Crypto, NFTs and the Metaverse–

Making Sense of
a Digital World

Financial media outlets, with increased frequency, are showcasing three new common characters: Cryptocurrency, NFTs, and, more recently, the Metaverse. Who are these mysterious economic game changers and what does it all mean for your investments?

Brett Miller, CFA, CFP ® | Senior Financial Analyst Tweet

As societies evolve and economies move deeper into the digital world, it is important we make sense of the foundation in which it is being constructed. The adoption and application of these technologies offer unique investment opportunities (and risks) to your investment portfolios.

Let’s begin at the beginning with Cryptocurrencies. To grasp Cryptocurrency tokens like Bitcoin and Ethereum, we must
first understand the blockchain. The blockchain was originally created by an ex-Google executive who craved a monetary
exchange system, or digital ledger of debits and credits, that eliminated counterfeit activity and government manipulation (i.e. quantitative easing and money printing). 
Thus, the blockchain was born. 

The blockchain is a 100% digital accounting ledger system that accounts for all “Tokens” on its platform. Tokens are the store of value and means of exchange on this digital ledger. In simpler terms we can look at bitcoin: one “Token” on the bitcoin blockchain is one bitcoin. 

There is a defined number of bitcoins that can possibly be “mined” or added to the system, eliminating the possibility of devaluing currency and money printing. The cap of bitcoins available is 21 million. Bitcoin “miners” are harvesting these until the maximum number is reached. Once the system has 21 million full bitcoins harvested, no more can be added or subtracted to the digital ledger. Bitcoin, therefore, is a finite resource. Each one of these 21 million tokens carries its own unique digital signature that cannot be replicated. Think of this unique identifier made of up numbers and letters like a VIN number that is unique to every automobile. 

The blockchain system is so advanced that it tracks every individual token and accounts for any transactions that occur. No exchange of tokens between two parties goes unaccounted. How? Everyone with access to the blockchain can view and validate the transaction. If I want to buy a Tesla from you for one token, I simply send the token from my blockchain account to your blockchain account address; much like we do with our bank accounts today. Here’s the key difference – the computers on the system validate the transaction, account for the exchange with a debit in my account and a credit in your account, then post it publicly for all to see and take a small commission for doing so. The ability for anyone with access to the network to validate and view the transaction adds a whole new level of transparency and security to the exchange process. The chart below illustrates the transaction process. 

Knowing this about the blockchain, we see how it offers a solution against money printing and counterfeit money entering the system, an objection many economists raise against central banks’ ability to print money out of thin air. The appetite for blockchain technology and its decentralized nature grew rapidly in the 2010s and the world witnessed the introduction of various new tokens, or cryptocurrencies – Ethereum, Dogecoin, etc. But soon savvy innovators began to see a broader base application to this transactional blockchain technology.

Instead of exchanging a Bitcoin token, people began to think, what if you could exchange ownership of artwork where transfer of ownership was verified and viewable on the blockchain? What if you could exchange business contracts between companies on an open network that can be viewed and validated seamlessly? What if healthcare providers could seamlessly share medical information and trust the information was valid? This list goes on but the simple answer for these innovators was clear. Create a digital ledger with tokens representing ownership of each of these things. The applications of the technology became endless. 

All these examples lead to the genesis of the NFT or “Non-Fungible Token”. Tokens that cannot be replicated and offer a unique signature of ownership to whatever item they are assigned to – a piece of fine art, a business contract, medical information, and so on. Widespread excitement surrounded the NFT world, in 2020 and 2021. The market saw bubble-like valuations in crypto exchanges that saw a single bitcoin top $60,000 per token. We witnessed digital artwork pieces of a cartoon ape, titled Bored Ape, sell as NFTs for hundreds of thousands of US Dollars. No, that’s not a joke… an artist created a blockchain token to sell digital ownership and received nearly half a million dollars for one. You’re probably just as shocked as we are.

While we can poke fun at some of the silly applications of the technology and overpriced cartoon apes, it is undeniable that the business and societal applications are growing daily. This digital world of property exchange and currencies is now colliding with an expanding virtual reality network. This new place of digital ownership and virtual reality needed a name, so the internet looked to Neal Stephenson’s 1992 novel Snow Crash. That novel took place in a fictional digital world called… you guessed it: The Metaverse.

Beyond video games, the metaverse aims to provide businesses the opportunity to meet virtually, teachers to educate students from anywhere in the world, and sporting events to become larger than life all while sitting in the comfort of your own home. It truly will transform many basic functions of our economy. This provides a unique investment opportunity for companies and investors.

In the last three calendar months, we’ve seen fortune 500 companies prepare for the virtual move. Facebook legally changed its name to Meta Platforms, Inc. and Nike filed patents to sell shoes digitally. Walmart filed seven vaguely worded patents related to digital product sales and while we’re not quite sure of the applications for airplanes in the virtual world, Boeing filed patents like those from Nike and Walmart. The world of entertainment is changing before our eyes as virtual reality headsets and glasses become household items. If all these companies are investing and preparing for the Metaverse, should you?


How is Polaris Reacting to the Metaverse?

At Polaris, we’re taking a thoughtful approach to this type of investing. We understand the opportunity but, even more so, understand the risk. The massive sell-offs of the 2000s Tech Bubble are mirrored in today’s markets with the so-called “Innovation” stocks. In the chart below you will notice ARKK Innovation ETF’s decline over the past year.

Disruptive and innovative companies, in their early stages, often carry unjustifiable share prices by most earnings and revenue metrics. This makes entry and exit in these transformative investments extremely difficult for the most talented investors. Polaris knows this and deploys a disciplined investment approach into the metaverse. By researching and buying well-diversified companies with established product lines that invest in the metaverse we can find exposure to these investments without taking the direct exposure and downside risk that often comes with innovative stocks. We own semiconductor manufacturers that provide the essential hardware for blockchains to function. We own healthcare companies that invest in virtual healthcare services. We own the software companies building the blockchain and virtual platforms. This list goes on, but the philosophy behind the Polaris investment approach is clear in everything we do – take a diversified approach to limit downside risk with the skill to capture long-term returns.

The economic transformation has already begun. Polaris Wealth and its teams are well equipped to address your portfolio’s needs in whatever changes lie ahead. Using cutting-edge research, quantitative and qualitative approaches, and a holistic portfolio view, we navigate markets and make sense of a complex global environment for our clients. We pride ourselves on bringing you and your investment plan stability and peace of mind in swiftly transforming times.