NFTs 101: Should you buy an NFT today

In March 2021, an artist named Beeple sold an NFT collection for a whopping $69.3 million. In a single swoop, this sale shot NFTs into the spotlight and threw the media into a frenzy trying to figure out what is an NFT. This might make you think that NFTs started in 2021, but in reality, there were sales of NFTs that happened in 2014, and some historians argue that NFTs date as far back as the 19th century.

But what are they?

NFT is an acronym for non-fungible tokens.

When you say that something is non-fungible, that means that thing is unique, distinct, and cannot be replaced or exchanged for another. An example of a non-fungible thing is your fingerprint. It is unique to only you; no one, not even a twin, will have the same fingerprint as you.

A token is an item on the blockchain whose existence has been permanently recorded there from the start, and anything that happens to it — a sale, a trade, etc. — in the future will be permanently recorded as well.

So put together, a non-fungible token is a unique item that is permanently recorded on the blockchain.

NB: Think of the blockchain as a digital ledger or a record book.

The value of an NFT lies in the “non-fungible” part. One bitcoin is exactly like another, just as one dollar or any other currency is exactly like another, so it makes no difference which particular dollar you own. NFTs, by contrast, are all distinct “objects."

Interestingly, though, this doesn’t mean that NFTs are necessarily unique in terms of their content.

NBA TopShot is an NFT platform for trading what are essentially digital basketball cards, featuring highlights of great plays (like this?phenomenal shot block ?by rising star Zion Williamson). Many of these NFTs are now incredibly pricey; the Williamson NFT was recently bought for $100,000, a LeBron James dunk highlight went for $208,000, and the platform has handled more than $830 million in trading volume. And yet, there are more than one of almost all these NFTs since they’re typically issued as part of a limited series. That is, more than 10 people can own NFTs for the same LeBron dunk.

So, if the content of an NFT can be the same, what are you getting when you buy an NFT?

An NFT is really a certificate of ownership for a virtual asset. It's like buying a share of a company in the past. When you buy an NFT, you're buying the papers that say where the piece of art came from, the history of the owners, essentially its record.

The buyer of an NFT gets a long string of numbers and letters (code) that exists on the Ethereum blockchain. You're essentially buying a digital receipt that shows evidence of your transaction and every transaction that has ever happened.

Interesting, if you're just buying a receipt...

Why are NFTs popular? Who cares?

In one sentence: The prestige of owning something that no one else has.

Human beings are collectors. People have collected baseball cards, action figures, stuffed animals, even rapid lateral flow tests in the age of COVID.

There is, though, one big difference between the NFT collectible craze and collectible crazes of the past, which is that, from the start, the NFT collecting frenzy has been largely about money, and the prospect of getting rich.

On the other end, people like making money. And 1 thing the sale of March 2021 and other notable sales of NFTs have shown is that there's money to be made in NFTs.

Academic studies suggest that collectible investing can be quite profitable — if you get in early. But one of the main reasons for this is that there weren’t many investors in most collectible booms early on. So could this boom be profitable for everyone on the train?

Another reason why NFTs are so popular is the boom in speculation we're currently in. Since March 2020, the rise of YOLO investing has increased significantly. Some also argue that with the US stimulus package and a lot of money in the economy, people with means have more money to spend on speculative investments.

It's a way for artists and musicians to make money from the art they have. In the past, digital artists had to make their online stores where they list their art, and only people who know them typically find their art. NFTs will become one more avenue for digital artists to sell their art.

Some believe NFTs are raking in so much in sales because major money launderers couldn't meet up at Art Fairs this year.

Art is a speculative and tax haven investment. The ultra-wealthy have used art to defer millions of dollars of taxes for years.

There are maneuvers that allow investors to delay paying the hefty 28% capital gains tax on sales of art and other collectibles, like stamps and coins. One of such moves is by pouring the profits from one work into the purchase of a similar one.

