After GameSquare just spent $5.15 million on a CryptoPunk, the crypto-sphere is jacked. Preferred stock and a “Cowboy Ape” hook you right away. With Robert Leshner in the mix, this scenario comes straight out of a cyberpunk novel. Is this a smart stroke of genius that will further GameSquare’s future in the metaverse? Or is it a reckless gamble that will blow up in their face in the near future? Let's cut through the hype.

Iconic Asset or Speculative Bubble?

The justification for the purchase rests on the assertion that the CryptoPunk is a “culturally iconic asset.” Okay, I get it. They're early NFTs. They have a certain cachet. Let us not conflate cultural importance with intrinsic worth. Remember Beanie Babies? They were a cultural phenomenon, too. Where are they now? Retirement saving. Then why are these things sitting in attic collecting dust and not making the 6-10% annualized returns?

GameSquare is gambling that this specific digital artwork will appreciate over time and crucially provide a stream of revenue in the process. In the process they’re learning marketing, community building, and licensing opportunities. Besides these very basic examples, who is going to license a CryptoPunk? For what? A limited-edition t-shirt? A fleeting cameo in a metaverse ad? The scale of the anticipated revenue streams would need to be massive. They’d have to be a lot more tangible than what’s been publicly discussed so far to merit a $5M cost.

This is starting to sound a lot like purchasing that classic, muscle car. Sure, it's cool. It might even appreciate in value. But it comes with high maintenance, high insurance and a dedicated garage. If the market for vintage autos collapses tomorrow, you’ve got an oversized paperweight.

I'm reminded of the dot-com boom. At that time, companies were dumping money into everything with a “.com” in its title. They were agnostic on the business model and on the long-term prospects. Could this CryptoPunk acquisition be another instance of FOMO leading to more irrational purchase behavior?

The Yield Strategy: Realistic or Wishful?

GameSquare has targeted a 6-10% annualized return on this NFT. That's a bold claim. How are they planning to achieve this? The joint press release states that 1OF1 AG, run by Ryan Zurrer, will serve as the fund’s NFT yield strategy manager. Okay, so they’ve outsourced the challenge. It doesn’t address the fundamental question: where is this yield coming from?

Consider this: a traditional investment yielding 6-10% requires significant underlying assets and a proven revenue model. What other underlying assets does a CryptoPunk have apart from its pixelated image? And how do you extract value from this digital token — which proven, tested revenue model exists?

The only reasonable assumption here is that they’re hoping to flip the CryptoPunk for a quick profit. Buy low, sell high. But that's speculation, not investment. It’s a dangerous strategy to pursue in such a volatile, cutthroat market.

Let's also consider the opportunity cost. That $5.15 million does not have to go to prizes, it could be spent creating new games, or acquiring promising esports teams, or amplifying their media network. These are all activities that fit firmly into the high-profile wheelhouse of GameSquare’s core business and with a far-sharper trajectory to profitability at that.

Concentration Risk and the Crypto Treasury

Now GameSquare has $250 million authorization for its crypto treasury management strategy, including $52 million in ETH. Allocating over 2% of the entire authorized crypto treasury and approximately 10% of current ETH holdings to a single NFT is a significant concentration risk.

What happens if the NFT market crashes? What if CryptoPunks lose their appeal? What happens when the superior NFT public goods project comes along and snipes their initiative? GameSquare’s balance sheet just went from looking quite healthy to severely underwater.

Moreover, the acquisition was financed with preferred stock, which is convertible into common stock at $1.50 per share. This is essentially diluting existing shareholders. Robert Leshner as an investor, but with what implications for the other investors in GameSquare.

It's one thing to diversify into crypto. It’s quite another to completely bet the farm on one, very costly, digital solution.

This takes me back to the very early days of venture capital. Other firms took risky gambles on one, untested startups. Sometimes it paid off. More often, it didn't. Risk cannot be eliminated, but rather it must be better and more proactively managed. As always, though, diversification, due diligence, and a healthy dose of skepticism are important.

So, was GameSquare’s CryptoPunk purchase a stroke of genius or a foolish bet?

The truth, I imagine, may be found somewhere in between. It’s a high-risk play, but it could prove incredibly lucrative if the NFT market keeps surging. This tact seems almost guaranteed to land GameSquare deep in the penitentiary. If the market goes south, the damage could be extensive. It's a bet on the future of digital identity and decentralized ownership, but it's a bet on the continued hype surrounding NFTs.

Whether this was a move of genius or a dangerous folly will only be determined in the fullness of time. For now, I remain cautiously skeptical. I’ll be watching closely to see what GameSquare does next to deliver the yields they’ve guaranteed to provide. This CryptoPunk will either become a great asset, or it will collect digital cobwebs. Perhaps they ought to have consulted the Beanie Baby mavens on best practices before proceeding.