Guest Edition: Investing in NFTs
This week’s newsletter is another guest edition. What better topic to explore than NFTs, which appear to be the most popular buzz word at the moment. Just this week, Disney announced that they are to release a collection of NFTs. There is an incredible amount of information and noise about NFTs and with that I am delighted to welcome the incredibly informed Morgan Linton to cut through the noise and tell you what you really need to know.
Hi, I’m Morgan, and in this article I’m going to do a deep dive into NFTs and share more about why I think they represent an entirely new asset class. Before I get to the good stuff, I’ll start by sharing some basics, but I won’t dwell on this for too long since you can oncover that yourself with a quick Google search and I want to really delve into the investment potential I see in this space.
What is an NFT?
NFT stands for non-fungible token, and most of the time it refers specifically to an ERC-721 token on the Ethereum blockchain. You don’t need to know exactly how an ERC-721 token differs from an ERC-20 token, or the details of the Ethereum blockchain to understand NFTs so I’m not going to bore you with the details. Instead, I usually tell people to simply think of the Ethereum blockchain as a ledger with a list of transactions, and an NFT is a token that’s every move is tracked and traceable on the Ethereum blockchain.
The most important thing to understand about NFTs is the fact that the first two words are “non fungible” which means what you have is something authentic and verifiable. I’ll carry this into the next section, but just keep this in your mind, I’ll say it again – authentic and verifiable.
How NFTs work?
NFTs work like any collectible, from art to Rolex’s collectibles are valuable because they are both authentic and verifiable. If I say that I have a rare Rolex, but there’s no way to prove it, well then, it’s not going to command the value that a rare Rolex would.
The same is true for art. Saying I own a Picasso with no way to prove it, really is the same as not owning a Picasso. In many ways an NFT works just like collectible asset classes that we have today, and I think more than anything they represent the evolution of the world as a whole from physical to digital.
What gives NFTs a bit of an edge over physical assets is just how ironclad the verification process is. If I buy a rare watch or painting, someone, who the industry deems an expert, studies the asset and does their best to verify that it is indeed authentic. While you can have two, or maybe even three experts agree the rare Rolex you’re thinking of buying is the real thing, there’s actually no way to prove with 100% certainty that they are correct.
This is where NFTs have a significant edge, and as I’ll discuss more below, gives them a real opportunity to become a true asset class. With an NFT, you can verify with 100% certainty that an asset it authentic, you can see its entire history from inception to this very second, and you can prove to anyone in the future that you are the owner.
How this works on the Ethereum blockchain is also not as complex as you’re probably thinking. Let’s go back to the ledger example – and remember, any blockchain be it Ethereum or Bitcoin is just a ledger, and ledgers have been around for a long time. I think people often make blockchain technology sound a lot more complex or intimidating than it needs to be. Instead, if you understand a ledger and the concept of writing down the details of a transaction, you already understand blockchain, it’s just happening digitally and unlike in real life, you can’t go back and erase or change past transactions - once something is written to the ledger (blockchain) – it’s there forever.
NFTs are simply tokens on a blockchain, and the most popular NFTs right now are ERC-721 tokens on the Ethereum blockchain. Anyone can make a token, add artwork to it, insert metadata and then list it for sale through a marketplace like OpenSea, gift it to someone, really do anything they want with it.
While I could go on for a long time about the deep mechanics of Ethereum and debate the pros and cons of different token types, you don’t need to know that to understand NFTs as an asset class, and you’ll never need to. So now let’s get to the good stuff and talk about the different types of NFTs that are selling now and what has emerged as the blue chip NFTs that places like Christie’s and Sotheby’s have shown clearly appeal to traditional collectors.
How I got started in the NFT world
First came crypto, then came NFTs for me. I started buying Bitcoin, Ethereum, and a few other cryptocurrencies back in 2016. Back then, people told me I was crazy, which makes it even more crazy to fast-forward to today and see huge finance companies like Fidelity giving seminars to customers on Bitcoin and Ethereum.
I can still remember the very early days of NFTs, but I didn’t get it, then in May of this year, everything changed for me when I discovered Bored Ape Yacht Club. First, rewind a year ago and I never thought I’d be writing an article, about investing, and talking about something related to Bored Apes, but the world has changed and here we are.
So, what is Bored Ape Yacht Club and how did it change my life in May? Well it all started on Twitter. I’m pretty active on Twitter, it’s my jam, and it also happens to be the place that the crypto and NFT community lives which means it’s front-and-center in my life on a daily basis. Back in May, NFTs were starting to get some attention but for me and many others, Bored Ape Yacht Club was the tipping point. One day my Twitter feed just started filling up with people talking about Bored Ape Yacht Club – the idea was simple, you bought an NFT of a cartoon ape, and that served as your pass into an exclusive club.
As for what you got for joining the Bored Ape Yacht Club; initially it meant getting access to a gated version of the website where only you and other Bored Ape token holders could go. I had missed the mint which meant I would now need to buy on the open market, and the prices had jumped over 6x since minting. I thought I had missed the boat.
The next day, Twitter was even more flooded with tweets about the Bored Ape Yacht Club and the fomo set in, I had to have one, even if it meant spending over $1,500 on a JPEG of a Bored Ape…I pulled the trigger, I had my ape, and my first order of business was clear – let’s see what’s on the other side of the website.
What I found was, well, disappointing. With my Bored Ape NFT in my wallet I was able to access the restricted area of the Bored Ape Yacht Club website which was essentially a bathroom wall that people could scribble on. Had I made a huge mistake?
