Why Are NFT's Selling For So Much? What Is An NFT Anyway?
16 months removed from another "once in a generation" economic disasters, and the investment economy is overflowing. The S&P 500 returned 18% in 2020, despite the mother of all crashes in March. Cryptocurrency had a bumper year, and 2021 is shaping up to be the year of the Dogecoin. Hell, even bonds had a decent year. Oil is up over 70% in 2021 and climbing. It seems like anywhere you look, there are investments outperforming benchmarks. But investors have become a little bored for the standard investments recently. Sure you could take your cash and dump it into some rental properties, but you know what you're getting there. You'll get some rental income, you'll get steady appreciation, and you can sleep soundly at night, albeit with some sloowwwwwwww gains. Not to mention, the federal government has given out almost unreal amounts of free money, which, according to Forbes, much of which has been poured right back into the markets. So investors have started looking elsewhere. But what does that mean?
The rise of alternative investments in 2021 is something to behold. A study by JPMorgan's asset management division on alternative investments even titled the paper "Alternatives: from optional to essential." The move into alternatives in 2021 has been staggering. And while no one is quite sure the exact number poured into the alternative class, due to everyone's definition being a little different, a good indicator could be companies that deal in alternative investments. YieldStreet, a digital alternative asset platform, announced in June of 2021 that they raised $100 million in Series C funding. Other alternative investment platforms, like Coinbase who deals in the buying and selling of cryptocurrency, went public at a $60 billion valuation. And if you thought crypto was crazy, wait until you hear about what people are investing in now.
The first is physical assets. People are beginning to vacuum up things like vintage watches, cars, jewelry and even whiskey. Did you listen to your mom and keep your Pokemon cards from the mid 1990's? If so, you stand a pretty good chance at making some decent coin. The recent explosion in Pokemon card values saw Logan Paul purchase a Charizard card for $150,000 in 2020, only to see an identical card sell at auction later that year for $369,000. Maybe you were a Cleveland Cavaliers fan in 2003 and purchased a LeBron James rookie basketball card. Those are worth around $5.2 million today, according to some experts. You don't even have to go back that far. With rookie cards skyrocketing in price, you can even day trade them with rookies drafted as recently as 2020 with Lamelo Ball cards. With all that, however, they don't come close to the hype of the NFT.
What is an NFT?
In case you don't spend that much time on the internet, an NFT stands for "non-fungible token." Essentially, they're the original version of a digital asset. For example, anyone can make a meme. But only one person can own the image that the meme is based on, and that ownership is the NFT. It's "non-fungible" because it can't be reproduced as an original. If you, me and a friend each threw a $1 bill in a bowl, mixed them up and each pulled one out, they're identical in nature. They look, sound, feel and spend the same, and there's no difference between them. An NFT would be like putting the original Mona Lisa in a bowl along with two photocopies. Only one person can own that original, and that is what produces the value. Their authenticity, and in turn their ownership, is verified on the Ethereum blockchain, which is a public ledger that holds everyone in the world accountable, creating a public record of authenticity and ownership.
How Do They Make Money?
Anything could be turned into an NFT, but not everything has value. It's back to the art example. I could finger paint my dog, digitize it and sell it as an NFT, but there's no value there because my work doesn't have value in the art world (yet). But do that to the Mona Lisa and you're looking at record prices. Why? Because it's sought after. It's the ultimate supply/demand example on a digital scale with a single asset. Noted digital artist "Beeple" created headlines earlier this year because his NFT set a record by selling for $69 million. That's when the NFT market caught fire, and the mania was on.
How Do I Buy One?
Just like with stocks and crypto, there are exchanges. The most famous NFT exchange so far in 2021 has to be NBA Top Shot. Top Shot is essentially a digital trading card library full of the original versions of gifs and images from NBA history. Sure, you could go to Google and download the gif of whatever you want for free, but this gives you the actual ownership rights to some of the NBA's most famous moments, and you own it on the blockchain. Why would you want to own it? Well, apart from the clout, you own it to sell it! According to Hoops Hype, here are the top valued Top Shot items. See if you notice a pattern here:
1. LeBron James dunk against Sacramento: Sold for $208,000
2. LeBron James Kobe Bryant tribute dunk: Sold for $125,000
3. LeBron James block against San Antonio: Sold for $100,000
4. Ja Morant dunk against Phoenix: Sold for $100,000
5. Zion Williams block against Denver: Sold for $100,000
So What's The Point?
Everything listed in this article is a speculative investment. Trends come and go in investing, just like in everything else. The advent, and subsequent rise of, cryptocurrencies has opened the floodgates into the digital ownership market thanks to the blockchain. For the first time, artists can sell their works quickly and easily, and buyers can have instant delivery on their new art collection while treating it as a speculative investment. Are NFT's here to stay? No one knows. What we do know is that the rise of alternative investments to a new generation of investors is likely to change the investment mindset moving forward, creating potentially seismic shifts for generations to come.
Are you interested in alternative investments? Why or why not? Would you own an NFT? Let me know in the comments below! And don't forget to sign up for the email list so you never miss a post. See you next time!