What are NFTs and why are they significant?
NFTs stand for non-fungible tokens and are an attractive investment opportunity because of their extremely lucrative ROIs. Because of their relevant newness, they are volatile. Because they are based on the blockchain, they are safe.
NFTs have seen a massive bull run recently given that some of them have returned north of 1,000% over the past few weeks.
In fact, the largest marketplace for NFTs (think of it like an exchange for NFTs, but with the ability to only buy and sell), OpenSea crossing over $1,000,000,000 ($1B) in trading volume in the month of August alone.
Let's explore why NFTs have become a reliable (albeit extremely volatile) investment tool.
Before that, however, let's just quickly gloss over the basics.
NFTs - A Primer
You can think of NFTs just as cryptocurrencies, because just like any cryptocurrency, they don't have any intrinsic value.
However, while several cryptocurrencies like Bitcoin and Ethereum have garnered value for the purposes they solve, NFTs - by themselves - have no value whatsoever. They are a piece of technology.
A joke going around is that NFTs are merely JPEGs that you can copy and paste--if that is all the value you see within them, then that is the value they hold to you.
However, similar if not the same thing could be said of options derivatives and how their values are understood, at least in respect to the majority of retailers' conception and motivations behind utilizing them for speculating on stock market prices.
What gives an NFT its value is the underlying asset. So, in this case, you can think of it just as a derivative, because the non-fungible token doesn't have a value on its own, but its underlying asset does. As most of these assets are digital/physical assets like artworks, the value of each is determined by what the buyer is willing to pay for it. Again, just like an options contract.
Now that we have basics out of the way, let's understand why they are a reliable asset.
NFTs - More than a Craze
The market saw its initial boom in 2017 with the launch of Cryptokitties (an NFT-based game) but fell dead afterwards. With the rise of sports collectibles in late 2020, the craze re-emerged and with the subsequent sale of Beeple's artwork for about $69M stirred up a new industry of digital collectibles.
What makes NFTs different from other cryptocurrencies are the artistic freedom. Creators can work to the best of their ability and publish incredible pieces that get sold for incredible prices. And this artistic freedom has resulted in the way people look at various assets. Where there are no middlemen (art galleries like Sotheby's), no external entity to decide the price of each asset, there are only buyers and sellers.
The sellers are artists who have thus far been unable to earn a decent income off their work, and buyers are the crypto community that has thus far supported the evolution of the ecosystem.
So the inherent value does not only lie in the assets, but it also lies in the ever-growing community. And this is indicative in the crazy NFT sales that have happened over the past few months.
The overall trading volume over the past 30 days has already crossed $1.8B with NFT-based games (Axie Infinity), digital collectibles (CryptoPunks, Art Blocks, and Bored Ape Yacht Club) taking the lead.
Did you know that users earn crypto while playing Axie Infinity that they can convert to fiat currency? Many users in the Philippines are earning an average income just by playing the game!
The number of active users in the space has also seen a tremendous increase over the past few months.
The NFT ecosystem has grown beyond measure. There are now platforms that allow you take out crypto loans depositing your NFTs as collateral. There have also been some incredible NFT sales over the past few months. Here are some notable examples:
- An apartment was sold as an NFT for approx. $92K
- A meme of the famous Dogecoin was sold for approx. $4M
- Visa bought a CryptoPunk for $150K
- Each collectible from the Bored Ape Yacht Collection sells for at-least $120K
From this data, it is evident that digital collectibles have seen an extraordinarily high volatility and, perhaps by extension, a gamma exposure--people buy a collectible when it is first announced, and then sell it for an extremely lucrative profit--just the way that SPACs or new derivatives on the options market for a volatile (high IV) stock might.
The trading of these collectibles are driving the ecosystem forward. While we don't have access to traditional financial instruments when it comes to NFTs, we certainly have taken a step forward in using it to earn profit.