Quick Summary: As blockchain investors, we look for underlying value. Most NFTs today have no underlying value. But NFTs as a technology have a ton of potential value, especially if they are linked to things that really do have value (like earning future royalties on a pop song NFT, for example). The best long-term investment is likely buying and holding tokens in NFT platforms — don’t buy a collectible, buy the collectible company.
Why Would Anyone Invest in NFTs?
The illustration above is an animated flying cat with a Pop-Tart body. It sold to a collector for over half a million dollars.
If you’re new to this world of digital collectibles, also known as non-fungible tokens (NFTs), this will require some explaining.
This animated GIF is Nyan Cat, one of the first Internet memes. The original YouTube video, with 185 million+ views, was a mashup of a Japanese pop song and a flying pastry kitten leaving a trail of rainbows and sparkles. It has all the makings of a meme: it’s catchy, it’s weird, and it involves cats.
…But is it art?
Meme creators don’t usually get paid for the joy they bring to the world, but Chris Torres, the digital artist who animated Nyan Cat, put up the one-of-a-kind “original” for auction as an NFT, digitally signed on the blockchain (just as you would sign over proof of ownership on an expensive piece of art).
I repeat: it sold for half a million dollars.
The original meme puts the “cat” in “catchy.”
Two things are driving the growth of NFTs:
1) People are trying to “flip” NFTs: buying low and selling high, hopefully in a short period of time (just as people tried to flip Beanie Babies).
2) Money doesn’t feel real: The flood of new money into the economy, combined with the flood of crypto tokens, makes it all feel like “Monopoly money.”
Money feels divorced from real value, so people are running up the price buying all kinds of ridiculous things. Translation: The NFT market has all the makings of a bubble.
To that end, we need some principles for investing in NFTs. In this column I’ll briefly explain whether and why NFTs are worth anything, and how we might think about them as smart crypto investors.
Here’s a CryptoPunks NFT that someone probably paid a fortune to own. You’re getting it for free. Think about that.
How to Invest in NFTs: A Step-by-Step Guide
1) Buy Ethereum. Sign up for a service like Coinbase, go through the ID checks to approve your account, then use your credit card to buy ETH.
2) Install MetaMask. You’ll need to store your ETH in a digital wallet, and MetaMask is the most popular and most supported.
3) Transfer your ETH to MetaMask. You can easily send it from Coinbase to your new digital wallet.
4) Visit an NFT marketplace. The most common sites are OpenSea (think of them like the eBay for NFTs), followed by Rarible, Superrare, and others. There are also NFT-specific marketplaces, like NBA Top Shots (basketball collectibles) or Axie Marketplace (for the Axie Infinity game).
5) Connect MetaMask to the NFT Marketplace. Click the MetaMask fox icon in your browser toolbar, or the “Connect Wallet” icon on the marketplace, and you’re connected.
Here’s the option to connect MetaMask to OpenSea.
Here’s what it looks like once you’ve connected.
You now are able to buy or sell NFTs, but please invest carefully. Be willing to lose 100% of what you put into NFTs.
What Was the First NFT?
The first NFTs were a project called CryptoKitties, and we literally wrote the book on it. In short, these were digital cats that you could buy, sell, and breed with each other, with proof of ownership stored on the Ethereum blockchain. (Watch the one-minute video below.)
When they were introduced in 2017, CryptoKitties were such a phenomenon that they brought down the entire Ethereum network. I remember going to Meetups where blockchain geeks were livid that these silly cartoon cats were disrupting their Very Important Business.
Great art is disruptive. We forget that the masters – from van Gogh to Picasso, from Wagner to Kanye West – redefined what art “should be.” Great artists break the molds.
…But is this art?
Now millions of people are “investing” in these NFTs, just as quickly as creators can churn them out. It’s not limited to cat memes: you can buy all kinds of digital art, pop music, sports memorabilia, and even virtual real estate.
Even if you understand all this, the NFT craze may be a bit of a head-scratcher. If you buy traditional art – say, a Warhol print – you’re the only one who owns that Warhol print. The $580,000 Nyan Cat, in contrast, is still available for anyone to go watch on YouTube for free.
Which brings us to the basic question for blockchain investors: What are you really buying?
How Much is My NFT Worth?
