Would you pay $15 million for a plot of virtual land?
Someone just did. Pieces of land in a game called Legacy were sold for exactly that amount.
Image: plot of land from the upcoming Legacy video game
…and the best part about it is that the game where this land is used has not even been released yet.
Before you dismiss it as a bubble… let’s take a closer look and see what really is going on here.
What Are NFTs?
NFTs have captivated the markets this year… but should you pay attention to them?
Before we get into the details, let’s get the basics out of the way.
NFTs are non-fungible tokens. The “fungible” part means that each of them is unique.
Fiat money, bitcoin, or gold are fungible. In other words, any dollar is like any other dollar. An ounce of gold is like any other ounce.
(We’re not talking about collectible coins here, though. A rare gold coin that has value beyond what the metal is worth is also non-fungible. It cannot be replaced by a newly minted one.)
Fungibility is good if you want to use something as a medium of exchange.
Non-fungibility is great if you want to buy and own something unique.
Non-fungible tokens are digital assets, like images, sounds, or 3D objects. But you can’t copy them. Each of them has a unique identifier that is recorded on the blockchain.
Without this blockchain, you can’t verify if an image someone is selling is truly unique. It could be just a copy.
This is why NFTs and blockchain go hand in hand. The blockchain makes these assets unique and verifiably so.
How Much Are They Worth?
$15 million in virtual land already changed hands, so we know how much those assets are worth.
A piece of art titled “Everydays: The First 5000 Days” by the artist Beeple sold for over $69 million.
It contains 5,000 images, and it looks like this.
Image: Beeple’s “Everydays: the First 5000 Days”
If you want to understand how to look at them, consider art or real estate.
Every piece is unique, so you don’t know its “market price” until someone makes an offer.
Because there is almost no market for each and every one of them, they are illiquid.
For comparison, illiquid stocks could still trade in hundreds or thousands over a day.
If you buy an NFT, you might need to wait weeks or even months to find a buyer.
This is why NFTs are a very niche, if massively popular, asset class.
A lot of people talk about them, but the actual market is small. And the NFTs that go viral and get sold for millions are few and far between.
In addition, it’s quite impossible to predict which one will become a viral hit.
Would You Invest In them?
First off, none of this is financial or investment advice. We are just discussing a market phenomenon.
But… if you want to approach this market, there are some things to consider.
First, using well-known NFT trading platforms would make sure that the NFTs are real and unique. You don’t want to end up with a JPG image that has already been copied thousands of times.
OpenSea is one of the best-known platforms.
Second, to buy NFTs, investors need to own crypto. Very often, you can only buy NFTs with cryptocurrencies like bitcoin or ether tokens.
We are not going to discuss whether these are good investments or whether holding them at all is a great idea.
The best way to get answers like these is by talking to a financial advisor who is well-versed in the latest market trends.
Third, applying some rules that art investors use could be helpful. It will put you in the right frame of mind and set your expectations.
For example, some art gets ignored for decades until it’s recognized and valued.
Vincent van Gogh, one of the most well-known artists ever, died penniless.
Now his paintings are worth billions.
The lesson here is: think long-term. It might not take decades for an NFT artist to reach public acclaim but expecting an overnight success won’t likely do you any good either.
You should also consider risk. NFTs are like illiquid stocks on steroids. Putting your retirement savings into a single image on the blockchain, however good-looking, isn’t probably the best idea.
Never bet the farm on any trades, including digital assets.
Finally, don’t rush into this market because people are talking about it.
Observe, as you would do if you happened to step into an art gallery.
Look at what is selling and what the public prefers. And what they might like next.
In other words, approaching NFTs as art speculation is, in our view, the right thing to do.
Accredited investors can now buy the Bitwise Blue-Chip NFT Index Fund. It gets investors exposure to a diversified portfolio of NFTs. You can learn more about this fund here.
Note, however, that this is not an investment recommendation. Talk to your advisor and consider the risks.
NFTs are an exciting new frontier in the investment world.
If you approach it from the right perspective, it may be worth educating yourself about and speculating on.
Thank you for your loyal readership,
The Financial Star team