Tired of the endless hours you spend researching your stock investments? P/E ratios got you down? Try a Special Purpose Acquisition Companies (SPAC) on for size! Famous billionaires like Sir Richard Branson are involved with these—and it has nothing to do with the fact he has more money than you. Just find a SPAC, write a check, and the sponsor will go out and find a company to acquire—maybe even two or three! If it works out, you’ll be on the ground floor of a new IPO that will surely make millions.
Is that a little too reminiscent of a Ponzi scheme? Don’t like the idea that the investment has no fundamentals like earnings, profits, or an actual company with operations? Maybe you’d be interested in owning a fine piece of art.
With this Non-Fungible Token (NFT), you could own an adorable cat GIF. It’s sure to be the next viral meme, and others will want to own it too. Hold out long enough, and someone will probably pay you hundreds of thousands for the ownership rights. But you have to transact in bitcoin so the whole transaction can be recorded on the blockchain. That way, we know it is legitimately yours.
Satire aside, SPACs and NFTs are getting a lot of attention in the “alternative asset class” world. The scarcity of these investments makes them seem like you’d be missing out if you didn’t buy the right now and preys on your fear of missing out. Add in a celebrity “endorsement” like Branson or NFL player Rob Gronkowski who launched his own NFT collection, and they’re tapping into your greed.
The other impetus driving these speculative investments is the flush of money in the economy. Central banks have flooded consumers with cash while trying to prevent an economic meltdown because of the pandemic. People feel good with their financial situation and end up taking unnecessary financial risks.
SPACs have been around for decades but have gained popularity since 2019. Known as “blank check” companies, the goal is to raise money through an initial public offering, placing the money in a trust account. The SPAC will attempt to acquire smaller companies in a specific industry. If successful, the SPAC is then often listed on a major exchange. However, as an investor, you generally have no idea what companies are being targeted for acquisition. The SPAC sponsor may offer a vague description like “electric air taxi companies.” The vagueness eliminates extensive disclosures and sometimes scrutiny from the Securities and Exchange Commission.
NFTs combine the collectibles market and blockchain technologies making a market for things that were untradeable, like a tweet or a GIF. The NFT isn’t the item itself—it’s similar to a deed that represents ownership. Because the NFT is tied to the blockchain, there is a permanent record of ownership and uniqueness. Like other collectibles, the tweet or GIF is only worth what someone else is willing to pay for it. Maybe it is digital art by famous street artist Bansky, and the value will continue to rise. On the other hand, maybe it’s just another image of a cat sitting on a laptop.
In my opinion, an investment is something that provides a stream of future cash flow. It’s backed by earnings, profits, and usually a business that manufactures a product or provides a service. If you don’t know how your investment is making money, you are probably not the person who is benefitting from the “investment.” While SPACs and NFTs are intriguing, I don’t believe they should be used to build long-term wealth.