For example, someone who made $10 million from selling an art piece would ordinarily owe the government $2.8 million. But with an exchange, the entire $10 million can be recycled into the purchase of another art piece. If the investor holds that painting for a decade or longer before selling, inflation eats away at the effective cost of the $2.8 million tax bill. You may even never pay capital gains if you die before the replacement work is sold. Learn more about this here .

In summary, NFTs are popular for a myriad of reasons. For some, it could be a status symbol. Scarcity improves perceived value. For others, it's a long-term investment or a cheap tax-free way to hold their cash.

Here are some examples of notable sales you may or may not have heard of that launched NFTs into the limelight.

Notable sales of NFTs so far

In March 2021, a 10-second video clip created by digital artist Beeple sold for $6.7 million. More notably, in March, Beeple sold an NFT collection at a Christie’s auction called "Everydays: the First 5000 days" for a whopping $69.3 million.

What you may not have known was, there were 5000 art pieces in the collection. So, it was not one piece of artwork that sold for $69 mil. It's the work done daily, without fail, for 13 YEARS, that amassed $69 mil. And it averages out to $13,800 apiece.

Still in March, Jack Dorsey, co-founder & CEO of Twitter, sold his first tweet for $2.9 million and donated all the proceeds to charity.

Also in March 2021, A single red pixel was put up for sale for $900,000. Several others were making 100s of thousands of dollars in a few days from flipping NFTs.

The NFT boom was fueled by speculators, not enthusiasts

Vignesh Sundaresan, the cryptocurrency investor based in Singapore known as MetaKovan who bought “Everydays,” boasted that it is “going to be a billion-dollar piece someday.” He made little mention of its aesthetic qualities in interviews. MetaKovan runs an investment fund that has already bought up other?NFTs, including many issued by Beeple. The high price MetaKovan paid for “Everydays” also pushed up the price of other Beeple?NFTs. That made MetaKovan’s fund even more valuable. It just so happens that Beeple himself was given around 2% of that fund by MetaKovan.

The real winners of the NFT craze may not be the people speculating in NFTs, but the companies and technologies enabling them to speculate.

When the NFT boom of March 2021 happened, everyone wanted to know what NFTs were and how they could create, sell, or buy them. It led people to wonder who were the companies that were/could create marketplaces for NFTs. Who could become the Amazon of NFTs?

This led people to speculate on stocks companies that they believed would start selling NFTs. The popular answer floating around Twitter & Reddit was: Takung Art ($TKAT). This speculation sent the stock SOARING from $3.26 on the 1st of March to $8 on the 15th to over $74 on the 23rd. Increasing just under 25 times in value between 1st March and 23rd March (a little over 3 weeks) or over 9 times from the 15th to the 23rd (1 week).

Other companies that saw significant boosts to their stock prices during the NFT frenzy were: Hall of Fame Resort & Entertainment Co. ($HOFV), Color Star Technology ($CSCW), and Dolphin Entertainment ($DLPN).

You can make money being a gambler. But in the long run, it’s much safer to be the house

The stock prices of these companies have since come back to earth. TKAT is currently trading at around $6 (which is a long way from the $74 it was in March), and the others are also down.

Not all NFT sales were made for millions of dollars. In fact, NFTs can sell for as little as $1

Benyamin Ahmed, a 12-year-old boy from suburban London released an NFT collection last month. The project, “Weird Whales,” featured 3,350 pixilated whales, each with distinct traits, some rarer and thus perceived as more valuable. The collection sold out and earned Ahmed tens of thousands in crypto.

Indeed, for some teenagers, making NFTs and other digital art forms has become the new summer job, a modern take on bagging groceries or working at a fast-food restaurant.

The most popular and successful young NFT artist is Victor Langlois, a transgender 18-year-old who goes by FEWOCiOUS, or Fewo, to his fans. He makes digital art that chronicles his difficult childhood and struggles with gender identity and his transition.

