Chances are you’ve been seeing the term NFT popping up in headlines all over the place. But what are NFTs? NFT is the abbreviation for non-fungible token. NFTs are a type of cryptographic asset that are verified using blockchain technology. Huh? WTH does that mean?
If you a creator and an investor, NFTs could be the right up your alley with the alternatives portion of your portfolio. Let’s dive in.
What are NFTs?
When I first heard about NFTs, I didn’t know what the hell people were talking about. Now, I understand what they are, but I still find this new asset class incredibly bizarre. This is mostly due to the insane amounts of money people are throwing into them. More on that below.
First, let me help you better understand what a non-fungible token is.
Simplest Definition Of A Non-Fungible Token
The simplest definition of an NFT is an original, one-of-a-kind asset that can be digitally authenticated using technology. The type of technology that is used to verify an NFT’s authenticity is blockchain. Blockchain is encrypted and includes information such as who sold the NFT, who bought it, and when it was sold.
NFTs are cryptocurrencies. But unlike Bitcoin, which is a fungible cryptocurrency, NFTs are all unique. Because a non-fungible token is unique and can be digitally authenticated, this creates scarcity and helps increase its value.
Wait, step back a minute. Need a refresher on blockchain? Here’s my oversimplified stab at it. Blockchain is a type of database technology. Data is grouped together into clusters: the blocks. Each block has a storage capacity. Once a block is full of data, another block is created and filled with new information.
These blocks of data are strung together chronologically like a chain, creating a timeline of data. In other words, blockchain is a chain of unique data blocks. When a block is full, the data inside is essentially frozen in time. One way to visualize blockchain is like a bunch of snapshots put into an album chronologically.
Regular Money Is Fungible. NFTs Are Not.
Another way to better understand what NFTs is to understand what they are not. The opposite of an NFT is a fungible asset. Take everyday money as a classic example. Let’s say you have 2 bucks in change in your piggy bank.
You might have 20 dimes, 8 quarters, or 2 silver dollars. Instead of carrying heavy coins around, you can exchange them at a bank for two crips one-dollar bills. Or you could even ask for a two-dollar bill instead. You can continually substitute or exchange various coins or bills to represent your $2.
Regular currency is fungible because you can hold it in different forms that represent the same value.
On the other hand, NFTs are not fungible. Hence, the name non-fungible token. Each NFT is unique and can’t be easily substituted for something similar.
You can also think of a non-fungible token kind of like a famous painting. Let’s use The Starry Night by Vincent Van Gogh. The original is hanging in the Museum of Modern Art in New York City. It can’t be swapped out for a screen print or poster of The Starry Night. Even though they may look somewhat similar, the copies don’t hold anywhere near the same value. However, what’s different about The Starry Night and an NFT is you don’t actually get something physical to look at or hold with the latter. More on that down below.
A non-fungible token can also have its own set of unique and complex terms that can impact its value. For example, it could have terms such as the creator will get paid X amount of money upon each re-sale. Or, some NFTs can even mint other NFTs. The possibilities are practically endless, but terms can vary greatly from one NFT to the next.
When Did NFTs Start?
So who created the first non-fungible token? Matt Hall and John Watkinson, software developers at Larva Labs, are credited with creating the first NFTs in 2017. They created CryptoPunks, a wide range of ~10,000 digitized characters that have sold for millions. You can see a small sample set of them below. Funky.
NFTs also started to gain attention in 2017 when a digital collectible game called Cryptokitties became popular. Users could buy, trade, and collect unique digital cat collectibles. Sounds like something only 10 year olds would do, but to each his own. Anyway, each cat was an NFT.
My son approves of these and says they are very cute. Do I plan to buy him one? No. I’d much rather make our own fun, frugal toys of them that he can actually play with.
A Shift From Physical Collectibles To Digital Collectibles
After Cryptopunks and Cryptokitties got out, video games, sports memorabilia, and digital art started to follow suit creating their own non-fungible tokens.
NBA Top Shot is one of the most recognized in the sports NFT space so far. They’ve already sold over 7.6 million unique sports clips from NBA history. And, in just the first six months since their launch in October 2020, NBA Top Shot’s sales have quickly surpassed $338 million USD. They are also one of the few marketplaces that accepts USD making it easier for buyers who don’t own any cryptocurrency.
The shift from physical collectibles to digital collectibles is intriguing, but it’s not my thing. I’m not gonna lie – I love 80s memorabilia. But I collect it purely for fun, not as an investment.
Collecting baseball cards, Air Jordans, coins, Garbage Pail Kids cards, Strawberry Shortcake figurines, Beanie Babies, My Little Pony, and more were all the rage in the past. We couldn’t wait to get our hands on those things. That’s all we had back in the 80s growing up after all.