NFTs are just a digital form of collectibles, which have been around for as long as humans have been collecting stuff. Traditional collectibles include not just fine art, but luxury items like wines and classic cars—as well as more common collectibles like coins and comic books. It takes many hundreds of hours to become an expert on valuing collectibles.
Investing in collectibles relies on one central idea: that someone will pay more in the future for them.
The hard part is knowing which collectibles will be worth more in the future. It’s easy to see the mint-edition Superman comic is valuable now ($3.2 million), but it wasn’t easy to see then, or more people would have saved them. The scarcity, by definition, drives the price.
The argument for NFTs is that they are scarce by definition: if you’re buying Jack Dorsey’s first tweet, well, there’s only one of them. You become the owner, with the digital record verified on a public blockchain.
…But is this true?
Does anyone really own Jack Dorsey’s first tweet? We understand that seeing a photo of the Mona Lisa is not the same as seeing the actual Mona Lisa, but seeing a link to Dorsey’s first tweet is exactly the same as seeing the “original.” Why on earth would someone pay $2.5 million for that?
The New York Times art critic Jason Farago recently dismissed the $69 million sale of a work by the digital artist Beeple, along with the concept of NFTs in general. I want to be careful about writing off the entire movement — because again, great art is disruptive. (I suspect Farago’s NFT column will age like a banana duct-taped to a wall.)
There’s a huge difference between enjoying or appreciating art, and investing in art. When you buy an NFT, you are entering the world of investing—why else would you buy it? A perfect digital replica is already available, for free. (Nyan Cat has been viewed 185 million+ times.) When you pay half a million dollars for the “official” Nyan Cat, what are you really buying?
In short, buying NFTs is buying bragging rights. If you think the bragging rights will be worth more in the future, then invest in them. But realize that collectibles are a highly risky and highly illiquid investment, and NFTs even more so. Here’s why.
What Makes an NFT Valuable? Here are the Two Things
One of the best art exhibitions I’ve seen was a collection of the actor Steve Martin, at the Bellagio Hotel in Las Vegas. Steve Martin, you may know, is a sophisticated art collector—and the Bellagio actually has a world-class art gallery.
The exhibition had an audio tour, narrated by Martin himself, along with art curator James Mann. Martin offered two principles for evaluating great art, especially the tricky subject of modern art, which does not offer us the perspective of time. These two principles struck me as so important that I still have them committed them to memory, twenty years later.
The two principles for evaluating great art are:
1) A sense of imprint: Does the image sear itself on your mind? When you close your eyes, can you see it vividly: every line, every brushstroke, every hue and color?
2) A sense of incompletion: At the same time, does the image seem to be unfinished? Does it raise more questions than it answers? Does it leave you wanting more, a mystery always on the verge of being solved?
These two contrasting elements—imprint and incompletion (my words)—are the tests of great art.
They are, of course, highly subjective. And they also require expertise: you have to evaluate a lot of art before you can really feel confident in your assessment. You don’t just go to OpenSea and sort by “Greatness.”
On the other hand, art is not like other investments: it is a thing of beauty, an object to be enjoyed. So if you are buying a collectible like art for the enjoyment of the thing, who cares whether an art critic likes it? If it brings enjoyment to you, that’s valuable.
Here are some other factors in evaluating the future value of an NFT:
- The Artist: If they’re already a celebrity, the NFT may hold its value (provided the market doesn’t crash). If you’re buying an NFT from a nobody, you’re banking on them becoming the next Banksy.
- Level of Effort: A one-of-a-kind painting, film, or song that takes many hundreds of hours to produce will likely retain its value more than slight variations on a Photoshop template.
- History of Ownership: Since it’s all transparent on the blockchain, a history of owners, with each paying progressively higher prices, is more likely to lead to higher prices in the future (if the market holds).
- Royalties and Licensing Rights: NFT owners should demand that they receive royalties and/or licensing rights from the underlying intellectual property. If you can create T-shirts and Netflix series from your NFT, then it can be a revenue-generating investment.
If modern art is tricky to value, NFTs are even trickier—especially given that art is only one of the NFT categories. So if you’re thinking about NFTs as an investment, here are some guidelines.
NFT Investing Strategy #1: Treat Them Like Collectibles
For most crypto investors, NFTs are not a reliable way to make money. It’s like collecting vintage wines or Pokemon cards: only invest in NFTs if you love them, and are willing to spend hundreds of hours becoming an expert. If you do invest, keep NFTs as a small slice of your Blockchain Believers Portfolio (preferably less than 1%).