Last summer, Fewo started selling work on SuperRare and built a following there and on Nifty Gateway. Soon, he came to the attention of Noah Davis, the digital art specialist at Christie’s, who arranged an auction of his work in June. Read more here

DIGITAL ROCKS

EtherRocks, an early NFT project consisting of identical digital rocks that come in different colors, are now selling for more than 69 Ether (almost $200,000). The NFT rocks have been around since 2017 and were created around the same time as CryptoPunks, one of the earliest NFTs on the Ethereum blockchain.

On the?EtherRocks website ,?it states that the NFTs “serve NO PURPOSE beyond being able to be brought and sold, and giving you a strong sense of pride in being an owner of 1 of the only 100 rocks in the game.

We live in the meme economy, and right now jpeg rocks are outperforming gold

2021, the financial year of memes

Even an Olympic team has gotten into NFTs.

The team from Great Britain became the first-ever Olympic team with an NFT marketplace offering NFT collectibles for Olympics fans. The team curated a storefront of non-replicable cryptographic tokens in partnership with Tokns, an NFT commerce provider. The partnership will run from the opening of the summer games until the Beijing Winter Olympics next year, offering new items and collections for sale every night, such as an NFT celebrating the double gold medal-winning achievements of Team GB gymnast Max Whitlock.

NFT enthusiasts also say that they are not just excited for the current applications of NFTs but for future use. So what are the possibilities for NFTs?

Other uses of NFTs beyond art

The five-star hotel, Ca'di Dio,?which will officially open in Venice on August 27? auctioned off an NFT which gives the highest bidder a room at the hotel for them and two or three guests for 1 night, including dinner on the rooftop — with no other guests at the property.

The hotel, in a statement, said they did this to micro-target a niche segment of travelers that would be interested in NFTs. They went on to say that “if you care about cryptocurrency, you probably haven’t heard of our small brand yet. Whoever wins the auction will probably be new to our brand and, when they have an amazing time, can spread the word through their community.”

This is similar to what the world’s largest luxury goods brand, Louis Vuitton, did when they launched?“Louis: The Game,” a video game with 30 embedded NFTs. The purpose of the visually striking game, which debuted on August 4, was to connect with digitally connected young consumers.

In August, Fortune magazine decided to drop its latest cover as an NFT.

NFTs have also been used to raise money for charity.

Another potential use of NFT can be seen in Bitclout. It's a platform that merges the blockchain with celebrity. Simply, it allows you to buy a "unit" of an upcoming celebrity's "clout" in hopes that they get more clout in the future and, as such, are worth more. You're essentially speculating on their long-term growth. If they become very popular and more people want to buy units of that celebrity's Bitclout, you can sell at a higher price.

Downsides/problems with NFTs

For every brilliant technological innovation, there is someone with too much brains, and a bit too much time on their hands, who will come up with a way to defeat it

Going back to the sale of "Everydays" (the $69 million art collection), 1 of the reasons it was worth so much is because there is only 1 of it in existence. If they were two, suddenly the value could be significantly less—tens of millions of dollars less.

Recently, the artist behind "Everydays," Beeple, was hacked. The hacker "sleepminted" (meaning registered) a new NFT as if it were the creation of Beeple. It was as if Beeple woke up one morning to see a forgery of his work in his studio.

The hacker who pulled this trick calls himself Monsieur Personne (French for Mr. Nobody) and said that his goal was not one of malice but merely to point out the silliness of the NFT craze over "one of a kind" digital art that is prone to hacking.

While it was all a publicity stunt, MetaKovan and his $69m masterpiece might have been robbed of most of its value if the truth had not been outed so swiftly.

Ownership concerns

Owning an NFT is not owning copyright, just like owning an art piece doesn't give you the copyright to that piece.

This sounds like a great thing for the seller and a really dumb thing for the buyer

As we can see from the NBA TopShot listing, there can be multiple NFTs with the same content but being listed and sold as separate NFTs. So in effect, you may not be buying something that is one-of-a-kind.