But now, the “art” of collecting is turning digital and NFTs are exploding.
Why Are NFT Sales Exploding Now?
Besides the euphoria around being able to collect unique assets digitally, let’s look at some of the reasons advocates claim for the sharp rise in NFTs.
- A growing desire by the crypto super-rich to diversify their bitcoin holdings while supporting the crypto ecosystem.
- Buyers wanting to directly support independent creators.
- Rise in bitcoin prices.
- Impact of the pandemic and the K-shaped economic recovery. Roughly 60% of people making six-figure salaries saved heavily in 2020.
- Distrust in the US dollar.
- Art has historically been bought by investors as a means to store value. NFTs are a modern approach to art investing.
- Pressure within the crypto community to buy and create NFTs from other members.
Proponents are comparing the boom of NFTs to the dawn of the internet. Take a look at the growth of NFTs in the last few years. But is it sustainable?
Here’s a look at how big of a surge crypto asset sales have made in just the last few months. Talk about a huge spike.
And here’s a look at the rising market cap of NFTs and the collectible tokens.
What Do You Actually Get When You Buy An NFT?
So with all this crypto lingo mumbo jumbo, what do you actually get when you buy an NFT? You can’t hold it, nor can you touch it. Can you even really see it or keep it all to yourself? Not really.
You’d think that if you spent millions on something, you could keep other people’s prying eyes away and no-one could figure out what your prize possession looked like. But that’s not how NFTs work. There are copies of NFTs all over the internet. They don’t have the same value as the actual NFT. But, anybody can see what Nyan Cat or Beeple’s Everydays looks like with a quick web search.
When you buy an NFT, you’re basically owning a bunch of metadata. And it’s not even stored on your own computer. So although you don’t have to worry about losing it if your laptop is stolen, the experience is very different from the traditional sense of collecting something tangible.
Most NFTs don’t transfer copyright to the buyer upon purchase either. Some platforms like NBA Top Shot also have strict terms that don’t allow commercial use of any NFTs purchased on their site.
In addition, some inexperienced sellers who are creating NFTs don’t actually own the rights to all of the content used in their creation. For example, a user who makes an NFT of his viral clip on TikTok probably doesn’t own the rights to the music embedded in that video. There’s a lot to consider from a legal standpoint.
Next, NFTs are basically stored somewhere out in cyberspace on a decentralized file system called the InterPlanetary File System (IPFS). I’d never even heard about any of this crazy stuff before I pulled together the research for this article.
So, if you’re old school like me and want to actually see and touch your collectibles, you don’t get any of that satisfaction with an NFT.
Examples Of Famous NFTs
Here are a couple examples of famous NFTs that have been grabbing headlines.
Beeple’s “Everydays — The First 5000 Days”
American digital artist, designer, and animator Michael Winkelmann (aka Beeple or Beeple Crap) sold a groundbreaking NFT through Christie’s auction house for $69.3 million USD. What’s so special about it?
Beeple, known for his satirical style and references to pop culture, posted a new digital picture online every single day for 13.5 years in a row starting back in 2007. Talk about being dedicated for the long haul. He compiled every one of his creations into a monumental digital collage and “minted” them into his NFT. This was Christie’s first purely digital artwork offered for sale.
You can view a copy of Beeple’s collage on Christie’s to get a taste at what all the fuss is about. Or just take a look at this small version below.
Back in 2011, maybe you came across the viral meme of Nyan cat. I didn’t, but apparently a lot of people did. What’s really interesting happened recently in February 2021, ten years later. The original creator of the Nyan cat gif animation decided to sell it at an online auction for 300,000 Ether.
Wait, wth is Ether? I had to look it up myself. Ether is a type of cryptocurrency on the platform Ethereum. Ether is the most active blockchain today and is second largest by market cap. Bitcoin has the largest market cap.
Anyway, the sale of Nyan cat was for an equivalent of ~$600,000 USD! Impressive for a little gray cat with a poptart body. Here’s a little clip of what he looks like.
The First-Ever Published Tweet
Jack Dorsey, Twitter CEO, auctioned off the very first tweet as a non-fungible token in March 2021. The final winning bid was for $2.9 million USD. Dorsey chose to donate the proceeds to the charity Give Directly Africa Fund.
Skepticism And Concerns About NFTs
It’s hard to believe that NFTs are really worth their hefty price tags when all it takes to view them is an internet connection. Here are some of the other most common concerns.
- Not all NFTs for sale verify the original seller is actually the original creator.
- Some critics don’t think that ownership alone makes an asset valuable.
- Even if a buyer owns an NFT, that can’t stop other people from viewing, sharing and making their own copies online.