Think of NFTs as collectibles. Traditional financial advisors recommend no more than 5% of your portfolio be invested in collectibles, if you’re rich. If you’re just starting out, less than 1%. Make it a tiny slice, and be willing to lose it all.
Rarity = value. When the market is flooded with artists monetizing everything they’ve ever made, it’s difficult to spot what will be considered “rare.” Many NFTs — like CryptoKitties — can be endlessly manufactured using computer algorithms or Photoshop templates. (Just because it’s sold on Rarible doesn’t mean it’s rare.)
It’s not easy money. According to The Telegraph, the average return on “investment-grade” art held between five and 10 years is around 4 percent. That’s for the mature and established art market; NFTs are just becoming a thing.
IRS will tax your capital gains. If you buy and sell an NFT for a quick profit, know that governments will still view it as a digital investment, meaning you pay tax on the profit. If you’re trading NFTs on a regular basis, keep track: every transaction is taxable.
Buy an NFT because you enjoy it. Don’t try to time the market or “flip” for a profit. If you are a super-Superman fan and want to own rare issues because you love the story, great. But don’t buy comic books expecting to make money. With NFTs, as with all collectibles, buy it because you love it.
NFT Investing Strategy #2: Invest in NFT “Stocks”
At Bitcoin Market Journal, our philosophy is to buy and hold bitcoin, plus a small number of high-quality crypto investments, for the long term (5+ years). Instead of buying an NFT, consider buying the NFT marketplace (i.e., buy and hold their token).
The simplest way to invest in NFTs is to buy and hold the “stock” (i.e., the token) in top NFT platforms, which fall into three categories:
1) Open Marketplaces: Anyone can list anything, which means they have an enormous selection, and also a lot of junk (like eBay).
OpenSea is by far the largest open marketplace, but they’re privately held, so you can’t easily buy OpenSea stock. You can buy OpenSea stock through secondary markets like EquityZen, but that’s complicated for most investors. For most of us, we’ll have to wait until they go public.
Rarible has a RARI token, which might be like buying “stock” in the company. One problem: RARI is currently minted at the price of 41,250 new tokens each week, so your share of ownership is constantly being diluted. The tokenomics are not great for long-term investors.
2) Curated Marketplaces: On this type of NFT marketplace, not just anyone can list an NFT; creators have to go through a screening process. This means fewer listings, but higher quality.
The biggest player here is SuperRare, whose RARE token at least has clear tokenomics. One billion RARE will be minted, with about a quarter of those going to partners and investors. SuperRare is still very new and unproven, so this would be a highly speculative investment.
3) Proprietary Marketplaces: These are marketplaces that sell only their own NFTs. For example:
NBA Top Shot, where you collect NBA clips from your favorite players. This runs on the Flow blockchain, which has its own FLOW token. As Flow was created by Dapper Labs, who literally invented NFTs, buying and holding FLOW might be a good bet on the future of their NFTs.
Ethereum runs most all the other proprietary marketplaces, so the strategy is just to buy and hold ETH. Of course, Ethereum has morally reprehensible fees, so you might make small side bets on Solana, Algorand, Cardano, and anywhere else NFTs are emerging.
Using the instructions at the top of this page, you can simply buy and hold ETH, instead of buying and blowing it on NFTs. Your future self thanks you.
NFT Investing Strategy #3: Demand Licensing Rights
If you buy an NFT without licensing rights, you’re giving up so many ways to make money on it in the future. Demand that NFT sellers offer it under the NFT License 2.0, which lets you earn up to $100,000 per year in licensing fees.
NFT holders should rise up and demand that they get licensing rights to the NFTs they have bought with their hard-earned money.
If you buy a CryptoPunk, you should be able to plaster that mofo on T-shirts, mouse pads, and toaster cozies. You should be able to pitch a new series to Netflix based on your NFT, because you own it. That CryptoPunk should work for you: otherwise, you’re the punk.
If you buy an NBA Top Shot, you should be able to get royalties on that clip every time it is broadcast anywhere in the world, in perpetuity.
