16th Dec 2021
Judging by the headlines, NFTs are the new toy for millionaires looking for something to do with their money. Famous names like rapper Snoop Dogg and entrepreneur Mark Cuban are leading the charge on the new technology. It’s never a good idea to blindly follow the celebrities, but it might be worth trying to understand what is attracting them.
Among the sea of mega-investors, it could be hard to remember that NFTs, and the blockchain technology on which they are built, are touted as a way of democratizing and decentralizing finance, economy, and trade. Are non-millionaires being shut out from the party? Here’s how regular investors can join the game.
Why the excitement around NFTs?
An NFT is a digital asset that represents either a digital or a physical object. It’s non-fungible, so it cannot be interchanged with any other object, and has real world value even when it only exists in the digital world. An NFT makes it easy to convert digital assets into fiat currency.
NFTs are changing the game for artists
Until recently, it was difficult to prove ownership of a digital asset. Platforms like Twitter and Facebook claimed content published on them, stripping artists of their rights. Digital artists were powerless when people copied their work, and even famous actors and musicians were frustrated when clips of their greatest achievements were used to drive ad revenue for third parties.
NFTs allow creators to assert ownership of their creations and generate their own income, instead of watching the profits go to middlemen and collectors. That’s what’s provoking so much interest, particularly among celebrity artists.
Famous athletes are also drawn to NFTs to get around licensing rules, which make millions for the license-holder but little for the athlete themselves. “When you’re signed to these leagues, you basically sign your likeness away. You might get a check at the end of the year,” says NFL linebacker Cassius Marsh 1.
Scarcity breeds value
When anyone could copy a digital asset, there was little value in the original. But as Arry Yu, chair of the Washington Technology Industry Association Cascadia Blockchain Council, says, “Essentially, NFTs create digital scarcity, unlike most digital creations which can be infinitely produced.2” Digital art, music, videos, and even memes, in-game assets, and tweets can be minted with an NFT, and then bought, sold, and owned without losing their value.
High net-worth fans and collectors are excited to be able to own a piece of their favorite band, artist, or personality and value the scarcity of the items they buy, especially since NFTs offer a more direct relationship with the creators.
Who is involved in the NFT scene?
If you thought that techies and geeks would dominate NFTs, it’s time to think again. Musician David Bowie was one of the first to predict the changes NFTs are bringing, even though he died before they really took off3. Back in July 2020 – light-years ago for this new sector – actor William Shatner minted 10,000 NFT digital trading cards which have seen their resale value skyrocket. In August of the same year, Paris Hilton auctioned a drawing on NFT platform Cryptograph4.
It’s hard to count the number of celebrities who’ve joined the NFT wave since it grew in early 2021. Synth-pop singer Grimes sold 10 NFTs for $5.8 million in February5; Snoop Dogg released his first NFT collection in March6; and Mila Kunis dropped the NFT of the first episode of her animated series Stoner Cats in July7. Artists Damien Hirst8 and Banksy9 have both produced NFT artwork; NFL player Rob Gronkowski sold 5 NFT trading cards for approximately $1.6 million10, and skateboarder icon Tony Hawk minted an NFT video of his signature move, the 540-degree Ollie11.
Entrepreneur Mark Cuban is also a big cheerleader for NFTs, writing “The transparency is the biggest upside. I can see the history of every buyer and bidder, I can see what they own, what price they paid12.
Christie’s Hong Kong’s latest auction included 14 NFTs13, and Sotheby’s sold a Collection of digital art for more than US$17 million in April 202114, showing that ultra HNWIs who prefer auction houses over NFT marketplaces are also taking part.
How can ordinary investors participate in NFTs?
Investors can look for new, up and coming digital artists like Jazmine Boykins15, buy their NFT art while they are still relatively unknown, and then spread the word to raise the value of the investment. It’s the traditional patron model reinvented for the digital age. Collectibles are also seeing their value rise through NFTs, including digital items like ticket stubs, virtual gaming cards, and famous tweets. If you make the right purchase now, you could see several thousand dollars of profit a few months later.
Anyone can buy NFTs on marketplaces like OpenSea, Rarible, and Foundation. Investors with a smaller budget can buy shards, which are fractions of NFTs. You’ll be charged “gas” on every trade, i.e. fees for computing the blockchain transaction, but those are relatively low. OpenSea charges 2.5%, for example. You’ll also need a crypto wallet, and to buy the right cryptocurrency for the NFT you’re targeting.
Alternatively, you could mint your own NFTs. Sought-after domain names, social media handles, and memes are all valuable as NFTs. You could even video your achievements, like Hawk with his boarding move and, in a different way, Kate Moss with an NFT video of herself sleeping16.
But direct NFT investment is risky. NFT prices are based on demand, like artwork, rather than economic indicators, which means it can be tricky to spot items that are worth investing in. “Anyone on the internet can create an NFT out of literally anything, which means there are a lot of “really bad” tokens out there” said Nadya Ivanova, COO of L’Atelier BNP Paribas17.
There is still foul play in what’s been described as the Wild West, with markets rife with people stealing artists’ work and manipulative moves like wash trading18. The untried nature of the new ecosystem is a further concern. “The marketplaces that create and transfer NFTs are relatively new and they have not made credible promises that they will still exist 20 or 50 years from now,” warned William Entriken19. If the storage for your token breaks, you won’t be able to access the NFT.
Finally, NFTs are not liquid, so if demand and/or the market tank, you could be left with a useless set of code.
