The NFT Revolution
From Bored Apes to Metaverse land, NFTs are making headlines for the eye watering valuations they are attracting. Is it all a bubble and a lot of hype or is there a fundamental change starting here?
Tens of Millions of dollars is being spent daily on JPEGS - what on earth is going on?
Have people gone crazy with speculation, is it money laundering or is there actually something really special happening here?
To understand why NFTs are surging in popularly it helps to understand two big concepts, one emerging and one that has been around for centuries.
People have always wanted to collect things and have paid a premium for things that are both beautiful, useful and also scarce.
We don’t find it unusual that the real Mona Lisa is worth so much more than a print or even a perfect replica. They look the same, they have the same utility, but one is the authentic original and one is not and that matters to a lot of people in our society.
The same occurs with every day branded products. A real Louis Vuitton bag is more desired than a copy, even if the copy is better quality. People prefer the original.
Beyond this there are many people collecting all sorts of artefacts like baseball or Pokemon cards, stamps, parts of train sets; it’s an endless list. Some of these items sell for small fortunes because they are rare and people like rare items.
The concept of the metaverse is a whole separate lesson. Its gained a lot of publicity recently with Facebook's name change to Meta, but it's been envisaged for decades.
The Metaverse is still in the early stages of its development right now, but the vision is clear. If you have seen the popular Spielberg movie Ready Player One, you will have seen the idea of digital reality that people spend time in.
You probably know a lot of people who spend a significant proportion of their time “online” in a digital ecosystem of games, social media, and information, and the time spent there is increasing rapidly.
The metaverse will make this “online” experience more immersive and more functional and more like a version of the real world but with less restraints and more options for creativity. In Ready Player One, the characters and much of the population escaped their miserable physical reality in favor of the opportunities of this digital world.
If we are heading on a path to spend more and more time in this new online reality, does it not make sense to want to invest more in enhancing our life there through acquiring digital assets?
So with these concepts in mind, what specifically is giving these NFTs value?
While the hugely valuable NFT collection "crypto punks" are not attractive art to most people, they are readily identifiable to those in the know and they were the first mainstream NFT. In particular, they introduced the concept of traits and rarity by creating a finite number of punks with a common set of traits but with some far rarer than others, therefore making them more unique and more desirable to collectors. There are 10,000 punks, but only 9 are aliens with blue skin, for example.
As the genesis project of this type, crypto punks are collectible in the same way as maybe the first computers, or first editions of books; the alien punks maybe being like a signed first edition. Or, maybe its even more significant and the first NFTs are akin to the first books of any type.
Status and Exclusivity
By definition anyone with a Crypto punk has about $500,000 of spare money such that they don’t need to liquidate their punk to pay the bills.
Having a punk is a “Social Flex” - it’s like having a Bugatti or a Diamond Rolex or owning some other exclusive branded item. But it’s in the online environment, not the physical world. I did not use the phrase “Real World” as they are both real.
For the Bored Ape Yacht Club (BAYC), where again the cheapest is now worth hundreds of thousands of dollars, the attraction is more about being part of an exclusive community. Again there is an element of social flex, but what the BAYC team have excelled at is adding value to the community by arranging exclusive parties in NYC and Miami, freebies (such as the Mutant ape NFTs that were given to ape holders), exclusive private chat rooms for holders, and the promise of much more in their "roadmap". So there is a degree of utility that the punks did not have.
Both Punks and BAYC has attracted many celebrity investors such as Jimmy Fallon (BAYC), Serena Williams (Punk), Tom Brady (rumoured to own an Ape), Snoop Dog and many more quiet probably under the radar with more to follow no doubt.
Name my ape! Drop your suggestions below 👇@BoredApeYC #BAYC #BoredApeYachtClub #NFTs pic.twitter.com/pwFynGy9QJ— jimmy fallon (@jimmyfallon) November 17, 2021
This creates an elitism to the ownership to be part of this exclusive group, and potentially being able to network with many HNW individuals and celebrities. Beyond that there is no knowing how this exclusive group could develop. At this point, it's useful to understand two other critical features of NFTs
NFTs are Digitally verifiable
If you participate in the Crypto and NFT space, then you most likely have a Metamask or similar wallet to manage your tokens and NFTs. Metamask is a browser plugin on desktop and app on mobile that among other things, allows you to authenticate the assets you own to another site.
