NFTs are all the rage these days. At a first glance, they may seem like a fun pandemic distraction, a Twitter trend inspiring collectors to change their profile pictures to colorful little avatars, like the $280,000 Serena Williams CryptoPunk pin Alexis Ohanian wore to the Met Gala.
Wait ? a pixelated cartoon valued at $280,000? Maybe NFTs are worth a deeper look.
As more financial advisors are learning, NFTs are starting to catch on, even among non-celebrities. And it may not be long before a client asks you how to include NFTs in their portfolio.
This column originally appeared in Crypto for Advisors, CoinDesk?s new weekly newsletter defining crypto, digital assets and the future of finance. Sign up here to receive it every Thursday.
While the jargon used by the NFT community may be head-spinning, there?s something to these pieces of digital art. The technology itself isn?t too hard to grasp (at least not on a conceptual level), but what?s truly exciting is the potential this technology brings ? and where it could take us in the future.
So what exactly is an NFT? And how will you advise clients when they wonder if they should buy digital tokens? Ahead, I?ll help demystify this new form of a digital asset.
What are NFTs ? and will they live up to the hype?
The acronym ?NFT? stands for non-fungible token. That?s a fancy way of saying irreplaceable, or not interchangeable. Dollar bills, for instance, are fungible. One dollar bill represents the same thing as the next dollar bill. As long as none are counterfeit, a cashier will accept any of the dollars you have in your wallet. It makes no difference which one you choose to pay with.
Most cryptocurrency is also fungible. One bitcoin, for instance, is equal to one bitcoin, is equal to one bitcoin. The actual file transferred is irrelevant to its value, even though there is a finite number of bitcoin out there.
Non-fungible tokens, however, are not fungible. Minted on the blockchain, these digital files represent an asset that is unique and therefore scarce. Those cute CryptoPunk cartoons might look similar to one another, but the digital record stamped upon the blockchain can verify which is which, and, more importantly, who owns it. When ownership is transferred, the blockchain records that, too.
If you?re tech-minded at all, it doesn?t take a lot of imagination to understand how this new technology opens up a world of possibility that could change how we record and transfer digital ownership. We already understand how to send digital files like PDFs, JPGs, and more ? but NFTs add a new layer of data validation.
There?s even such a thing as smart contracts, where a creator can code royalties into their NFT, so that any time the asset is sold again on a secondary marketplace they (and anyone else they want to write into the code) keep getting paid. Compared to the ?90s when any neighborhood kid could simply burn a CD or download their favorite songs on Napster, exchanging NFTs on blockchain creates a record that is stored into, as far as we can comprehend, perpetuity.
Last, NFTs aren?t just about art, though that is the most popular context in which they?re being discussed right now. Technically, an NFT can be any kind of file, says Jordan Lyall, chief product officer and co-founder of the NFT marketplace Nifty?s.
?It?s almost just a kind of new file format,? he says. ?Netflix used to put movies in the mail, but when the technology got good enough, they started streaming. It?s kind of the same thing.?
Now, NFT technology is winning over the art community, but it?s just a hop, skip and a jump away from being used for ticketing, property deeds ? and maybe even for financial security ownership, says Lyall.
?I can see at some point Nasdaq is running completely on a blockchain,? says Lyall, who started the NFT farming site dontbuymeme.com before he founded Nifty?s. Having experienced firsthand what kind of innovations come about through experimentation, he expects NFT technology to keep snowballing until it is ubiquitous.
But now we?re getting speculative (see how easily excitement creeps in?). Let?s refocus and discuss where and how your clients can trade NFTs.
What is an NFT marketplace?
To buy and sell NFTs, your clients must first pick the NFT marketplace and wallets of their choice.
Similar to Amazon or eBay, an NFT marketplace is a platform where users can store, display, trade and, in some cases, mint (create) NFTs.
Users will need a funded crypto wallet that?s compatible with whatever blockchain network used by the marketplace they want to buy or sell an NFT in. MetaMask, for instance, is a popular wallet run on perhaps the most popular blockchain platform, Ethereum. Marketplaces that use Ethereum include OpenSea, Rarible and SuperRare, to name a few.
Sometimes, users can fund their wallet with U.S. dollars through automated clearing house (ACH) transfers or other means. Nifty?s, for instance, lets users put in their credit card number and make transactions in USD, even though the money is linked to a cryptocurrency known as a stablecoin, which is designed to have value against the USD. (This is to make cryptocurrency exchanges more accessible to newcomers.) The currency used in every scenario and whether currencies are interchangeable depend on the platform.
Just like with any financial account, users will need to sign up and share personal identifying information, such as bank accounts and credit card numbers. There will be transaction and processing fees for making purchases, just like with any kind of online shopping. Users should use their discretion.
Why NFTs are so appealing
Simply put, people love collectibles. And thanks to the growing accessibility of NFT marketplaces, the title of ?collector? now applies to someone trading free Space Jam tokens just as much as it does to prominent figures like the pseudonymous Whale Shark, who owns more than 220,000 pieces of digital art and has consulted Paris Hilton on how to break into the market.
As a financial advisor, your first priority is to look out for the long-term financial security of your clients. It might be helpful to think of NFTs the same way you would a rare stamp collection, for instance, or a signed original manuscript of the great American novel. NFTs are a lot like old-school comic book collecting, or baseball cards and Pokémon cards. Except, thanks to blockchain, their true scarcity (and value) is much less speculative because we have an irrefutable record of every token.
Assuming your clients have a healthy amount of money invested for their retirement, a sizable emergency fund and enough disposable income that they can experiment with NFTs, collecting can be a fun and innovative way to feel a part of the future.
But if someone isn?t in the position to invest money on speculative art ? whether a hundred dollars or a thousand dollars here and there ? there are ways your clients can dip their toes into the NFT market for free.
How to get involved with NFTs without spending a dollar
?Check out Twitter,? Lyall says. And he?s right.
With a quick scroll through the feed for #NFT and #NFTs, you can find artists, platforms and companies chatting about anticipated drops (releases), industry news and more.
Lyall also suggests checking out projects like OpenSea, the largest NFT marketplace, to learn about well-known artists, exclusive collaborations and how much your favorite NFTs cost. Monitoring these developments costs nothing, but it helps you become a more informed buyer when you are ready to start collecting.
And don?t be discouraged by the most expensive NFTs, Lyall advises. Tokens from one of the first-ever NFT collections, CryptoPunks, for instance, are valued at extremely high prices now, even though they were free when they first dropped in 2017.
Instead, ?find an artist that really resonates with you,? Lyall says. Notice an emerging creator whose work isn?t yet known or valued. Buy early when the price is low ? it could pay off later. But most importantly, do it for enjoyment, not for potential profit. That?s been Lyall?s secret to success.
?There are dozens of artists every day that are dropping collectible projects. It?s so hard to decipher. What?s good? What?s bad? What?s interesting?? he says.
The playlists featured on Nifty?s attempt to help newcomers answer these questions, offering curated collections for people to learn about, including such categories as collectibles, animated art, photography and more.
Bottom line
At best, NFTs signify a revolution. Stamped on the same blockchain as cryptocurrency, this new technology makes it possible to track ownership and authenticity unlike ever before. That will perk the ears of art collectors, curators and alternative investors interested in owning original digital imagery, music files and other forms of intellectual property.
But at their worst, NFTs can appear to be exclusive ? which is ironic given the battle cry of decentralized finance (DeFi) and the NFT community?s overall sense of optimism. Many expect NFT technology will democratize digital property ownership and empower the little guy, but while we wait for everyone to get familiar with the new technology, encourage your clients to have fun without many strings attached.