Your Guide to Understanding NFTs

Originally published on March 1st, 2021

Before I dive into this article, please understand that NFTs are a very new development and not considered a traditional investment.  There is a large risk involved with investing in NFTs and this is not a recommendation to skip investing for retirement and try to get rich quickly by buying NFTs.

First off, WTF is an NFT?

The acronym NFT stands for Non-Fungible Token.

What does “non-fungible token” mean?

Basically, it means that each NFT is unique and cannot be duplicated or replicated.  Think of it as a concert ticket.  You have your ticket, assigned to your name, with a unique ticket number on it.  It’s nobody else’s except yours.

I want to keep this article as simple as possible so without diving into the deep details of the technology and infrastructure around NFTs, (which you can learn more about here), they are basically a digital asset.  An NFT is an entry on the blockchain, the same technology that Bitcoin is built on.

This is an example of an NFT:


This 34 second video of an unreleased song from a SoundCloud artist sold for a little over $1,000.

Is it really worth that?  If people are willing to pay that, yes.

Imagine if Kanye released an NFT like this for his song Runaway back in 2010.

You might’ve paid $1,000 for it initially.  But the song blows up like it did and now people might pay $100,000 to own it because it’s the original piece of art created by Kanye.

It’d be like buying the original movie script for Scarface.  It’s just writing on a piece of paper, right?

The brand of Scarface and the popularity of the movie creates the demand and value.

The original script for Scarface is selling for $5,000.

This is exactly how NFTs work.

They can’t be duplicated and the future price of an NFT will be determined by the demand and perceived value.

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Why are they becoming popular?

There’s a lot of reasons.

One reason being is that there’s a lot of money in the system so people are venturing out to new investments outside of typical stocks, bonds, and real estate.  Alternative investments as a whole are picking up popularity with platforms such as Rally Rd, Collectable, Vinovest, and others allowing people to invest in things from the rarest sports memorabilia to a dinosaur skull.

Technology is also rapidly growing and creating new asset classes that have never been available before, partially due to the wider adoption and development of blockchain technology. (Learn more about blockchain here)

I saw this explanation from Gary Vaynerchuk on Clubhouse the other day:

“Regarding musicians - imagine using NFTs to raise money by selling 10% ownership rights to your first album which is stored on the blockchain.

If you make it big, your earliest fans stand to profit huge”

This is a huge advancement in the world of creators.  NFTs give more power to the creators - musicians, artists, everyone.

NFTs allow the original creator to participate in the appreciation of their art or assets.  For example, if you painted something and sold it to someone for $100 and that person turned around and sold it for $5,000 - you wouldn’t receive any money from that $5,000 flip because you gave up ownership when you sold it for $100.

With an NFT, creators have the ability to place permanent partial ownership on the NFT so they can always own a piece of their original work.  So in this same example, if you placed a 10% ownership on that NFT and that same person sold it for $5,000 - you’d get $500 from the appreciation.  This is game changing for artists and creators.

I know I’m using a lot of music and art references, but this area of NFTs makes sense to me.  NFTs have unlimited use cases and you’d be surprised at the amount of them out there.

This is another example of an NFT:



This little thing that looks like it was created in Microsoft Paint just sold for $165,878 on February 25th.

I’m not even kidding.



A side note: One of the many reasons that blockchain technology is being widely adopted is because of the transparency.  You can see every transaction within the blockchain.

Now you might be thinking, what’s the difference between having a screenshot of that digital person and actually owning the NFT?

That’s the thing.  The screenshot isn’t real.  It’s not the original.  I don’t have the token code to prove I own it.

Now that there’s technology to verify and authenticate digital art, it’s a whole new world.

It’s like the Mona Lisa.

I can go to the Louvre and take a picture of it - but why isn’t it that picture I took worth $100,000,000?

Because it’s not the original.

NFTs allow artists and creators to mint their work and create 1 of 1 digital assets.

It’s hard to understand but always think of it like a typical piece of art.

The Mona Lisa is only worth so much because that’s what people value it as.  There’s a lot of pieces of art in the world that are better and more beautiful but aren’t worth as much as the Mona Lisa.

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NFTs are more than just a hot trend and a way to *maybe* make quick money.  A lot of people are going to lose money trying to invest in NFTs - there’s no way around it.

However if you view them as what they are, a digital piece of art rather than a quick dollar, it changes things a little a bit.

How is physical art currently valued?  By the price that people are willing to pay for it.

No different than a piece of digital art. The world is transitioning to digital more and more every day.

The one thing that I’m curious to see play out is how this digital art is going to be displayed.

Why?

Because that’s a large part of the reason people buy art and collectibles.  To show off to friends and other people.  It’s human nature to show off cool things you own.

Right now, about all you can do is show someone within an app that you own a clip of LeBron dunking.  

But once NFTs are adopted in the “real world” or there’s a better way to show off your NFTs digitally, it’s game over.

They will explode in popularity more than they already are.

Maybe it takes 10 years for them to be widely adopted.  Maybe we’ll have to become a digital-first society before that happens.  Who knows.

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If you’re going in with the mindset that you’re going to get rich quick, there’s a good chance you’ll fall short of those expectations.  I like to view NFTs as a way to invest in things or people you’re passionate about.

For example, if Lil Wayne released an NFT tied to a piece of his music I’d love to buy it. I wouldn’t necessarily view it as something I’m trying to make money off of because I’d just genuinely like to own it.

Just like any collectible. Which is basically what NFTs are right now. A digital collectable.

They’ll transform and develop into new things as they continue to grow, but I don’t think they’re going anywhere anytime soon.

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I believe it’s important to be informed about new investments and new developments but again, this is not a recommendation to go out and start buying NFTs.  There’s a lot of risk involved and this post is simply just explaining in my own terms what NFTs are and if you do choose to invest in them, consider it gambling/speculation rather than an actual traditional investment.  

Just like any investment there’s no guarantee that they’ll hold their value.  Since there’s no history or track record of performance, it’s impossible to know what they’ll be worth 5, 10, 15+ years from now.

Always do your research and make sure you understand what you’re investing in before making any decisions.

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