What do CryptoPunks, Stoner Cats, and an animated flying cat with a Pop-Tart body have in common?
They’re all NFTs – or non-fungible tokens. NFTs are like the new, cool kids on the block in crypto, representing digital ownership of a wide range of irreplicable intangible items.
While they’ve been around since 2014, 2021 was the first year that this novel technology broke through into the mainstream. Total NFT sales hit $ 25 billion in 2021, compared to $ 94.9 million the year before, according to data collected by DappRadar, an app store for decentralized applications. They’ve drawn the attention of celebrities and big companies ranging from American Express to Gucci, and have exploded across the worlds of music, art, sports, and more.
From an investing perspective, buying an NFT is “even riskier” than buying crypto because it’s “almost like a leveraged bet on crypto,” according to Humphrey Yang, personal finance expert behind HumphreyTalks. “It’s essentially gambling but people do not really know the difference and they buy them because they’re fun.”
On the other hand, a lot of people are buying NFTs not as investments but simply because they are fun or bring them joy. Crypto expert Laura Shin is one of them. She purchased an NFT related to music, but she says her decision was driven by emotion, not investment.
“I bought the Kings of Leon NFT when it came out because I love crypto and I love Kings of Leon,” says Shin, a crypto podcast host and author of The Cryptopians: Idealism, Greed, Lies, and the Making of the First Big Cryptocurrency Craze, ”referring to a Kings of Leon album released in the form of an NFT. “I just wanted to buy it the way I want to buy anything else. It was not an investment. It was like an emotional thing. And that’s what a lot of NFTs are. ”
If you’re curious about whether NFTs should be part of your investment strategy, here’s a primer.
What Is a Non-Fungible Token, or NFT?
Contrary to popular belief, an NFT is a token created on a blockchain that proves you are the only owner of that one-of-a-kind digital item – whatever it might be. An NFT is not just a JPEG. It’s not a profile picture of a bored ape, a tweet turned into a digital collectible, or a pixelated punk face.
Those are all things that an NFT can represent, and what they are representing is code, otherwise known as smart contracts. Smart contracts power NFTs because they make it possible to sell or transfer an NFT, set royalties for artists, interact in the metaverse, and more. NFTs are most commonly built on the Ethereum blockchain.
Unlike regular cryptocurrencies, NFTs cannot be directly exchanged for one another. This is because no two NFTs are identical – even those that exist within the same platform, game, or collection. Essentially, the underlying thing you’re buying is code that manifests as video clips, photography, or art, among many other things.
To better understand, it may help to break down the term “non-fungible.” If something is fungible, it’s able to replace or be replaced by another identical item. Cash is a good example – you could have multiple $ 5 bills in your wallet and use any one of them to buy something. It is interchangeable, and therefore fungible. The opposite of that is “non-fungible,” or something that cannot be replicated or replaced.
For instance, Jack Dorsey sold his first tweet as an NFT for over $ 2.9 million last year. Technically, you could screenshot Dorsey’s first tweet without purchasing it and have that image saved on your phone, but it’s still not yours and you wouldn’t be able to sell it at the value of the original – a distinction that matters when it comes to NFT trading. The person who bought Dorsey’s NFT owns the digital representation of that tweet that exists on a blockchain, and it can not be interchanged with another or replicated.
“I would view an NFT as a digital collectible – that’s as much as I would think into it,” says Yang.
Why Are NFTs Popular All of a Sudden?
Most people before 2021 did not know what non-fungible meant, and now people like The Weeknd, Paris Hilton, and Jimmy Fallon are using it in everyday conversation. NFT sales are in the billions, a near 38,000% year-over-year increase, according to a DappRadar report. In fact, the most expensive NFT ever sold was auctioned off in 2021 – a $ 69 million sale by digital artist Beeple. There’s even an SNL skit about NFTs that itself was minted into an NFT.
So, why are NFTs popular all of a sudden?
The explosive popularity of NFTs showcases the unpredictable adoption curve of new technologies, and there were many factors that contributed to the growth of NFTs in 2021, according to experts.
Many new investors flocked to crypto in 2021 because of the Bitcoin and Ethereum bull run. And once you own a little bit of crypto, it’s easy to start exploring other alternative crypto investments, such as NFTs, staking, and more, says Yang. NFTs also became a new medium for artists and creators to showcase and monetize their creations while providing full transparency and authenticity of ownership.
“It’s an easy slippery slope, because if you buy Ethereum, it then becomes very easy to buy an Ethereum-based NFT,” says Yang.
