Why Do People Buy NFTs?
Generally, I like to think of NFTs in 4 different ways:
1. The "hype" NFTs
- NBA Topshots
- Cryptopunks (in the picture above)
2. The functional NFTs
- Bored Ape Yacht Club
- Tom Sach's Rocket Factory
3. The passion NFTs
- Digital Art (without any added features)
4. The utility NFTs
- Tickets, albums, verification of digital ownership, etc.
But before we dive into it, let's get an understanding of what an NFT (non-fungible token) is.
If you've ever played a video game and bought an in-game add-on, you already have a basic understanding of how it works.
Basically, they're digital assets. Like a painting, but digital. Or like a concert ticket, but digital.
You can go to OpenSea.io and purchase an NFT just like you could buy a canvas painting on Amazon.
And the thing that makes an NFT different than a regular picture or JPEG is that you can prove ownership of it.
In the picture below, you can see the transaction history of an NFT on OpenSea, how much it's sold for, and who owns it.
To give a loose example of what an NFT can be viewed as I'll use Fortnite here because I religiously played it my senior year of college and spent way too much money on this exact thing I'm talking about.
In the game, you can buy characters, accessories, or even dance moves.
For example, these aren't default characters within the game. You have to buy them with in-game currency.
So for the sake of this example, the Marshmello guy is an NFT.
And you can buy these different add-ons to customize your gameplay, like dance moves or harvesting tools. Again, these aren't technically NFTs, but the transaction and use case is NFT-esque.
And Fortnite, a free game, made more than $9 billion in revenue in its first 2 years with a reported 70% of its users spending real money on its in-game currency.
People spend money on these in-game add-ons because it's a flex. It shows that you play the game and spent money on it.
But people who don't play Fortnite don't see any value in these characters or accessories whatsoever.
Which is how a majority of people view NFTs right now.
A vast majority of people aren't in the NFT "ecosystem" yet. But that ecosystem does in fact exist.
So having certain NFTs may not seem cool right now, but over time, as more people get familiar with them and enter the ecosystem, then the people who bought the early projects will seem "cool".
And whether we like it or not, people care about what other people think about them and their possessions. Keeping up with the Joneses isn't just a saying, it's based on natural human behavior.
And NFTs are playing into that human desire to show off and have cooler things than someone else.
Once digital ownership is adopted and becomes a standard, I believe NFTs will be even more 'valuable' than they are now. And some NFTs are quickly becoming adopted and the owners are being rewarded heavily.
Bored Ape Yacht Club is a perfect example of an NFT project that has started to hit the mainstream.
In the project, there are 10,000 individual NFTs and each ape counts as one NFT. Each ape has its own characteristics and rarity based on what accessories it has.
If you own one of the NFTs, you're in the community. It's like a modern-day status symbol.
Like car clubs where a group of guys who own Ferraris get together and drive around on Sunday afternoons.
Now, since there are only 10,000 Bored Ape NFTs that will ever exist, scarcity comes into play. Just like how Supreme releases limited edition everything and as soon as it sells out, the resellers flip the shirts on the secondary market for wayyyy more than the original cost. And this is how the market of NFTs work.
I believe when Bored Apes first came out a few months ago, they started at .15 ETH, which would be around $400-ish dollars.
Now, the absolute cheapest one you can buy right now (8/21/21) is going for $75,000.
Athletes like Dez Bryant, Von Miller, and LaMelo Ball now own Bored Apes, Gary Vaynerchuk owns some, Mark Cuban owns one (which you can actually view his whole NFT collection here).
And as of yesterday, Arizona Iced Tea - yes, the tea company - owns a Bored Ape.
The crazy thing is that the more popular it keeps getting, the more valuable it gets for every single person that owns one because there's a limited supply.
And the cool thing is that if you own one, you could be in the same community as your favorite athlete or celebrity. And with Bored Apes, you own all the media rights to that Ape and can use it however you would like.
I wouldn't be surprised if we saw a Bored Ape appear in a music video soon, but that's another rabbit hole that I don't want to take you down in this post.
But in short, NFTs are a digital asset.
Like a digital version of the Mona Lisa. Or a digital version of sports cards.
And since it's a digital asset, they can have utility features built into them which wouldn't be possible with a piece of cardboard or canvas.
For example, VeeFriends NFTs can give you access to meet with Gary Vaynerchuk.
I'm not going to dive into the intricacies of how the underlying technologies of NFTs work in this newsletter because I don't think it would help answer the question - but here's a decent explainer.
And the reason I don't think explaining the technology would help is because I don't know if it really matters - for example, do we care how FaceID on our iPhones work or how iPhones work in general, or do we only care about what they can do for us..?