Instead, here’s the common licensing terms that most people agree to when buying an NFT:
“Your purchase of [the NFT] does not give you the right to publicly display, perform, distribute, sell or otherwise reproduce [the NFT] for any commercial purpose.”
How does this make sense?
As a long-term value investor, I am very excited about the possibility of NFTs that would earn revenue over the long term. I would totally buy an NFT of a pop song that would pay me royalties on every stream, or an NFT of a book that pays royalties on every copy sold.
Dapper Labs, the OGs of the NFTs, actually released an NFT License 2.0, which does exactly that: it offers the ability to commercialize your NFTs – to make money with them. With this license…
…you can do with your Kitty art what you could never do with Mickey Mouse: you can take the art and design associated with the NFT, and make a living by using that art in creative ways. Put it on a shirt. Make your own comic book, featuring your Kitty. Buy 52 Kitties, and put the art on a deck of playing cards. The possibilities are endless. (Full blog post here.)
This sounds pretty great: you can make up to $100,000 per year by licensing your NFT, if it’s offered under the NFT License 2.0.
The only problem? NFT License 2.0 was released years ago, and no one’s using it.
That’s because NFT “investors” do not know any better. They think this is as good as it’s going to get. I will always side with the investors, so I am encouraging all you Bored Apes and Stoner Cats and Meth-Huffing Coyotes to demand the NFT License 2.0.
DEMAND LICENSING AND ROYALTIES ON YOUR NFTs.
The Future of NFTs: The Bruno Bond
While most individual NFTs are a waste of your hard-earned money, NFTs as an asset class are potentially a revolutionary technology that will allow us to invest directly in artists we admire. Here’s an example.
In my book Blockchain for Everyone, I tell the story of the Bowie Bond, which was a financial instrument launched by David Bowie in 1997 with the help of banker David Pullman. They offered a bond that earned income based on the future royalties of David Bowie’s music.
In other words, if you were a Bowie fan and looking for a reliable income stream, you could buy one of these bonds, which would pay you a percentage of Bowie’s ongoing royalties. In return for giving up these future royalties, Bowie got a bigger payday up front, which he used to invest in Internet businesses during the dot-com boom. (The full story is fascinating.)
I would totally buy an NFT that paid me royalties on every stream of this Bruno Mars song. (Now, THAT’S an investment.)
Imagine there was a way to pull a “Bowie Bond” using blockchain-based NFTs. Here’s how it would work.
1) An artist releases a new work: let’s say Bruno Mars releases a hot new single with Anderson .Paak.
2) A blockchain investor (and Bruno Mars fan) buys an NFT tied to the single.
3) As the single earns royalties from streaming and radio plays, a percentage of those royalties are now paid back to the owner of the NFT in Ethereum.
This “Bruno Bond” is an investment I’d consider, because now we can a) be confident of a future income stream and b) have some idea of what Bruno Mars singles are likely to earn, based on his past record(s).
Also, that single is incredible.
Potentially, artists and writers will also be able to earn royalties more directly, rather than through networks of streaming services, publishers, agents, and managers. (I suspect these networks of middlemen will still stick around, though, because they do provide value by allowing artists to focus on their art.)
We don’t technically need NFTs to realize this vision – it could all be managed in a standard blockchain smart contract – but here I think NFTs give an added psychological value. Record companies have long relied on “limited edition” singles; movies are reissued as “Director’s Cut” editions; even the traditional art market has “signed and numbered” prints. Again, these things imply rarity, and rarity drives up value.
As blockchain investors, though, we look for underlying value. Most NFTs today have zero underlying value. But NFTs as a concept have a ton of potential value, especially if they are linked to things that really do have value (like earning future royalties on a pop song NFT, for example).
For me, NFTs are currently a giant bubble made up of a million smaller bubbles. I’m not going anywhere near them. But I believe that bubbles are usually the “startup capital” needed to fund some great next stage of innovation. That next great wave of NFTs, I believe, may actually be quite nifty.
…And that just may be art.
Related Articles:
- NFT Investing: How to Buy Sorare Trading Cards
- NFT Investing: How to Buy NBA Topshot Moments
- NFT Investing: How to Buy Hashmasks
- NFT Investing: How to Buy Cryptopunks
John Hargrave is the author of Blockchain for Everyone: How I Learned the Secrets of the New Millionaire Class, which tells the full story of the Bowie Bond.