There have also been a lot of celebrities talking about them and contributing to the buzz, especially on social media. Take the Bored Ape Yacht Club, for example. Jimmy Fallon bought one, Stephen Curry bought one, Paris Hilton bought one. So if you bought a Bored Ape, you would be part of the same group that many famous celebrities are a part of, and there’s even a real in-person element, with Board Ape Yacht Club parties for those who own one. And because there’s a finite number of Bored Apes – around 10,000 – for purchase, people compete to buy them. Those two aspects are essentially what makes them valuable from a societal perspective, says Yang.
“Who does not want to be associated with Stephen Curry, for example? In addition, if you own that NFT, you get to go to all their parties that they might have in real life. It’s like a membership pass, so the value really comes from other people assigning value to it, ”says Yang.
Are NFTs a Good Investment?
NFTs aren’t quite ready for primetime investing, and there are several aspects of crypto you’ll want to be really comfortable with before you find yourself owning an NFT, experts say.
For one, the process to buy an NFT is complicated, says Doug Boneparth, a financial advisor and president of Bone Fide Wealth in New York. You need an Ethereum-compatible crypto wallet and some ether to get started, and you have to connect your wallet to an NFT marketplace – a lot of hoops to jump through. NFTs are also susceptible to crypto hacks and scams, which have become increasingly common and sophisticated. A Google search for “NFT scams” shows just how much opportunity there is to run into trouble.
And then there’s the question of value and utility. NFTs are not like a stock or a bond where you generally know the intrinsic value of that investment. A successful NFT is similar to a strong brand, and a lot of value is given to it by other people, so it’s “only as valuable as someone else is willing to pay for it,” says Yang.
“For the average investor, I think it’s generally a bad idea unless you just want to buy into it for the artwork, and you’re OK with never seeing that money again,” says Yang. “There’s so much inherent risk in NFTs.”
Knowing that NFTs are risky, speculative assets like crypto, you’ll need to determine your level of exposure to them. Generally, experts say most long-term investors will be better served by allocating only a small portion of their portfolio (less than 5%, and never at the expense of meeting other financial goals) to cryptocurrency rather than to an NFT.
“There’s quite a bit of knowledge, trust, understanding, and guts it takes to do that right now, if you’re a retail investor or just an ordinary person going into space,” says Boneparth.
For investors betting on a long-term increase in the value of Ethereum, more people buying ether for NFTs has the potential to be a very good thing. But a big downside is the fees to purchase NFTs, says Yang. On Ethereum, you may have to pay “upwards of a hundred or $ 200 just to make the transaction happen,” he says. These fees are known as “gas fees” or fees paid to miners for validating a transaction on the Ethereum network. Gas fees have climbed due to an increasing number of transactions on the Ethereum blockchain, mostly driven by widespread adoption.
If you want to buy an NFT, buy it for fun like you’d buy a ticket to a concert or sporting event – not as an investment. Boneparth recommends doing it in a fairly risk-free way by putting in only what you’re willing to lose, or avoid it altogether if it would get in the way of other financial priorities, like saving for an emergency or paying down debt.
“You start by owning some crypto. Then read. There’s no shortage of primers that you can read on NFTs, ”he says. “Then go play. See how difficult or easy it is and whether you liked it or did not like it, whether you figured it out or learned more about it. ” Again, make sure you’re not putting any amount of money in NFTs that you’re not OK with losing, whether it’s $ 5 or $ 500, he says.
The Future of NFTs
So are NFTs here to stay or simply a fad?
Experts remain split on it – some are screaming “bubble,” while others claim NFTs will create new ownership opportunities, and remix old ones. Meanwhile, creators and artists are claiming this is the next form of monetization.
Shin is one of many experts who expects more mainstream adoption of NFTs in 2022. “They’re definitely here to stay,” she says.
It’s the technology behind the scenes of NFTs – the smart contracts on blockchain technology – that offers the real value, says Boneparth, noting it’s about seeing the forest for the trees.
“The flipping of JPEGs on OpenSea is really just a showcasing of what it can do at a very surface level,” says Boneparth, referring to buying low and selling high on the NFT marketplace. While there could be interesting potential for technology in the future, right now Boneparth acknowledges it can seem like NFTs are just “a bunch of crypto bros flipping JPEGs on the internet.”
Experts also say the NFT marketplace would need to become more accessible for everyday investors in order to be more widely adopted. OpenSea is the main peer-to-peer trading platform for NFTs, but there are other companies that want to bring NFTs more easily to the masses. Popular crypto exchange Coinbase, for example, recently announced plans to open a new marketplace where people can buy, sell and collect NFTs.
Though demand for NFTs could wane over time, says Yang.
“I do think that right now they’re very trendy, especially the last four months,” Yang says. “In 10 or 20 years, I think they’ll still be around. How much we use them – that I do not know. People will still always find some value in communities, but the broader applications of NFTs will be more interesting. ”