Invest in NFT stocks
An alternative is to invest in companies developing NFT marketplaces, wallets, and NFT-based communities, or others working to make the blockchain tech on which NFTs rest more secure, reliable, and fast. This broader perspective looks to invest in the metaverse, which encompasses the range of companies involved in the blockchain sphere. But like many disruptive technologies, both the metaverse and the NFT markets hold risk.
Millionaires may be able to afford losing all their investment, but smaller investors might not feel that way. “NFTs are risky because their future is uncertain, and we don’t yet have a lot of history to judge their performance,” notes Yu20. Others warn that most investors lack the knowledge and experience to identify promising NFT stocks or metaverse stocks in a volatile and still-evolving market.
“Given this high level of uncertainty about NFTs valuations, it might be more prudent to take a venture capitalist approach,” advises Brai Odion-Esene, founder of SW4 Insights. “Don’t buy the flavor of the month; rather hedge your bets and invest in a portfolio of assets—just like VCs investing in a broad selection of promising startups,” he adds21.
An NFT ETF can be an inviting prospect for new investors
This is where an NFT ETF comes in. With an ETF, investors who are new to the NFT scene can dip their toes into the nascent and disruptive market without needing to spend time learning how to distinguish between lemons and the next big thing.
An ETF like Defiance’s NFTZ offers a way for investors to spread their investment across a number of promising NFT stocks that are involved in a range of aspects of the NFT and broader blockchain ecosystem. Despite its name, some might call it a meta ETF for the exposure it offers to those that compose and affect the NFT markets as a whole. NFTZ lets you mitigate your exposure to risk and access a more balanced portfolio while still taking part in what may be one of the biggest disruptive tech trends of the future.
1 “Why Celebrities and Brands Are Betting on NFT Startups” May 17, 2021 https://www.inc.com/amrita-khalid/nft-startups-celebrities-intellectual-property.html
2 “What You Need To Know About Non-Fungible Tokens (NFTs)” May 14, 2021 https://www.forbes.com/advisor/investing/nft-non-fungible-token/
3 “Creators, Communities, and the Gray Space in the Middle” October 10, 2020 https://www.nichanank.com/blog/2020/10/9/gray-space-in-the-middle
4 “These celebrities are bringing NFTs to the mainstream — and cashing in” March 9, 2021 https://www.businessofbusiness.com/articles/nft-celebrity-non-fungible-tokens-crypto-grimes-paris-hilton/
5 “These celebrities are bringing NFTs to the mainstream — and cashing in” March 9, 2021 https://www.businessofbusiness.com/articles/nft-celebrity-non-fungible-tokens-crypto-grimes-paris-hilton/
6 “Snoop Dogg Announces the Release of His First NFT Collection: “A Journey with the Dogg”” March 30, 2021 https://www.prnewswire.com/news-releases/snoop-dogg-announces-the-release-of-his-first-nft-collection-a-journey-with-the-dogg-301259014.html
7 “Mila Kunis’ Animated ‘Stoner Cats’ Series Released as NFTs” August 6, 2021 https://www.awn.com/news/mila-kunis-animated-stoner-cats-series-released-nfts
8 “DAMIEN HIRST: THE CURRENCY, TOTAL MARKET VALUE IS APPROX $500MILLION” September 13, 2021 https://fadmagazine.com/2021/09/13/damien-hirst-the-currency-the-total-market-value-of-the-project-is-approximately-500million/#:~:text=The%20Currency%20by%20Damien%20Hirst,each%20of%20the%2010%2C000%20artworks
10 “Gronk Super Bowl NFTs Score $1.6 Million in Ethereum at Auction” March 15, 2021 https://decrypt.co/61271/gronk-nfl-nfts-sell-for-millions-in-ethereum
11 “13 Celebrities Who Have Joined the NFT Crypto Art Craze” May 24, 2021 https://www.lofficielusa.com/pop-culture/celebrities-on-the-crypto-art-craze
12 “The Store of Value Generation is Kicking Your Ass and You Don’t Even Know it” January 31, 2021 https://blogmaverick.com/2021/01/31/the-store-of-value-generation-is-kicking-your-ass-and-you-dont-even-know-it/
13 Post by Tomer Niv on LinkedIn, September 28, 2021 https://www.linkedin.com/posts/tomer-niv_nft-meraverse-crypto-activity-6848557857890152448-p4t3/
14 “$17 Million Realized in Sotheby’s First NFT Sale with Digital Creator Pak” April 16, 2021 https://www.sothebys.com/en/articles/17-million-realized-in-sothebys-first-nft-sale-with-digital-creator-pak?locale=en
16 “13 Celebrities Who Have Joined the NFT Crypto Art Craze” May 24, 2021 https://www.lofficielusa.com/pop-culture/celebrities-on-the-crypto-art-craze
17 “NFTs could be the future of collecting — or a huge bubble. We talked to 3 experts about the risks to consider before buying in.” March 13, 2021 https://www.businessinsider.com/what-are-risks-of-investing-in-nft-2021-3
18 “NFTs could be the future of collecting — or a huge bubble. We talked to 3 experts about the risks to consider before buying in.” March 13, 2021 https://www.businessinsider.com/what-are-risks-of-investing-in-nft-2021-3
19 “Are NFTs a Good Investment?” April 13, 2021 https://www.thestreet.com/investing/are-nfts-a-good-investment
20 “What You Need To Know About Non-Fungible Tokens (NFTs)” May 14, 2021 https://www.forbes.com/advisor/investing/nft-non-fungible-token/
21 “Are NFTs Worth Investing In?” may 25, 2021 https://www.rollingstone.com/product-recommendations/finance/nft-explainer-are-nfts-worth-investing-in-1170059/