Since NBA Top Shots and artist Beeple’s digital collage that sold from Christie's for $69 million this year, the NFT investing craze has only gotten hotter.

Artists from Snoop Dog to singer-songwriter Grimes and rock band Kings of Leon made huge profits minting these unique digital collectibles. Even big brands like Budweiser, Coca-Cola, Dolce & Gabbana, Taco Bell, and Nike are now tinkering with the technology. Soon, Twitter will even grant special badges of authentication to users who want to flaunt NFTs as profile pictures.

One telling sign that NFTs are more than just a fad is the accelerating pace venture capitalists are backing companies in crypto gaming, betting that NFTs and other digital assets can redefine how and why we play video games.

On Wednesday the crypto gaming investor and publisher Animoca Brands raised $65 million at a $2.2 billion valuation from backers like Ubisoft. On Oct. 19, Galaxy Digital Holdings, whose CEO is Michael Novogratz, announced an additional $325 million raise with a significant portion of funds – like Animoca – going to crypto gaming businesses.

Galaxy partner Sam Englebardt told Yahoo Finance the shift to crypto games has been tossed around for years, but 2021's NFT boom – along with breakout gaming successes like Axie Infinity – are accelerating the pace of investments.

VC investment in crypto gaming in October surges

Crypto or blockchain gaming is a niche segment that implements NFTs and other digital assets at some level of gameplay. It could be creating digital collectibles or building more robust in-game economies, features that enhance how players and the games themselves progress.

The worldwide video game industry is valued at roughly $175 billion, getting a big boost from more time spent at home during the pandemic. It's also the largest and fastest-growing form of media in the world, according to Newzoo. A similar narrative is playing out in the crypto sector. In the last quarter, user growth and engagement in crypto-related gaming projects has exceeded other NFT and DeFi applications, according to analytics platform DappRadar.

Blockchain gaming investments were valued at $476 million for the first half of 2021; investments in October alone are double that number.

Currently, the most common business strategy explored by larger video game publishers is selling collectible NFTs using legacy brand value. For example, Animoca Brands is now giving diehard fans the chance to trade and collect Atari games as digital boxes.

Digital boxes may not sound revolutionary, but Piers Kicks, senior associate at gaming and esports VC firm BitKraft, anticipates many gaming publishers will follow the trend.

This month BitKraft, with $540 million assets under management, opened its own fund to invest $75 million in NFTs and other tokens for gaming projects. Like Animoca Brands and Galaxy Digital, BitKraft's investments show how much further ahead venture firms are thinking about crypto gaming, while larger game studios and publishers are still deciding whether to dip their toes into the space.

These funds are thinking of how the futuristic "metaverse" will play out and whether it's content or intellectual property, they're betting video games take a leading role.

"The stuff that really excites me is a lot more crypto native, things that are built from the ground up rather than bolting on NFT strategies to [existing] games," Kicks said.

A leading indicator

As Kicks and Galaxy's Englebardt pointed out, the bellwether for built-from-the-ground-up crypto gaming came earlier this year in the form of the Sky Mavis game, Axie Infinity. Axie Infinity is a “play-to-earn” (P2E) mobile game likened to the Pokemon franchise. In it players can battle, breed and trade digital monsters also called Axie. Thanks to the success of Axie Infinity, Sky Mavis raised an additional $152 million in a series B funding round led by Andreessen Horowitz (a16z), the same week Kicks' BitKraft launched its fund.

Axie's user growth over the last year is staggering. Since its inception, the game has generated more than $2.4 billion in total transaction volume, making it the most valuable NFT collection to date. For one week in July, the game raked in more revenue at the protocol level than bitcoin, ethereum and most of the top-ranking DeFi projects. In August, it boasted an average 1.8 million active daily users, at one point reaching $33 million in daily transactions.

"It'd be impossible – unless you're living under a rock – to not look at [Axie Infinity], take it very seriously and try to figure out what's going on," said Englebardt explaining how Axie has become one barometer crypto gaming investors use to gauge the space.

It's worth pointing out that the core of gameplay in Axie Infinity depends on players owning and trading in-game assets. It's a near-revolutionary break from how traditional mobile games work. Everything in Axie Infinity, from money and land to items and creatures, carries real-world value that can be exchanged into cryptocurrencies like Ethereum (ETH-USD) and local currencies like the Philippine peso. Players can earn yield on these assets. While their value fluctuates sometimes as dramatically as bitcoin (BTC-USD), a July study by Coingecko showed that Axie players can at times earn more than the hourly U.S. federal minimum wage from gameplay.

"If nothing else, what blockchain enables is the greatest, most viral, cost efficient form of user acquisition, and we see it again and again," Englebardt explained, citing bitcoin as the most successful example.

On the fence

Not all video game publishers are sold on crypto gaming. In response to the gaming platform Steam's decision last week to ban all games that feature crypto or NFTs, Fortnite creator Epic Games is opening its Game Store to the niche intersection so long as they follow the rules.

Epic CEO Tim Sweeney has also expressed mixed opinions, saying the space is "currently tangled up with intractable scams," in addition to having "interesting decentralized tech foundations."

For more context on how major publishers could be thinking about crypto gaming, Yahoo Finance reached out to Amy Wu of Lightspeed Partners, a venture firm that backs Epic Games, 1047 Games and others in crypto, gaming or both.

Wu said larger game publishers put much more at risk by diving into the blockchain compared with small independent studios, especially those that are already crypto enthusiasts. "Every major gaming publisher is at the least NFT-curious and some soon to announce major partnerships," said Wu.

She classified a major gaming company's willingness to hop on a blockchain into three main buckets: cosmetic NFT drop in-game, potentially with brands (Atari); items as NFTs, traded on an open or closed exchange; full play-to-earn + tokenized in-game currencies (Axie Infinity).

"The revenue upside and deeper player engagement is attractive. Implemented poorly, however, and a publisher could frustrate massive existing player bases," said Wu.

While game developers going deep into crypto gaming could deepen revenue streams and player engagement, "there could be irreversible consequences" if something goes wrong, according to Wu. In essence, the mistakes, hacks and inherent volatility in crypto could more directly impact video gaming.

"The real challenge though is compliance," said Wu. "Not all publishers are thinking about this yet. Allowing a player to withdraw money from a game runs into gambling laws in many markets. Also there are only a couple blockchain partners, FTX being one of them, who can enable launching NFTs, compliant in over 100 jurisdictions that a game publisher will need."

The current approach for how countries want to regulate the crypto sector might be enough to hold back many gaming publishers from, at least publicly, announcing the development of a game like Axie Infinity this year. Still, that makes the present moment the perfect time for VCs to place their bets.

David Hollerith is a senior reporter covering the cryptocurrency and stock markets. You can follow him @DsHollers.