NFTs: A $14 Billion Bubble?
From graphic designer to multimillionaire, the story of the world’s most successful digital artist is a real rags to riches tale. In March 2021 Christie’s auctioned a digital collage of 5,000 images with a minimum bid of just $100. To the surprise of the entire art world, and the artist himself, bidding for Beeple’s “EVERYDAY: THE FIRST 5000” concluded 10 days later at a cool $69 million.
Besides making Beeple a millionaire, the blockbuster sale also helped popularize NFTs or “non-fungible tokens” as an investment opportunity. And it’s not just limited to digital artworks. Overall NFT trading volumes have surged from $1.2 billion in Q1 2021 to $10.7 billion in Q3 20211, and the market is forecasted to jump from around $14 billion today to $75 billion by 20252. It’s a booming market that includes digital collectibles, virtual real estate, and even gaming assets like weapons and characters.
So, how seriously should investors take NFTs? Is it all just a bubble waiting to burst? In this edition of Alt Class we’ll dig into the practicalities of investing in NFTs and weigh the risks and potential rewards of this high-tech alternative investment.
The easiest way to understand NFTs is to think of them as digital collectibles. A non-fungible token can represent any asset on the Ethereum blockchain. While digital files can be easily duplicated, each NFT is unique. This means that a digital artwork, for example, can be “tokenized” to create a digital certificate of ownership. This record of who owns what is then stored on the Ethereum blockchain which acts as a digital ledger. These records can’t be forged or tampered with because the ledger is maintained by thousands of computers around the world.
For many people what’s really exciting about NFTs is that they can represent virtually anything. There are NFTs of Twitter founder Jack Dorsey’s first-ever tweet, Taco Bell’s taco-themed GIFs, and Shawn Mendes’ iconic Fender guitar.
What makes it even more interesting is that it’s also possible for almost anyone to create an NFT. All you need is to have some Ether, the cryptocurrency used for all transactions on the Ethereum blockchain, in a digital wallet like Coinbase or MetaMask. You can then turn digital artwork or other digital assets into an NFT using a platform like Rarible. Bear in mind you’ll need to pay a so-called “gas fee” to mint your NFT on the Ethereum blockchain. CNBC has a great article outlining this process if you want to find out more.
How Do I Invest In NFTs?
The first step is to consider what type of NFT you want to invest in. NFT art might tend to grab the headlines, but Collectibles currently dominate the market with a 76% share. Art comes second with a 9% share, followed by Gaming NFTs with 7%.
Art: For most people these are probably the most familiar type of NFT thanks to Beeple’s multimillion-dollar digital artworks. NFT art sales totalled around $3.5 billion in the first three quarters of 2021 according to the Hiscox Online Art Trade Report 2021.3
Collectibles: All types of collectibles can be sold as NFTs, but the most popular tend to be trading cards. These NFTs are often virtual representations of the underlying physical asset.
Gaming: Gaming companies sell in-game assets as NFTs. These could be anything from characters and avatars to virtual real estate.
Sports: These NFTs are popular because sports fans have always loved to buy exclusive items linked to their favorite teams. Now they have the opportunity to buy digital versions of these. Research by McKinsey showed that weekly sales of sports NFTs in the U.S. reached $138 million at one point this year.4 NBA star LeBron James has even launched his own NFTs that sold for over $100,000 each.5
Where To Trade NFTs
Once you’ve decided which type of NFTs you’re interested in, the next step is to explore NFT marketplaces and learn how to trade NFTs. Many NFTs are sold via auction and need to be paid for with Ether. You’ll need to connect your digital wallet to the marketplace where you plan to buy NFTs. Here are the main marketplaces used to trade NFTs:
Rarible: One of the world’s largest NFT marketplaces, Rarible allows users to issue and sell NFTs and primarily focuses on NFT artworks.
Opensea: The largest NFT trading platform by trading volume, Opensea tends to feature higher-ticket NFTs. As well as digital art, the marketplace has domain names, trading cards, and other digital collectibles. Unlike other sites which operate auction systems, Opensea has an option to buy an NFT at a set price.
Superare.co: As the name suggests this marketplace specialises in premium digital artworks. According to Dapprader, the average sale on this platform is over $10,000.
Valuables: This niche platform literally just sells tweets that have been turned into NFTs.
Zeptagram: Another niche platform, Zeptagram enables musicians to tokenize their tracks as NFTs. Investors and fans can then buy a portion of the ownership rights.
Risks & Rewards
NFTs are still a very new asset class and they’re widely considered to be high-risk. There’s a few basic principles you can use to minimize risk and increase your chances of generating a decent return:
Look Out For Community
Look for NFTs where there’s a growing community of loyal fans centered around a particular artist, sports star, or game. Future buyers will likely come from within this community.
Store Your Keys Carefully
We’ve all heard stories of unfortunate investors who lost millions of dollars worth of Bitcoin simply because they lost access to their digital wallet. To access your wallet you’ll need to use your private key. Make sure you store your private keys properly so you can sell your NFTs when the time is right. For extra security, you can store your NFTs in a so-called “cold” hardware wallet. This stores all of your data and assets offline, helping reduce your risk of being hacked and your NFTs being stolen.
Consider The Rarity Factor
Before purchasing an NFT as an investment, consider whether it is 1 of 1 or 1 of N. This works much the same as prints of a particular artwork. One-off NFTs (like original artworks) are likely to have a higher value than NFTs where there are multiple editions (or many prints) of the same artwork or other digital collectible. You can also use this principle to judge if a price is fair when buying NFTs.
Check Your Tax Obligations
NFTs are subject to capital gains taxes so it’s vital to check in with your tax advisor to understand how this might impact your finances. Earlier this month the H.R.3684 Infrastructure Bill was passed, meaning any crypto purchase of over $10,000 must now be declared to the IRS and NFTs are to be treated as cash.6
Final Thoughts
NFTs might be enjoying their moment in the sun, but the fact that most people buy them simply for the personal satisfaction of ownership makes them a very high risk investment. It’s nearly impossible to know whether a particular NFT will increase in value. Most blue-chip NFTs have achieved their hallowed status and hefty price-tag thanks to their celebrity connections or novelty value, such as Jack Dorsey’s $2.9 million tweet or Grimes’ sell-out $5.8 million NFT art collection.
If you do decide to invest in NFTs, look beyond the money and pick something that you genuinely want to own, like a particular digital artwork or collectible. That way you’ll still get something out of your purchase even if the NFT doesn’t generate financial returns.
Disclosure: All opinions expressed herein constitute the author’s judgement as of the date of this article and are subject to change without notice. Statements made are not facts, including statements regarding trends, market conditions and the experience or expertise of the author are based on current expectations, estimates, opinions and/or beliefs. Such statements are not facts and involve known and unknown risks, uncertainties and other factors. Past events and trends do not predict or guarantee or indicate future events or results.
https://www.reuters.com/technology/nft-sales-surge-107-bln-q3-crypto-asset-frenzy-hits-new-highs-2021-10-04/
https://www.nme.com/news/gaming-news/nft-owners-in-the-us-to-start-paying-taxes-on-their-investments-3090185