NFT in simple words
It seems like everybody is talking about NFTs lately. Maybe you have seen one of these headlines lately in news.
Nyan Cat Sold For $590,000
Punk 6965 Sold For $1.54M
Collage of 5000 Pieces of Beeple's Work Sold For $69M
After seeing the above digital items and how much there were sold for, you might rightfully ask:
“Who in their right mind would pay for such items when they can easily be copied or redistributed?”
We try to answer this question to some extent; nobody can answer it 100% correctly because the majority of people are speculating about NFT and its potential in the future. And there are also a lot of things we have not figured out about the copyright, taxation, and general legal issues regarding NFTs.
But before that, we need to know which group of folks might be interested in NFTs.
- Artists: They are looking at NFTs as a way to generate new streams of income
- Speculators: They fall in love with any buzzword they hear and just throw money at it, just not to miss the latest train of opportunity (even if it takes them to doom)
- Investors: They are looking at this space and trying to figure out scalable ways to benefit from it in the long run
- Celebrities: They are having fun/experimenting with NFTs and selling them not because of their intrinsic value, but because their name and brand image is attached to it
- Skeptics: They are not rich, celebrity, or an artist and also not foolish enough to jump into a new hype without understanding it
We will reference these groups of folks when diving a bit deeper into the valuation analysis of NFTs.
Basically, we are going to answer few basic questions here:
- What the heck is even an NFT?
- Does NFT have a value and future?
- If yes, how should you invest in it?
Let’s start with the first question.
What the heck is even an NFT?
The simple answer goes something like this:
NFT is a digital item that you can own that technically cannot be replaced by another digital item. Just imagine having a digital Mona Lisa painting that was made by the original artist; only you own it and nobody else can claim that they own the original digital painting.
That was a very simplistic answer. we need to go into more (technical) details to understand it better. Here is the more technical and in-depth definition:
NFT stand for “Non-Fungible Token”. It is “Non-Fungible” because it cannot be replaced by another token. If somebody takes one of your dollar bills and gives you another one, you don’t care about that because the new dollar can be replaced by the old on which makes it "Fungible")
But if somebody takes your collector dollar bill which was issued back in 1862, you will be screaming your lungs out if all they have left you is a recently issued dollar bill. This is because a unique item tends to be more valuable than something that is commonly available (only if people give it value. this is a big IF)
And it is also a “Token” that is located on a blockchain network like Ethereum and is initiated by a smart contract using the blockchain. This is the key part that makes NFTs appealing because, for the first time, a digital asset can be issued by a transparent and irreversible certificate that shows its history, owner, and properties. This digital asset can be anything from a digital painting (even the ugly ones that we drew in the Paint software 🙈), music, image, video, domain name, social media content, you name it. The opportunities to make NFTs are endless, expensive, and currently not so good for the environment (due to the high amounts of energy needed to fuel the blockchain as the underlying technology)
Now one thing we need to remember is that owning a unique digital item through the NFT does not mean that other people cannot use or reproduce it. Things are very easy to copy and reproduced digitally. For example, if you buy an NFT digital music file, you will not have the copyright of that music, and millions of other people can listen to it and also own it. But technically and on paper (or in better words as part of the smart contract that is stored on the blockchain), your name will appear next to the artist as well. So, on the blockchain level, your ownership to that particular asset is verifiable and not removable.
You might ask: “Who cares about that?”
That is a valid question. I guess we are in the process of finding that out, but in simple words, it will be valuable if enough people consider it as valuable (that is the case for a lot of other assets as well).
Let’s go into more details on this.
Does NFT have a value and future?
At this point, nobody knows.
NFT seems to have good potentials and benefits for certain groups of people, but it is not certain if it will extend its value for a lot of people (like the Internet did).
Just compare NFT to the Internet. If the Internet was bound to remain a closed network only available to governments and institutions, the impact and value of companies like Amazon and Google would have been much less or diminished. But the Internet became mainstream and the value of companies like Amazon and Google skyrocketed.
But even with that scenario, we had A LOT of failed companies and startups who just wanted to get a seat on this INTERNET thing. So every new technology is bound to have a lot of losers, even in the case they became widely accepted. The same scenario is happening now when a lot of people want to become involved in new technology in order not to miss out on the benefits.
As a plausible scenario, NFT's success will be highly dependent on how the crypto and blockchain sector will turn out. Some questions to consider:
Will we have a stable and widely accepted digital currency that boosts the value of similar sectors such as NFT?
Can NFT maintain its value and relevancy even if the majority of cryptocurrencies fail?
Do people value the uniqueness that comes with the NFTs the same as other valuable physical collectibles?
These are just very basic questions about NFTs that the world will try to find answers for in the coming years. But until we figure out what is going on, you need to be extra careful when it comes to investing in NFTs (I will not to try to give you any advice until the very end of this blog while giving you some context on that advice also, so you can make your own decision).
People have different benefits and skin in the game of NFT and it pays off to be aware of that. Let’s get back to define the value of NFTs based on some general categories of folks.
