Back in the halcyon days of August 2024, FT Alphaville argued that the launch of a leveraged single-stock ETF tracking MicroStrategy’s stock was the ETF industry’s shark-jumping moment.
Oh how sweetly/stupidly naive we were at the time.
Under new SEC chair Paul Atkins, the main US financial watchdog will “embrace and champion” innovation, an unsubtle signal to the crypto world that it can run wild once more.
The inevitable result is financial abominations like this:
A company called “Canary Capital” — yeah, us neither — has become the first asset manager to file with the US Securities and Exchange Commission to launch an ETF that would contain non-fungible tokens.
According to the prospectus, the mooted fund would “invest” 80-95 per cent of its assets in Pengu, which, apparently, is the “official token of the Pudgy Penguin project”. A further 5-15 per cent will be held in Pudgy Penguin NFTs, alongside a sprinkling of solana and ether.
It is perhaps a sign of the times that those latter cryptocurrencies — only one of which (ether) has been approved by the SEC as a holding for ETFs — are seen as almost grown-up assets in comparison to its proposed spheniscidae-themed holdings.
Its filing admits that:
PENGU is a new SPL token that exists on the Solana Network. Relative to other digital assets such as bitcoin, ETH and SOL, PENGU has very few identified use cases apart from a collector’s item . . .
There is no assurance that usage of the PENGU will continue to grow. A contraction in the use or adoption of PENGU may result in increased volatility or a reduction in the price of PENGU, which could adversely impact the value of the Shares. Sales of PENGU that have been newly released from escrow may cause the price of PENGU to decline, which could negatively affect an investment in the Shares. PENGU markets have a limited history, PENGU trading prices have exhibited high levels of volatility, and in some cases such volatility has been sudden and extreme. Because of such volatility, Shareholders could lose all or substantially all of their investment in the Trust.
Spot markets on which PENGU trades are relatively new and largely unregulated or may not be complying with existing regulations and, therefore, may be more exposed to fraud and security breaches than established, regulated exchanges for other financial assets or instruments, which could have a negative impact on the performance of the Trust. Disruptions at PENGU spot markets, futures markets and in the over-the-counter (“OTC”) markets could adversely affect the availability of PENGU and therefore their ability to create and redeem Shares of the Trust. The loss or destruction of certain “private keys,” including by the Custodian, could prevent the Trust from accessing its PENGU.
Pudgy Penguins is associated with the risk of an investment in NFTs. Investing in NFTs involves significant risk due to the highly volatile and speculative nature of the NFT market. The value of NFTs can fluctuate dramatically over short periods, influenced by factors such as market demand, trends, celebrity endorsements, and broader economic conditions. Unlike traditional assets, NFTs lack historical performance data, making it challenging to predict future value. Additionally, the NFT market is relatively new and unregulated, which can lead to increased susceptibility to market manipulation, fraud, and other illicit activities. Investors should be aware that the value of their NFT investments could decrease substantially or become illiquid, resulting in potential financial loss.
The tokens are at least going cheep, and are currently trading at $0.0103, according to Coingecko, a dive of 63 per cent from the level they hatched at in December 2024.
And that’s before we get to the NFTs. The eagle-eyed among you will have spotted that the whole point of NFTs is that they are non-fungible. To date ETFs, whether they hold stocks, bonds, derivative contracts or even cryptocurrencies, have always held fungible assets — shares in Apple, tranches of a given bond and even bitcoin are fully interchangeable.
Bringing in NFTs changes this equation. Each of the 8,888 Pudgy Penguin NFTs has a combination of different traits, including colour, facial expression, accessories and backgrounds. Indeed, it is this very uniqueness that gives NFTs “value” — at least to those who do not believe this value is approximately zero.
Quite how this would work in a fund structure famed for daily liquidity, constantly updated net asset value, and generally minuscule premiums and discounts to NAV due to the arbitrage model facilitated by authorised participants, is somewhat unclear.
To be fair, holders of Pudgy Penguin NFTs have thus far had a profitable, if wild ride, at least if they had hopped on board at inception.
The NFTs were minted at 0.03 ether in 2021. The floor price — the lowest price at which any of the collection trades — hit 21.68 ether in February 2024, a not to be sniffed at rise of 72,167 per cent. That took the market cap to within a feather of $500mn. The floor price has since dived to around 9.4 ether, or $23,300.
A push to extend the reach of ETFs into the realm of NFTs was perhaps inevitable, even under a less supine SEC.
Issuers have filed dozens of applications for ETFs that would hold cryptocurrencies other than bitcoin and ether, such as solana, XRP and cardano. Basket products holding a range of currencies are also in the offing.
Upping the ante further, in January, three asset managers filed to launch ETFs that would hold memecoins — lacking even the use cases usually ascribed to more “traditional” cryptocurrencies — linked to Donald Trump and Elon Musk.
However, even in this day and age it’s unclear whether the Pengu ETF will ever actually happen. Canary Capital may have managed to make a filing, but that’s a low hurdle to clear. Many advocates for the ETF brand will hope it has as much chance of getting off the ground as everyone’s favourite Antarctic avians.
Further reading:
— SEC commissioner Crenshaw rips the agency’s ‘regulatory Jenga’ (FTAV)
— Bonfire of the NFTs (FTAV)
