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NFT’s – Non-Fungible Tokens

BLOG, MARKETS & ECONOMICS  |  15 Apr 2021

Let’s look at the latest investment (speculation?) craze

By Jon  Aldrich

Everydays, the first 5000 Days

The image above, known as “Everydays, the first 5000 Days”, by the digital-artist who goes by the name “Beeple” recently sold for an unfathomable $69 million on a Christie’s art auction. No, this is not an actual work of art on a canvas, it is a collection of digital artwork of many of Beeple’s prior pieces of digital work. You can’t touch it, or hang it on the wall, you can only view it on a computer screen and copies of the image are all over the internet. So, what the heck is going on here?

Ok, let’s start out with the basics. What is Digital or Crypto- Art?  We can look at it like this, in a tangible world we have physical art, that artists (a lot of them starving) create, and in many cases hope that they will be able to sell to someone through an art gallery and try to make a living that way. If you buy an original work of art, it will likely come with a certificate verifying that you own the “original” piece and all other versions of it are just copies. Depending on the artist (think Picasso), that original piece of art can fetch a lot of money if it is sold.

Now, who says all art needs to be physical? There are many talented artists working now creating fascinating and often beautiful pieces of digital art on their computer. These can be digital paintings, videos, or other animation. Until recently, there really wasn’t a good way for artists (and non-artists as I discuss later) to sell and profit from their creations. That has changed.

All right, so what does Non-Fungible Token mean? Let’s start with the definition of “fungible”. Fungible essentially means that each unit is interchangeable with another, an example would be Bitcoin or a dollar bill. Each “Bitcoin”  or dollar bill is identical to the other and they are all the same and have the same value,  one is not more scarce than another because they are ubiquitous. An NFT – Non-Fungible Token, is unique. The artist can encrypt programmed rules within the artwork they create that certify the piece as the original. They can also embed rules that allow them a cut of the proceeds each time that specific piece of artwork is sold in the future. This is all done using the Ethereum Blockchain. Ethereum is the second largest crypto-currency behind Bitcoin and a Blockchain is basically a digital ledger of all the transactions that have occurred with the digital artwork and cannot be changed or altered. You can easily buy Ethereum, Bitcoin and all other cryptocurrencies at a site such as Coinbase. When the artwork is embedded with these rules you have created an NFT and the creating artist can now monetize their work.

Another advantage is that NFTs cannot be hacked like other things on your computer. This is due to the fact that Blockchain has so many checks and balances due to the nuances of the Blockchain system, which I am not going to get into here. Thus, NFTs are very secure. This is also a reason cryptocurrencies such as Bitcoin, Ethereum and other Blockchain technology is becoming so popular and is likely here to stay.

Why do they have value? Well, why does any piece of art or collectible item have value? It is worth what someone is willing to pay for an object that increases in value because of scarcity. Think of baseball cards, original paintings, wine or antique autos. IF you have the NFT of something, you have the only “certified” original of that work. For a collector that is the holy grail. And as long as there is always someone else that is willing to pay to obtain that scarce item it will continue to have value.

Can’t I just copy and save on my computer?  Yes, you could do that, but you would not own it, you just have a copy of it. For many people, myself included, that would be just fine. It would be like having a copy of the “Mona Lisa” hanging in your house. You have a replica of the original, but it is just a copy, not the original work of art, and hence likely not worth much. For serious collectors though, they want a unique or original piece that they can claim that they own.

Why are people spending huge dollars on these?  Why do people spend huge amounts on original works of art, or rare wines, baseball cards or antique autos? Some do it because they are collectors, others because they are betting that it will rise in value and is an investment that can be sold for profit to someone later on.

Nyan Cat

                 The NFT for this image, “Nyan Cat” fetched over $500,000 at an auction recently

How are they selling these NFTs & where can I purchase?  There are plenty of auction sites out there where you can purchase your own NFT if you are so inclined.  You can visit sites like  Rarible or OpenSea along with several others and purchase NFTs using the cryptocurrency Ethereum. Think of these sites as an “EBay” for NFTs. The big auction houses such as Sotheby’s and Christie’s are also getting into the action. Which lends credence to whether NFTs may be here to stay.

Others are cashing in as well – Musicians are also getting in on the NFT craze as they are artists too. In March, the band “Kings of Leon” is going to be the first musical artist to release an album as an NFT. They will issue a certain amount of NFTs of their album, that will have extras such as front-row tickets for life, exclusive album artwork, and other goodies such as alternative or “demo” versions of a particular song. Since so many musicians make a living doing live shows, this has the potential to be a great new revenue stream for musical artists that cannot play live shows during the pandemic and after. Of course, the regular version of their new album will be able to purchase in a traditional version or available on Spotify as well to download, but you don’t get all the “perks” the NFT version has. I think you will see a rush into NFTs by musical acts.

Baseball cards were almost meant for a system like this, and the baseball card manufacturer, Topps, has jumped into NFTs and is issuing baseball cards this way as well. There is also a site called NBATopShot is a marketplace for NBA highlight clips that you can own as an NFT. Some of these NBA clips, which you can find for free on YouTube, have been going for tens, if not hundreds of thousands of dollars. In fact, over $230 million has been spent in the last year at Topshot.

A New Asset Class – Just as artwork, collectibles, wine and autos are considered separate asset classes, NFT can now be considered its own distinct asset class.  And just as all asset classes are subject to bubbles and busts, are NFTs currently in a bubble? I will leave that up to those smarter than myself to discuss, but when a video clip of a Lebron James Dunk can command $200,000 to own “the original” and I can watch it on YouTube for nothing, well, you have to wonder? And lets not forget the cat that shoots a rainbow from it’s back end (above) that sold for $500,000.

There are some well known people such as Mark Cuban and other well known investors getting into this arena, so there is a good chance NFTs are here to stay. People have been calling for the end to Bitcoin for many years now and it just keeps on growing, I have a feeling NFTs are going to be here a while as well. Plus, there seem to be a lot of people willing to throw around a lot of money for these things and many people are making a lot of money buying and selling them that this will only create more demand.

One cannot rule out that someday our investment portfolios not only consist of stocks, bonds and real estate, but also NFTs. Plus, speaking as a baseball card collector, you don’t have to worry about bending the cards by clipping to your bike spokes and diminishing their value. However, there are downsides to maintaining ownership of these NFTs since you have to rely on the internet and the links that lead to your NFT staying intact.

This is a whole new world and it is going to take some time for a lot of us to get used to this, but I am sure they said the same thing when something like credit cards were first introduced. You have to keep an open mind about the possibilities.

For some additional interesting reading, check out this article about Beeple and how his big payday came to be.