Artists: Artists will have every strong reason to be excited about this new technology. Imagine somebody making very high-quality music that a lot of people enjoy, but never has a chance to properly monetize it. The labels or social media platforms will benefit from their work mostly because they have the platform and the artist does not have any leverage. But if the technology like NFT has a built-in feature that allows artists not only to sell digital assets but also get royalties based on future resells, then that would be appealing to any artist for sure.
Speculators: The loudest folks about NFT and its future. They can be educated or non-educated about NFTs and the technology behind it, but what they have in common is a gambling strategy, whether they like it or not. Gambling can be fine as long as you know what you are doing; so don’t get surprised if you use a large amount of your savings to buy a trendy NFT and seeing its value going to zero in few years (or go up, who knows. it is still gambling).
I personally believe that the effects of the "pandemic" and the "historically low-interest rates" are motivating a lot of people to look for alternative investments like NFT. And also add the sudden increase of value in Bitcoin in the past year and you can easily see the motivation for speculators not wanting to miss out on another great investment like Bitcoin (which has its fair share of speculators also).
Investors: Also known as whales; they are making the biggest moves behind the scenes in the NFT scene. They have access to a lot of cash which might be sitting still in the aftermath of a pandemic, so it is only logical for them to invest portions of it in new areas where it could have a good future.
Winklevoss twins have recently invested in Nifty Gateway which is a platform that sells unique NFT items. Mark Cuban has also invested in a number of blockchain-related startups including Mintable App which serves as a digital items marketplace for selling blockchain items. Also, we have the tech visionary Peter Thiel who has invested in NFT marketplace OpenSea through his Founders Fund VC.
Each of these investors is highly appraised for their past achievements and their advice should be heard, but we have to remember that sometimes their message can be a marketing push for the companies they own. There is a certain type of investors who benefit a lot from any hype in the crypto or NFT sectors, as they have a direct benefit in all the transactions that are happening, either through their marketplaces or brokers. Just remember the saying that:
During the gold rush, don't mine the gold. just sell picks and shovels
Something to keep in mind about plausible motivations of some folks out there.
Celebrities: I don’t have much to say about this group. There could be a mix of good and bad influencers or celebrities who want to sell you something; which in this case is a digital item in the form of NFT. When a celebrity is selling an NFT (usually at a high price), they are merely attaching their name or brand to it; so you are buying their name or brand more than the underlying NFT asset.
As I said, there is nothing wrong with this approach if done correctly. There are celebrities who are experimenting with the idea of NFT by selling NFTs or just having fun with it, or in good scenarios, they are selling these NFTs to raise awareness about a cause or a charity. As an investor, just be aware of their approach and advice when it comes to NFTs.
Skeptics: And we finally get to skeptics. I am also an NFT skeptic myself because I am still not sure about its exact role in the future and how it can be integrated into the economy or our digital lives. As a skeptic, I will try to get educated on trustworthy analysis on this sector and also follow advice from reputable people, considering that I place them in the right category that we discussed above.
When it comes to investing in NFTs as an alternative way of investing, I will only be able to highlight it from a skeptic perspective. If my position on this will change in the future, I will make sure to write about it more in detail and publish it as a new piece. But if you are also an NFT skeptic and neither a millionaire nor a celebrity, then read my advice for how to invest in NFTs and then make a decision based on your situation.
How should you invest in NFT?
- It might sound cliche, but only invest the amount you can lose. Don’t borrow money from people, banks, or against your home to buy a digital NFT that might go up in value in the future. Remember NFTs are not completely figured out yet, so don’t gamble on your future with such an uncertain asset; only invest what you can afford to lose.
- Look at investing in NFTs as a way to support your favorite artist or favorite personality. If you know a very young artist or sports player that might have a bright future, invest in their work (could be a piece of music, an image, or a digital card) as a way to encourage them. If you ended up buying an NFT from these rising talents and they went up the ranks and became famous one day; you will be able to sell that NFT for multiples that would benefit you both. Consider checking Rarible to check out some of these NFTs made by younger or less famous artists (and usually much less expensive than NFTs from more famous people)
- Only consider buying NFTs within niches you understand. This is essential because you need to understand an industry or an asset before investing in it. If you have no clue about Basketball, then don’t buy a Basketball digital card NFT. If you have no taste for music, don’t consider buying an NFT with a music theme. If you invest in NFTs that you enjoy and understand, then even if they don’t go up in value you will not have a lot of regrets (because you like and appreciate the theme of the NFT)
- And finally and for a less exciting strategy (but much more practical one), consider investing in the technology that had enabled NFTs, which is blockchain. Blockchain seems a very promising field that not only enabled NFTs and digital currencies such as Bitcoin and Ethereum possible but many other applications within voting, healthcare, manufacturing, etc. that could forever change how we distribute and validate the information. By investing in blockchain, you can be sure to get an upside of the profit if any of its related innovations such as NFT will take off. Consider buying a diversified blockchain ETF which I discussed in detail in this blog post here.
For more, watch my recent YouTube video.
This article is for informational and entertainment purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.