What exactly is the tokenization of sports?
Well, forget the sports industry for a moment, and let’s instead focus on the asset tokenization part of the question.
“Blockchain tokenization is the process of issuing blockchain-based tokens that represent a right, which can be the owner of real-world or intangible assets. These tokens may represent partial or complete ownership of the asset that can often be easily transferred from one person to another and used on different services,” says James Sangalli, the co-founder of AlphaWallet.
“These tokens can represent practically any right, including the ownership of previously indivisible assets like real estate, patents, works of art, contracts, and more, the process of tokenization unlocks previously illiquid assets and converts them into tokens that can be bought, traded, sold or used by anybody without intermediaries, which highly reduces the market friction and allows limitless integration through tokens.”
So, in a nutshell, tokenized assets make the trading of assets, and other things of value, far more efficient.
Why Buy Tokenized Assets?
In March, I discussed three reasons for investors to consider tokenized assets:
The democratization of investing: This would allow investors to buy assets anywhere in the world, at any time, in any amount like fractional shares of today. If I wanted to buy $50 in a stock that trades on the Nairobi Stock Exchange, I theoretically could without a third-party intermediary. Of course, we’re a long way from that model, but it’s certainly more than possible.
Once-in-a-lifetime opportunities: Tokenization would allow assets and other things of value to be purchased more efficiently. No longer will one person or company buy an asset. Instead, the ownership can be divided into as many pieces as demand dictates.
Further, those tokens could be resold at any time in the future. So, a company might control a business by holding a majority of the tokens. Still, if you owned a token in this business, you could turn around and sell it without involving a middleman like a brokerage house.
Common sense investing: Investors could use tokenized assets to sell revenue streams within a company. So, I could buy more than a piece of the company. I could also buy a portion of the company’s various revenue streams and divisions. And, the company will keep control of the overall business.
Sports shows where all of this is heading, and that’s great news for the flow of capital. Here’s why.
Early Days in the Tokenization of Sports
Brooklyn Nets guard Spencer Dinwiddie recently tried to tokenize a portion of his contract by selling 90 shares at $150,000 each. This sale represented $13.5 million of his $34 million, three-year contract. The plan provides Dinwiddie the $13.5 million immediately. Investors get 2.5% interest annually over three years and the principal repaid on maturity.
A good plan in theory. However, investors only bought eight of the 90 shares, raising just $1.3 million or 10% of the original goal.
In the months and years ahead, one area of sports that can benefit from tokenization is college athletics. Top athletes, while still in high school, might sell tokens representing a portion of their future income from pro contracts, advertising and marketing sponsorships, branding, etc.
The athlete and his family would receive a lump sum upfront in return for giving up a percentage of future income secured by tokenized assets.
Ownership of Teams
David Otto, president and co-founder of CounterPointe Sports Group, recently discussed the issue in the context of the NBA owners holding minority positions in league teams. CounterPointe was formed in 2019 to innovate how professional sports teams are owned and financed through the blockchain.
“Currently, the team ownership model in many professional sports franchises is highly centralized, illiquid, and the province of a select few with the capital and net worth necessary to acquire some or all of a team,” Otto writes.
“This model – as the NBA is currently experiencing – is inefficient, cost-prohibitive, and economically punitive to sellers, particularly with respect to the sale of minority interests.”
Otto also discusses the benefits of tokenizing team ownership, both in terms of economics, team governance, and even fan engagement.
Fan Engagement Would Increase
I’ve often wondered why publicly traded companies don’t own more sports teams.
In part, it has to do with archaic league rules. And, of course, some believe sports investments don’t make suitable public investments because revenue streams ebb and flow on team success.
For example, Madison Square Garden Sports (NYSE:MSGS) has a three-year annualized total return of -0.96%. It’s no surprise, then, that the New York Knicks and New York saw little success on the court and ice over this period.
However, what f James Dolan, whose family controls 71% of Madison Square Garden Sports’ votes, was able to sell some of those votes to fans through a security token offering while retaining control of the organization. My guess is the teams would get better in a hurry. Engaged fans with a vested interest in outcomes tend to voice their opinions more readily.
Level the Playing Field
As Otto states, “Tokenization also represents a sustainable model for broadening economic access to and increasing levels of fan engagement in professional sports franchises.”
The ownership of sports teams ought to be more broadly owned, genuinely reflecting the fan base at large. Tokenization will help us get there much faster.
Tokenization will truly level the playing field.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.