- Cryptocurrencies are notorious for scammers. If you don’t really know what you’re doing, you could easily wind up paying for a fake or vastly overpaying for something with little to no value.
- Most NFTs do not transfer copyright to the buyer.
- There can be a lot of expensive hidden fees buried in fine print.
- Less than 1% of the world’s population have a crypto wallet.
- NFTs have a heavy environmental impact from carbon emissions. Blockchain technology creates enormous greenhouse-gas emissions. The emissions from creating an average NFT equates to about 500 miles of driving in a gas-powered car.
- This whole NFT rage could just be a digital bubble in the making.
The world of collectibles may be profitable for a dedicated few. But, collecting really is just fun and fleeting for most folks. I mean who still collects Beanie Babies anyway?
So if you’re going to buy an NFT, know what you’re getting into. Do it for fun if you like the concept and have money to burn. Or really buckle down and do some serious due diligence if you want to dive in as an investor.
In 2022, the NFT market is collapsing. You can get much better deals as a result. But even though the average NFT price is down 70% from their highs, prices can still go down another 70%. Beware!
How To Buy An NFT
If you’re not turned off by the critics, you’re probably curious to know how you can buy an NFT of your own. It’s not as easy as buying a vintage MOTU Heman on eBay, but it’s not rocket science either.
Here are the main steps that are typically required if you want to buy an NFT.
- Get a digital wallet such as MetaMask, which is a plugin for the Chrome browser. You’ll need a digital wallet that’s compatible with the marketplace you use in step 3.
- Fund your wallet with a cryptocurrency. Ether is a popular choice, but check what’s accepted at the marketplace of your choice. You can purchase cryptocurrencies through MetaMask or apps such as Coinbase.
- Browse a marketplace for NFTs such as OpenSea, NBA Top Shot, Valuables, Nifty Gateway, Mintable, and Rarible.
- Purchasing an NFT is similar to buying something at an auction house or on eBay. When you find something you want, place a bid. See what happens and aim to get a winning bid within your budget. Some NFTs are also available at set “Buy Now” prices if you don’t like auctions.
- Be ready to pay fees at checkout. Most NFT marketplaces charge a “gas” fee that is used to pay for the energy required to complete the transaction on the blockchain. You may also have to pay fees to convert currencies and closing costs. Read the fine print, preferably before you start bidding!
How To Make Your Own NFT And Sell It
If you’re a digital artist or want to take a shot at it, you can make your own NFT and sell it. Of course it helps to actually have talent and the ability to create something unique that people will actually want to buy.
Once you’ve finished your creation, you’ll need to follow similar steps to those above. Here’s a simple step-by-step guide.
- Get a digital wallet.
- Fund it with some cryptocurrency.
- Open an account with an NFT marketplace.
- Upload your creation to the marketplace.
- Input details such as the name of your creation, a description, price, and royalties.
- Connect your digital wallet.
- Pay a “gas” fee to complete the listing. And check carefully if there are additional service fees. They may be buried in fine print.
- Sit back, wait, and hope someone buys your very own NFT creation.
- If you successfully make a sale, the proceeds should transfer to your digital wallet. You can then use your earnings to buy something or cash out.
So there you have it. Now you know a bunch of stuff about non-fungible tokens. We covered what an NFT is and isn’t, how they started, why they’re booming, skeptics’ concerns, how to buy one, and how to create and sell an NFT of your own.
Invest In Real Assets Instead
Instead of buying NFTs for speculation, I would buy real assets that produce income and provide utility. The best real asset to own is real estate. It is one of the best ways to store value.
In an inflationary environment, real estate not only benefits from capturing higher rents, but also tends to appreciate in value. This combination is a tremendous wealth builder for real estate investors over the long term.
Not only do I recommend owning your primary residence so you can get neutral real estate and inflation, you should also invest in rental properties and private real estate opportunities.
My favorite real estate investing platform is Fundrise. With over $2.5 billion in assets under management and over 210,000 investors, Fundrise is the leading, vertically integrated real estate platform today. Investors can invest in their diversified real estate funds with as little as $10.
Fundrise primarily focuses on single-family, multi-family, and build-to-rent properties in the Sunbelt. With lower valuations, higher yields, and strong demographic shifts, Fundrise investments are in the sweet spot of a positive long-term trend.
I’ve personally invested $810,000 in private real estate since 2016. I plan to continue investing to take advantage of positive demographic trends in the heartland of America.
Related post on NFTs and investing:
What Is A SPAC And How Does It Work? (another hyped up asset class)
Readers, what do you think of the NFT craze? They might be one big bubble in the making or the wave of the future. Are you a proponent or a skeptic? Do you own a crypto wallet or an NFT?
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