In August 2024, FT Alphaville suggested that the introduction of a leveraged single-stock ETF based on MicroStrategy’s shares marked a pivotal point for the ETF sector.
Looking back, we realize how overly optimistic we were.
With Paul Atkins now leading the SEC, the primary regulatory body in the U.S. is set to “embrace and champion” innovation, which indicates a fresh invitation for the crypto sector to expand freely once again.
This has inevitably led to peculiar financial products like the following:
A firm named “Canary Capital” — not one we were familiar with either — has become the first asset manager to seek approval from the SEC for an ETF that would include non-fungible tokens (NFTs).
The proposed ETF intends to allocate 80-95 percent of its investments in a token called Pengu, which is supposedly the “official token of the Pudgy Penguin project.” The remaining 5-15 percent will be committed to Pudgy Penguin NFTs, along with a mix of solana and ether.
It’s somewhat indicative of current trends that those latter cryptocurrencies — with only ether having received SEC clearance for ETF holdings — are viewed as relatively stable assets compared to the proposed penguin-themed investments.
The filing also acknowledges:
PENGU is a novel SPL token on the Solana Network. In comparison to other digital currencies like bitcoin, ETH, and SOL, PENGU has limited uses beyond being a collectible item.
There is no guarantee that the usage of PENGU will increase. If the demand or acceptance of PENGU diminishes, it could lead to greater price fluctuations or a fall in its value, negatively affecting the Share value. Newly released PENGU from escrow may lower its price, which could be detrimental to Share investments. PENGU trading markets are still developing, with prices showing high volatility, which might result in significant financial losses for shareholders.
PENGU trading platforms are largely unregulated or may not fully comply with current rules, increasing the risk of fraud and security issues compared to well-established financial exchanges. Disruptions in PENGU trading could impact the availability of PENGU for creating and redeeming Trust shares, and the loss or compromise of crucial “private keys” could hinder Trust access to its PENGU assets.
Investing in Pudgy Penguins carries risks typical of NFT investments. The NFT market is known for its high volatility and speculative nature, with values often shifting dramatically due to market demand, trends, celebrity involvement, and economic conditions. Unlike conventional assets, NFTs lack historical performance metrics, making future valuations uncertain. Moreover, the NFT market is relatively unregulated, heightening vulnerability to manipulation and fraud. Investors must recognize that the value of their NFT holdings could significantly drop or become untouchable, leading to potential financial losses.
Currently, the tokens are trading low at $0.0103, reflecting a 63 percent drop from their launch price in December 2024.
And that’s just the beginning with the NFTs. Some of you might note that NFTs are meant to be non-fungible. Historically, ETFs, which include stocks, bonds, derivative contracts, or even cryptocurrencies, have only contained fungible assets—meaning any share of Apple, a tranche of bonds, or even bitcoin can be swapped seamlessly.
Integrating NFTs complicates this model. Each of the 8,888 Pudgy Penguin NFTs features distinct traits like color, expression, accessories, and backgrounds. This uniqueness is what supposedly gives NFTs their “value”—at least to those who don’t think that value approaches zero.
How this would function in a mutual fund structure that is characterized by daily liquidity, regularly updated net asset values, and minimal price discrepancies due to the arbitrage opportunities posed by authorized participants is quite perplexing.
On a positive note, those who currently own Pudgy Penguin NFTs have experienced a lucrative, albeit tumultuous, journey, provided they invested when the project launched.
Initially minted at 0.03 ether in 2021, the floor price—the minimum trading price for any collection item—peaked at 21.68 ether in February 2024, marking an astonishing increase of 72,167 percent. This brought the market cap close to $500 million. However, the floor price has recently plummeted to around 9.4 ether, equivalent to $23,300.
The move to expand ETF offerings to include NFTs seemed inevitable, even with a less lenient SEC.
Many issuers have submitted numerous applications for ETFs that would encompass cryptocurrencies other than bitcoin and ether, like solana, XRP, and cardano. There are also plans for basket products featuring a mix of different currencies.
To raise stakes even higher, in January, three asset managers sought authorization for ETFs that would involve memecoins, which typically lack the utility found in more conventional cryptocurrencies and are associated with figures like Donald Trump and Elon Musk.
Nevertheless, whether the Pingu ETF will come to fruition remains uncertain. Canary Capital may have succeeded in filing its proposal, but simply submitting an application is a low barrier. Many supporters of the ETF model may wish for its success, much like hoping our beloved Antarctic birds take flight.
Further reading:
— SEC commissioner Crenshaw discusses the agency’s tangled regulations (FTAV)
— NFT market crash insights (FTAV)
