Investing isn't getting easier in current times.
There are more and more new ways of investing everyday and it's really easy to be outdated if you are not reading up regularly.
Hence, I thought it will be good for me to be sharing some new investment vehicles once in a while to keep you aware of the latest "fads" in the investing world through a brief read. At the same time, it also helps me internalise this through writing.
So, in the first of this series, I like to talk about two new investment vehicles- SPAC and NFT. (Technically, SPAC isn't really new but it just get more attention recently.)
Haven't heard of them before? Then yes, you are at the right place.
Let's talk about SPAC first.
What is SPAC exactly?
SPAC is the acronym for Special Purpose Acquisition Company. It is basically a company with no commercial operations. It does not make any products at all. The sole purpose of the company is to act as a shell company for the founders or management team of the company to raise money via IPO so that they can eventually acquire another company, often within two years. Now, here is the interesting thing. When people put in their money with SPACs, they actually have no idea what company will be eventually acquired by the SPACs. You are buying into the unknown. Essentially, you are buying in because you have faith that the founders or the management team will eventually acquire a great company and you will stand to benefit from it after the acquisition when you can swap your shares for the new shares of the merged company or sell them for the original sum plus the interest. Since you are buying into the unknown initially, SPACs are also called "blank-check companies".
So why is there a need for SPACs? Won't it be easier for the private companies to go through IPOs themselves instead of being acquired by the SPACs? Well, apparently there is a huge advantage in terms of the paperwork required. For a normal company to go through the usual IPO process, the paperwork is usually tedious and can take 6 months or more. By getting acquired by a SPAC instead, the paperwork is lesser and usually takes just a couple of months. This is thus attractive to the private companies as they could be on the open market faster, and thus gather capital from the open market faster.
Do SPACs then necessarily mean better buys for investors? Well, not necessarily so. The thing is that the whole mechanism do not incentivise the founders or management team of SPAC to acquire companies at the right value. Hence, investors might end up not getting the shares of the eventual merged company at the right value. In fact, it's found that the average returns from SPAC mergers between 2015 and 2020 actually fall short of the average returns from an IPO. So, do take take into consideration if you are looking at investing in a SPAC.
Now, let's talk about the other investment vehicle in focus today- NFT.
NFT is the acronym for non-fungible token.
What exactly is non-fungible? You may ask.
To answer that, you must first understand what is fungible. Fungible means interchangeable. If something is fungible, it could be interchangeable or replaceable by another item. For example, your dollar bills are fungible. A ten dollar note can be changed into five 2 dollar notes with no impact on the actual value.
Hence, non-fungible tokens are essentially tokens which are non interchangeable. You can't change them into anything else and they are thus unique. They usually act as non-duplicable digital certificates of ownership for digital assets such as digital art etc. Basically, they are smart contracts on the blockchain, usually Ethereum for now.
If you own the NFT of a particular digital asset, you then have the right to do anything to it such as reselling, distributing or license it. Unless, there are some exceptions written to this smart contract by the creator then those restrictions still apply.
It's getting really popular recently as it can be used to represent ownership of digital assets which some might find hard to do so without the use of NFTs. That is also where things can get a bit funky. For example, you can have a NFT for a meme and say that you own the meme. However, there is nothing stopping other people from having the same meme as they are digital products after all so you can have multiple copies of it. The only difference is that other people cannot claim that they own this meme. Only you can as only you have the NFT for it. Does it really matter since everyone else essentially still has the same meme (everything is the same to a pixel level)?
Well, some apparently think this makes a hell of a difference as this represents unique ownership. NBA Top Shot, a platform or market where traders could trade collections of shop clips of basketball stars in action using NFTs, has seen more than $200 millions traded in just six months after it went live. Just last week, a NFT digital artwork is sold for $69 millions during an online auction.
How could unique ownership of a digital product be such a valuable thing is beyond my current comprehension. But maybe, I'm missing something here...
Hope you learn something from this article.
I certainly did from writing it.
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