If you’ve been following crypto at all this year, I’m sure you’ve heard all the hype around non-fungible tokens (NFT’s). From Beeple selling a digital art piece for $69 million, to famous artists like The Weeknd and Kings Of Leon releasing songs and albums represented as NFT’s; the masses are waking up to the fact that NFT’s allow individuals to optimally take advantage of their social currency, prove ownership of digital and real world assets, and much more. In this article I’m going to break down what an NFT is, some of the benefits they offer, how they’re going to be the spark that ignites the last leg off this bull-rally, and my opinion on the role NFT’s will play in the future.
Disclaimer: I am not a financial advisor, this article is for informational purposes only and should not be considered investment advice or an individualized recommendation. Please consult a financial advisor regarding your personal financial desires.
Let me start off by breaking down the difference between fungible and non-fungible. The word fungible means being able to replace or be replaced by another identical item, making both items mutually interchangeable. Some examples of fungible items include Bitcoin (BTC) and the dollar. One BTC is equal to the same amount as another BTC, no matter if the parties are exchanging BTC from different sides of the world, or from different exchanges that use different fiat currencies to price crypto assets in. The same goes for a 1, 5, 10, 20, 50, and 100 dollar bill. Non-fungible means the opposite in that the fungible item cannot replace or be replaced by another item, making the non-fungible item exclusive. An NFT is a crypto asset that resides on a blockchain with unique identification codes and metadata that distinguishes it from any other crypto asset.
One of the first mainstream examples of NFT’s in action was the Ethereum-based game, CryptoKitties. Founded in 2017, CryptoKitties enables you to buy, sell, collect, and breed digital cats. More importantly Cryptokitties pioneered the ERC-721 non-fungible token standard while introducing one of the first non-financial use cases for blockchain technology. Each kitty is an NFT, (ERC-721 token) making it indivisible and unique via proof from their underlying code on the Ethereum blockchain. Each kitty has a name, bio, and price (in ether). Every kitty also has “cattributes” which are unique genetic traits — such as eye color, eye shape, and fur — that determines its appearance, and a generation that specifies when they were created. Ethereum utilizes smart contracts that controls the distribution of the kitties and tracks their ownership. Because the kitties are tokens on the blockchain, they can be easily transferred and will continue to exist as long as the Ethereum blockchain exists, even if the CryptoKitties website shuts down.
NFT’s Give Individuals The Best Ability To Financially Monetize Their Social Currency
If you’ve been inundated in the NFT world, I'm sure you’ve heard of Mike Winkelmann, the digital artist better known as Beeple. Until October 2020, the most he had ever made from a single piece of his art was just $100. On March 11th 2021, an NFT of his work sold for $69 million at Christie’s. The sale positions Beeple among the top three most valuable living artists.
Traditionally, when an artist of any kind (musicians, painters, sculptures, etc..) connects with their audience to sell their work, it’s normally done on a platform (facebook, Instagram, TikTok Google, spotify, Apple Music, Artsy, etc..) that connects the audience with the artists. The problem is, unless you’re an A-list celebrity with a fan base of millions of people (which most people aren’t) you have to spend a lot of money on advertising so that your work can be shown on the first few pages where most of the traffic is. Normally the best advertising spots go to the highest bidder but the highest bidder isn’t always the best artist. On top of that, the platform is taking a percentage of each sale (more times than not, a really large percentage) So you have a situation where it’s hard to make a living as an artist of any kind because of what you have to spend on marketing/platform sales costs. This discourages a lot of artists from pursuing their dreams, which means a lot of “would be” customers are missing out on “what could have been”.