There have also been several cases where someone mints an NFT for art not created or owned by them to sell. This raises the question of how we authenticate who has the right to mint and sell an NFT.

Is there an NFT bubble? Could they be overpriced?

Speculative bubbles are fueled by the idea that there’s always a greater fool to sell to. But the NFT bubble has inflated so fast that it may run out of fools faster than anyone thinks.

When you buy something that does not bring in profits directly in the form of dividend, you buy it with the idea that someone will be willing to buy it from you at a higher price in the future. And if this does not happen, you might be left holding something worth millions that no one is willing to buy.

The artwork is available online for free

People also worry that others can have copies of the same art for free since it's digital art. The idea behind NFTs is that the buyer owns the original.

Also, note that even with physical art, this risk remains. There are several copies of various notable art pieces available online and in physical form. If you Google it or go into a gift shop in some places, you can get a copy of it. But that copy is nowhere worth the price of the original. As such, it's just a cheap knockoff that you get to keep, and having a million copies doesn't exactly depreciate the value of the original.

The risk of Tech Failure

The blockchain is a permanent record. While the record is permanent and stable, the location where the work is hosted may not be stable.

When you buy an NFT, you are buying access to a code that runs through a gateway. Think of the gateway as a website. If the website goes down, you've essentially lost what you bought. If the server that hosts the NFT you bought goes down, or it's moved, or the owner forgets to pay their hosting fees, then the NFT could point to nothing.

It's like that guy that we learned earlier this year forgot the password to his digital wallet that holds 7,002 bitcoins which is worth over $265 million today. Read the full story here . Only in this case, it wouldn't be your fault. As such, the cost of maintaining an NFT largely lies with the seller/owner of the artwork. This means artists/sellers still have commitments to the buyer even after the sale is made.

There are also environmental concerns. Like Bitcoin, the amount of energy expended to mint an NFT is dangerous for the environment and contributes to global warming.

In light of all of this, Should you buy an NFT?

Think of an NFT as a collectible. Something unique that people collect and if they keep it in great condition, they can sell it at a much higher price in the future, like a baseball card, pokemon cards, etc.

With NFTs, by contrast, there are already so many people out there trying to buy and sell them that bargains will be harder to come by (though, of course, they’ll still exist), and the likelihood of overpaying will be higher.

In the short run, it may still be easy to flip NFTs to new and inexperienced buyers rushing into the market because of all the hype. But as that hype inevitably dies down, and NFTs become just another kind of collectible, it will be harder to turn a profit — simply because everyone in the market is trying to turn a profit, too.

How long will it be before NFT's go away? Hard to say. They may persist for a long time.

As we said in our previous article, most investors in the market are there for the money. The enthusiasts and believers are often the minority.

If NFTs have captured our imaginations, it’s because this fad fuses so many potent social and financial trends. It has a cryptocurrency angle, a virtual-reality angle, a meme angle, and it’s a social media-fueled speculative frenzy on top of it. NFTs are us.

Final thoughts

If you go into NFTs, don't buy something because you think it would be worth millions in the future. That may not happen if there's no one willing to pay a million dollars for it. Buy something you like and want to collect. A collectible that you would like to own. Like an art piece on the wall of your home. You don't typically buy those in hopes that they'd become million-dollar investments in the future, right? Apply the same thinking here.

I'll leave you with this statement by an NFT enthusiast.

"To me, the NFT craze is a way to market the technology itself and its potential, not the clips per se. The buyers driving up the prices are crypto whales who have a vested interest in seeing blockchain technology become a widely accepted standard for asset transfers and stores of value. The real investment isn't the artwork or the clip; it's in the fact that a major auction house facilitated a huge transaction and that Medium and hundreds of other media outlets are talking about highlight tokens. While there is certainly "dumb" money chasing these to get rich quick, the smart money is playing a long game and needs the ecosystem to be built."