for over $2.9 million; 3 and Mila Kunis’ 10,420 Stoner Cats NFTs sold for a total of about $8.4 million in just 40 minutes in August 2021. 4

NFTs remove the middleman from digital publishing, allowing artists of all types to sell directly to their supporters and enabling fans to act as patrons. In this way, NFTs could be paving the return to an older style of art community, where individuals support the artists they enjoy.

“Now, creators can not only engage but transact with their fans directly: the community can voice their opinions and have a better chance of being heard, the perks can be designed to reward members who add the most value, and the community can benefit through token ownership and redeemable real world rewards”

Nichanan Kesonpat
blockchain entrepreneur 5

In the long run, NFTs will further penetrate gaming, social media, art, music and more. Thought leaders have even suggested that NFTs could form the basis for virtual states, where every NFT holder has an equal voice in governance. In contrast to the dictatorial style of social media platforms of today, NFTs could lead the way to a true digital democracy.

An image of the draft kings logo with a football player in the background

The NFT value chain

If you are bullish on NFTs you could buy one and display it on a large monitor or at a virtual gallery. Alternatively you could trade it, or enjoy the benefits it brings (In early March, 2021 Nashville band Kings of Leon announced their next album would arrive in the form of multiple NFTs. Each NFT would unlock bespoke collection of perks such as alternate cover art, limited-edition vinyl, and even a “golden ticket” to a VIP concert experience).

Another way to gain exposure to NFT growth is to invest in the architecture and operating systems that support it. This could be via the specialized marketplaces like Zora, Rarible, and Opensea; or the games like Gods Unchained that are starting to use NFTs to sell in-game assets like weapons or cosmetic upgrades. Real estate in virtual worlds such as Decentraland and The Sandbox are also being sold as NFTs.

A graph showing the increase in total opensea traders over time
Source: https://www.forbes.com/sites/columbiabusinessschool/2021/09/13/nfts-what-youre-missing-and-where-theyre-going/?sh=9584575358da

An NFT ETF combines these elements while offering balanced exposure to the NFT space as a whole. As with any collectable item, it can be hard to know what will rise or fall in value. An ETF mitigates some of this risk by spreading exposure across a range of companies involved in the NFT domain.

NFTZ – The First NFT Focused ETF

Defiance’s NFTZ is the first NFT Focused ETF; it aims to provide investors diversified exposure to a powerful sector with potential for significant disruption.

NFTZ is a rules-based, passively managed ETF that seeks to track an index of a portfolio of publicly listed companies with relevant thematic exposure to the NFT (Non-Fungible Tokens), blockchain and cryptocurrency ecosystems. These elements are often collectively referred to as the metaverse, so in some ways NFTZ could be seen as a meta ETF. But whether its metaverse stocks or an NFT fund you are after, NFTZ is the first ETF to bring the NFT space within easy reach of retail and institutional investors.

Index values are disseminated on an intraday and end-of-day basis and the index is rebalanced on a quarterly basis.

NFTZ brings the next gen investor access to the digital trends that are set to shake the foundations of ownership and property rights.

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“Crypto is going to radically alter finance, value, organization, governance, the internet, money, and more. But it’s non-fungible tokens (NFTs) that will radically alter human society and culture” 6


1 “NFT Market Surges 2,100% to $2 Billion in Q1 Sales,” Sean Burch, April 13, 2021. https://www.yahoo.com/entertainment/nft-market-surges-2-100-160615381.html?fr=sycsrp_catchall

2 “Stories, Scarcity and Mimetic Desire,” Nick Tomaino, March 21, 2021. https://thecontrol.co/stories-scarcity-and-mimetic-desire-c4a344fa74e1

3 “Jack Dorsey sells his first tweet ever as an NFT for over $2.9 million” March 22, 2021 https://www.cnbc.com/2021/03/22/jack-dorsey-sells-his-first-tweet-ever-as-an-nft-for-over-2point9-million.html

4 “Stoner Cats NFT sale rakes in over $8 million despite technical ‘cat-astrophes’”, Saniya More, August 2, 2021. https://links.coinbase.com/u/click?_t=3aca56371967418192255878e9689713&_m=24c572e1bb024f5f8bff20cd71b2ee51&_e=SXC29XY2ezN2lfzvRd7Yxa145TlluooIO7JZxu-tu955jVX0S0IEVhjl7r7Ui6RsInuQAnCEWG6UTu98p8dVIsp6ZarMDYqO5v1_qKVeqt-zqxJwFqzgnWqj45FVwzOhJTMHmdM0uOH1drNuRjPea9p04jkM_hjjEjdaMwezyvoE6yotSLsLPk7jMnT6xGEhko5dYz02oaWgkjeFEXYdwtyk38ivcK2bU5iZY9YciEBjfC_ylImEbpp7ylqUJNXQFQ4uzCViwQwN3yDvB328nwQ2e34igq7lD6zxSknEwLtWyeBJFe5jb5wvPqPBOXTKYVIqDKUAJl2XXFdAH-IEmmk_uLRcfOcU4tfVktGhJVbvcVfjny5Upy8s-iO98_qmfcvJrliyoD2iJjiQoKWojkAJ1yIHHb48ZKv65HtMM1cc16t_Q1BrfVw0tqBcBMOq-su7Od-qERpOYJjPvxYGrMpYuPJXZN-WbPkZPN5fXOrHx9rY1dQAnON1iHEhGBuD

5 “Creators, Communities, and the Gray Space in the Middle” October 10, 2020 https://www.nichanank.com/blog/2020/10/9/gray-space-in-the-middle

6 “Crypto Will Change Value, NFTs Will Change Society” July 19, 2020 https://andrewsteinwold.substack.com/p/crypto-will-change-value-nfts-will