NFT’s change all of that BIG TIME. NFT’s allow artists to financially monetize transactions between them and their customers. Blockchain technology allows you to tokenize anything physical (a painting, ownership deed, sculpture, music, real estate, etc..) into an NFT, allowing them to be bought, sold, and traded more efficiently while reducing the probability of fraud. So now, as an artist you can interact with your audience directly without having to go through a middleman platform that takes a large percentage of the sale. However, if you’re an up and coming artist without a fan-base, your best option starting would probably be to list and sell your NFT(s) on a platform (Open Sea, Rarible, SuperRare, Foundation, Nifty Gateway, etc..) that connects artists and customers, and yes, pretty much all of them charge a service fee. For example, Nifty Gateway takes 5% plus $0.30 of every secondary sale; SuperRare takes a 3% transaction fee on all purchases, paid by the buyer; and Foundation charges a 15% commission.
Now, I know you’re probably thinking “you were just bashing the middlemen for taking a percentage of sales and now you’re recommending up and coming artists to go through platforms that do the same thing for NFT’s?”. While this is reasonable curiosity, the benefits of NFT’s don’t stop at digitally secure verifiable ownership, they actually offer another huge benefit that can compensate for the issue of middlemen taking a piece of each transaction. And that benefit is… Drum roll… Smart contracts allow for automated resale royalties from each sale that goes directly back to the wallet that belongs to the owner. Current U.S. law does not entitle artists to a percentage of the resale profits made by collectors on the secondary market. Let me provide some context so that you can understand how huge this feature is.
Every item has a secondary market after it has been sold via retail where the item is usually sold for more. For example, people line up outside of the malls and shoe stores around the U.S. in order to buy limited supply retro Jordan shoes. After people buy the shoes from the store, they will list them online for a much higher price. This is all fine and dandy but there's just one issue… Michael Jordan isn’t getting a cut from the sale after it’s sold online via the secondary market.
Now that you understand this point, let’s go back to our artist example. If you’re an up and coming artist and you sell digital art as an NFT, that means you’re going to make money when you sell your NFT on one of the platforms we covered above, and you can make money every time it’s sold on the secondary market… no matter what. Now let’s also say that you went from an up and coming artist to a more well known artist. What usually happens is that since you’re now well known, your previous paintings that you’ve already sold are now worth more. This would suck in the traditional art market because now you don’t own it anymore and if it’s resold, other people are making money off of your work and reputation. But if that art is an NFT, you can get percentage royalties from your art that you created once, as it's sold multiple times, even as it’s going up in value. It’s for this reason that the notable billionaire investor and Dallas Mavericks owner, Mark Cuban announced that he wants to turn the Maverick’s tickets into NFT’s. He knows fans will buy and resell them and he wants the Mavericks to be able to get paid royalties on all of the sales.
Gamers Are Going To Bring Billions Of People Into The Metaverse
Wikipedia defines the metaverse as a collective virtual shared space, created by the convergence of virtually enhanced physical reality and physically persistent virtual space, including the sum of all virtual worlds, augmented reality, and the Internet. In crypto, the metaverse is basically the virtual world shared between all video games. In these virtual worlds, players interact with the metaverse, while inhabiting an avatar’s body. They can chat with other users, earn cryptocurrency by playing games and gambling, buy art in galleries, attend concerts and events, and do lots of other things.
With NFTs exploding and the real real estate market afflicted by COVID-19, virtual worlds like Decentraland could be well placed to capitalize. There are other crypto-based virtual worlds, including Cryptovoxels, Somnium Space, Axie Infinity and The Sandbox, but Decentraland is the fastest-growing and most developed of them all. Not only is digital real estate capable of delivering outsized returns due to its alignment with the fast growing crypto-investment universe, but it also appears likely to become a viable store of wealth, similar to real-world art and real-world real estate. Digital real estate exists inside virtual worlds, each its own “digital nation” with a system of clearly defined, irrevocable property rights. All of the parcels (called “LAND” in the game) except for plazas and roads can be bought, sold and developed by the users of the game using “MANA,” Decentraland’s native crypto-token. LAND ownership is an NFT recorded on the Ethereum blockchain using the ERC-721 standards (same as CryptoKitties) which makes it both easily transferable and less prone to fraud. The game’s developers have set a cap of 90,061 on the total number of LAND parcels which will ever be minted. LAND parcels are non-fungible because every parcel has a different set of (x,y) coordinates.