I believe once we get past this initial discovery phase, digital ownership is adopted, and NFTs become a regular part of the digital world, no one will wonder how they work, they'll just buy them and use them.
Here's an NFT "version" of the Mona Lisa like I mentioned for sale right now:
Does this thing have any value? To me, not really. I won't ever buy it.
But there's only one of them. And imagine if the Rick & Morty creators saw it and really wanted it. They might pay 5 ETH (around $15,000 currently) for it and the owner of the NFT would get lucky.
The chances are slim, but it could happen.
And I think that's a mental hurdle that people have to jump through: just because you don't see value in something doesn't mean nobody else does.
Like if you don't understand NFTs or believe in them, cool - but that's not going to stop the millions of people who do believe in them from buying and investing in them. They'll make money, lose money, make friends, meet people online, all while you're still questioning if they're real or not.
I bought this NFT on Friday for .01 ETH not for an "investment" but purely out of passion. It's a representation of Lil Wayne, my favorite artist, and it's the only NFT project I know of that imitates Lil Wayne:
Does it have any value? Again, not really. But to me it does.
And that's what matters.
Every person in the world doesn't have to collectively agree that something has value for it to have value.
People have been collecting things for centuries. NFTs are just digital collectibles.
If your grandparents collected vintage tea sets, they might have paid $10,000 for each set I don't know - but just because you may not pay $10,000 for a set doesn't mean it isn't worth that.
The value is set by the buyer.
And when the buyer of an NFT can be anyone in the whole world with internet access and some crypto, that's a lot of opportunity for just ONE person to find value or want to invest in something.
But NFTs have use cases outside of being collectibles or random digital art.
Here are some real-world use case examples for NFTs:
An artist raising funds and selling their album
With the rise of independent artists and hate towards labels, NFTs give artists unprecedented control and flexibility.
Let's say an artist is wanting to release their first album but they don't have a label or funds to make it happen.
They could release 10,000 NFTs at $100 each to raise money to create the album, pay features, pay a producer, etc - and then whoever owns one of those NFTs could receive royalties from the album sales forever.
This completely changes the game for artists and fans alike.
Bet on an artist at the beginning of their career and you could get paid forever.
Like imagine if you owned royalties on the Beatles first album (if NFTs existed back then).
Success stories like that will be the norm in 40+ years when artists start using NFTs over the next decade.
Here's an awesome thread from @rorytait that breaks down how Kanye could release DONDA via NFTs
Real estate transactions
Rather than signing a bunch of paperwork, going to a bunch of meetings, and going through the nightmare that is buying a home, imagine if it was all done digitally, in a fraction of the time.
NFTs may turn that into reality.
(Hint: They're already starting to)
This is a quote from Forbes around NFTs and real estate:
"Here’s how a real estate NFT sale could work:
First, there is a legal preparation for the sale of a property as an NFT. Then an NFT is “minted” that includes descriptive and legal data about the property, including paperwork, disclosures, reports, image files, and even videos.
The NFT is proof of ownership.
Legally, whoever has possession of the NFT, owns the property."
So if NFTs could save people time, money, and it makes the home buying process way more convenient, what would stop this technology from being adopted over the next decade?
In my opinion, nothing. I think it's imminent if no regulations are created to halt the advancement.
These are just two examples, but over the next several months I plan to write more about the crypto and NFT space outside of this newsletter on my personal blog so if you find this kind of stuff interesting, please reply to this email and let me know what questions you have or what kind of content you'd like to see.
But to answer the question of why people buy NFTs, I believe there are 3 main reasons:
- It has utility (gives access, can create real-world value, etc)
- They personally value it (just like a regular piece of art)
- As an 'alternative' investment (I believe this style of investing will become traditional rather than alternative over time)
From an investment lens, if you bought a Bored Ape when it first came out and hadn't sold it until now, you would've made around a $70,000 return in just a few short months. The chances that you pick the right project that blows up and becomes popular is slim, but it could happen and it has happened.
I'm bullish on the NFT space as a whole, however, I'm in the camp that believes 99% of current NFT projects will go to zero as well.
There's too much supply out there and too many cash-grab, copycat projects.
But if you look at the community being built around a project, the utility it may provide, the scarcity, the actual artist/designer/creator, or the industry that it's changing, you might start to see how NFTs are more than just a JPEG.
Gen Z has grown up digital-first.
They understand this technology.
They won't have a problem adopting it. I mean, they already are.
The younger half has been playing Roblox, which is very similar to the NFT landscape, and I believe Roblox will either be an onramp to the metaverse, or will help build the foundation of the metaverse, but that's a topic for a different day.