Then something incredible happened, that one NFT I bought doubled in price, and quickly. I changed my Twitter profile photo to a Bored Ape and boom – I had thousands of new followers. The price continued to rise and I kept buying apes, soon I had six apes and I started pricing my apes at ridiculous prices, and they were selling.
Fast forward to a couple months later and I made my first six-figure sale. Within ten minutes I had taken every penny from that sale and bought another ape – my first six-figure NFT purchase. What I learned with Bored Ape Yacht Club is what I imagine other collectors learn about art, watches, and other valuable collectibles – there are intricate traits to these collectibles, and learning the traits, and being able to identify them meant understanding the true intrinsic value of the assets.
I spent countless days staring at a website called rarity.tools that showed all the different traits a specific NFT project could have, and the value of those traits. I was hooked, I couldn’t stop myself from studying every Bored Ape I could find and trying to understand what trait(s) made it valuable. Before I knew it I got to a point that I call, “seeing the Matrix” – which, for those who have seen the Matrix will know, is the point where Neo can see the code behind the simulation and finally understands how everything works.
From this point on my life changed forever. While I know that sounds dramatic - it’s true. I was able to analyze Bored Ape NFTs like a jeweler examining a diamond, and this meant I could identify good investments often just by looking at the NFT, which meant I could go through large lists of NFTs faster and faster. I started studying other projects, minting Gutter Cats, Punks Comic, and a number of other projects that have now crossed into “Blue Chip” territory.
Then came the tipping point, my first day of over $1M in offers on my NFTs. Today, Twitter has an entirely new meaning to me, it’s the core of my investment research, and those silly JPEGs of cartoon apes, they’re a part of my identity. But let’s back up because I know at this point, if you’re still reading, you probably want to understand where the investment opportunity might be for you, someone who hasn’t yet had an experience like me.
How to get started with NFT Investing
First – know, like most investment opportunities, there are a ton of scams out there and a ton of people who are just trying to make money off this new NFT craze. Just like the early days of SPACs, hype can lead to a lot of people investing in things that don’t have much long-term value, and avoiding some common pitfalls can help you get started on the right foot.
My first advice to anyone getting started with NFTs is to make your first investment a project that already has proven value. Which project you start with depends on your budget. For anyone with a budget of $200,000 or more, I recommend starting with a Bored Ape. Today you can get a solid investment-grade ape for around $250,000, and since this entire space is still so new, seeing that grow to $2.5M is absolutely fair game in my opinion. Speculative, yes, but when it comes to investing in the NFT space, your least risky investment is almost certainly Bored Ape Yacht Club.
If your budget is smaller, which is understandable since $250,000 is a pretty wild place to start – know that there are still plenty of opportunities for you. Mutant Ape Yacht Club (MAYC) allows you to get into the Bored Ape Yacht Club ecosystem for a fraction of the price and other projects like Lazy Lions and Gutter Cat Gang offer good opportunities to invest in NFT projects with strong communities that are still priced in a reasonable range for new investors.
All that being said, as many of us learned earlier this year, a lot of the magic, and opportunity comes with minting, where investors typically pay something in the 0.07ETH range to get a random NFT in a collection. What makes minting so special is the opportunity to get a rare NFT, that in some cases could sell for 10ETH or more for a fraction of the cost, if you’re willing to roll the dice.
I use the dice rolling analogy with minting because it does follow more of a gambler mentality. The reality is, minting an NFT means joining a project with no track record and no data around pricing, you’re effectively gambling which means doing your own research before minting is paramount. This is also why I suggest new investors start with an existing, already proven project like Bored Ape Yacht Club that has already proven it can perform well at auction houses like Sotheby’s.
All this being said, if you’re reading this – you’re still early. Ten years from now I think we’ll look back on 2021 and 2022 as the early days of NFTs. We’re still at a point in history where people are comparing NFTs to Beanie Babies and most people don’t even know what Bored Ape Yacht Club is.
As investors, we all have a choice – we either decide to pay attention to and try to understand new markets, or we decide we’ll stick with what we already know and understand. In my mind, the biggest opportunities come from the things we understand the least, because that’s a sign that it’s still early enough to make incredible gains that we aren’t likely to see anywhere else. We take these risks knowing they come with a greater risk profile than the traditional investments we’re used to, but I challenge everyone to take a step back and decide how they want to look back on the early days of NFTs.
Like most new markets, most will stay on the sidelines until the market has truly proven itself. And as most people are saying now, this market is still too nascent to show that it will stand the test of time. Still, we don’t know how many times the world will change in our lifetime, and how many opportunities like this will come along.
There is something truly transformational going on with NFTs, or at least I think there is, I could be wrong, but we get so few changes in life to bet on something truly unique and different. I encourage everyone reading this to do their homework, learn the risks involved, and decide what’s best for them. What I can say is, I don’t think opportunities like this come around often, and I’m glad I jumped in when I did.
Is it too late to jump in now? I can’t answer that for you, but I can tell you that if you’ve discounted NFTs as a fad, you might have just talked yourself out of an asset class that will make a lot more sense over the next 20 years than oil on canvas. Only time will tell, but I think the digital transformation is just beginning, and it’s up to you to decide how you navigate the changes ahead.
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Wolf of Harcourt Street
Disclaimer: I am not a financial adviser and I am not here to give specific financial advice. The opinions expressed are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. The information is based on personal opinion and experience, it should not be considered professional financial investment advice. There is no substitute for doing your own due diligence and building your own conviction when it comes to investing.