Buying land today in virtual worlds feels a lot like buying land in Manhattan back in 1750. In 2017, the year Decentraland launched, LAND parcels sold for about $100 per parcel. In 2019, a portion of the “Genesis Plaza” estate called Estate 331 sold for about $80,000, becoming the second-most expensive NFT of the year. In January, the price of an undeveloped parcel of land had increased to roughly 8,000 MANA (approximately USD$1,400), a 14x increase in just three years. Since the game’s launch, there have been more than 50,000 secondary LAND sales totaling $30+ million at an average price of $560, so these data points are not outliers. Today, the total value of all the LAND is about $100 million – and growing.
In 2010, the average person spent about 2.5 hours online per day. At the end of 2019, it was up to 3.5 hours – a 40% increase. By 2022, it’s estimated to be more than five hours. The point is, our lives are becoming increasingly digital. And as we spend more time online, our virtual experience becomes more valuable. That’s why people are gravitating to virtual items. And it won’t be long before we buy digital items as naturally as more tangible items… like a car or a new set of clothes. In 2019 there was $50 billion spent on in game virtual items. It’s a market that’s grown rapidly over the last five years and is expected to grow over 20% annually into 2025. By that time, it’s expected to be a nearly $200 billion market. Overall, I think just considering the video games virtual item markets is too small. That’s because digital collectibles are part of a larger trend: physical assets moving to a digital representation. Examples include digital art, trading cards, comic books… even digital cars. The possibilities are endless. Of course, we won’t see every collectible go digital. But as more do, it will dramatically expand the metaverse. Allow me to provide some context regarding real world collectible items vs. in game collectible items.
Let’s say I'm a collector and one thing I like to collect is Samurai swords. If I bought a sword in the real world, I would probably put it up on a wall for my friends and family to see and maybe take a picture of it and post it on social media. But that’s it, unless I want to sell it (which most collectors like to hold their collections for their entire life unless a financial emergency causes them to sell) my sword doesn’t have any other use cases other than collecting dust on the wall. However, if I bought a digital sword in the metaverse, not only can I show it off in one of my buildings on my scarce land parcel, but I can also use it by taking it to a game, (Clash Of The Aces, Pathfinders, Reality Clash, etc... ) I can trade it, and it has a currency to it (ETH). This example can be applied to multiple collectible items.
NFT’s To Kick Off The Next Leg Of The 2021 Bull Rally
Given the reasons described above, along with the current hype/state of the crypto market ($2.33 trillion at the time of this writing) I think NFT’s are going to be the catalyst to an altcoin super cycle that will propel the crypto market to a $5 trillion asset class (see chart below representing the entire crypto market, excluding Bitcoin). Large social media influencers, A-list celebrities, and gamers are going to bring their massive audiences into the crypto market. Nevertheless, I do think that NFT’s will end up being a bubble this cycle that will pop before a few good projects emerge as winners later down the road. So as an investor, I'm not actually buying actual NFT art, but instead I’m building positions in the top NFT platforms so that I can financially support/benefit from the growing NFT infrastructure. I think that once the hype dies down, a lot of people are going to be left holding bags.
In conclusion, now that the proverbial NFT genie is out of the lamp, I don’t think there is any putting it back in. Given that our lives are becoming increasingly digital, I think it’s only logical that adoption for blockchain technology and NFT’s will only increase. NFT’s have the ability to turn illiquid assets, such as real estate into a more liquid asset. Imagine, instead of buying an entire apartment to add to your real estate portfolio, being able to look at an apartment and buy just the top floor or just one unit, and being able to still get paid monthly cash flow. NFT’s will unlock mainstream opportunities such as these because it allows fractional ownership, given you can have an NFT that represents equity in anything physical or virtual (including a unit in an apartment). Given the security and the ability to offer verifiable ownership, I think in the future, a lot of projects, and products won’t be trusted without an NFT, similar to how we currently view any kind of business without a website. As usual I’ll end this article with one of my favorite quotes as it pertains to this article, “The most common way people give up their power is by thinking they don’t have any”.