So with your permission, websites and apps can verify if you own a particular NFT on the blockchain and treat it somewhat like a ticket or membership.
Consequently, by having a BAYC in your wallet, you can sign in to private areas once they have checked the ape exists. But this is most likely just the start.
As a website owner, this can allow you to identify VIPs or any class of user based on the NFT community they are part of. How long will it be before you can use an NFT to fast track a credit application, or for major hotel chains to give room upgrades if you can verify ownership of a particular NFT in the reservation process?
We have already established that NFTs are far more than a digital image, but by being on the blockchain your ownership is digitally provable. There's a group of people on Twitter known as the “right-click save-as” people, who delight in downloading rare NFTs and claiming they now also own them. However much like taking a photo of the Mona Lisa is different to owning it, they haven’t made the connection yet.
NFTs generate money
Depending on how the particular NFT community is setup, there is a royalty fee charged every time one of the NFTs is sold. This is typically 2.5-10% of the sale value and provides a huge incentive for the NFT developer to make their NFTs more desirable. While the money goes to the founders, many are choosing to spend a large proportion of the royalty income on marketing and on benefits to holders.
This can be traditional ads such as billboards in Time Square, but also the parties and events the founders hold. These parties and events increase the desire for the NFTs, increase the volume of their transactions, and further increase royalty income.
To date, BAYC trade volume is over 250K Ether. So that’s 250,000 x $4-5000, which is over a billion dollars of volume. BAYC sales have a 2.5% royalty, so this has potentially generated $25m.
NFTs create a market for gaming
People have been playing console games and levelling up their characters ever since the first Atari system came out. A combination of time, skill, and in-app purchases have created some cherished and sought-after characters.
While there has been some trading of logins and in game artifacts over the years, blockchain and NFTs takes this to another level with a secure and trusted way to verify ownership and marketplaces to transfer this.
There are new NFT projects launching every day, which bring together the original concepts of skill levels & experience points and different traits of NFT characters.
One such high profile project in development is The Shiboshis from the popular Shiba Inu meme coin community. Like with other NFTs, there are a finite number of characters with different combinations of traits (skills). The exact model they will employ is unclear, but gamers are investing in characters with certain potentially powerful characteristics; such as “laser eyes”, fire breathing, and Batman clothing.
It’s speculated that holders of these NFTs will be able to play in the games and earn rewards, rent out the use of their characters, and potentially breed with others to make new NFTs they can use or sell.
Digital Real Estate & Property
We talked earlier about the concept of the metaverse and the Ready Player One movie. As this becomes reality, there is a whole economy evolving within it. Popular metaverse projects like The Sandbox and Decentraland are founded on a finite number of plots of land that exist within their ecosystem. Just like in the physical world, land here is scarce and increasing in value–you can use it to build entertainment areas, businesses, and more. While technically there is infinite possible land, because anyone can start a new metaverse project, the reality is likely to be that a few will dominate.
The Sandbox game in particular has attracted investment from the likes of Atari, The Walking Dead, Care Bears, Rollercoaster Tycoon; and many other businesses looking to offer games, crypto casinos and members clubs. Single plots of land, especially those close to these (probably high-trafficked in the future) brands locations have been appreciating in value rapidly.
As well as land of course, a multitude of other assets within the metaverse are being created so users can level up their digital identities. it is quite likley that the JPEG NFTs of the current internet (Web 2.0) will evolve into digital avatars in the metaverse (2.0). Just like the physical world has celebrities, the internet world has influencers, the metaverse will have their own high profile segment of users. Maybe it you will WOW as a bored ape walks past you in the metaverse (or maybe you will throw bananas at him!). In the physical world people have their photo taken with supercars, and in the metaverse there will be an equivalent.
There are already digital merchandising shops like 10ktf where you can create your own digital items branded with the imagery and IP of the NFTs you own. For now these are just collectibles (and tradeable) but eventually its likely that this will extend to being able to wear these products in the metaverse
Having heard all about this, you may want to get in on the action while it’s still early. But there are a few risks you should keep in mind if you’re thinking about investing in NFTs.
NFTs are still new, and we don’t know how the technology will evolve over time. For example, right now most NFTs store their images on a network called the Interplanetary File System (IPFS). We won't go into the details about how this works, but suffice it to say that it allows people to store huge files, including music, images, and videos, in a way that is decentralized.
But despite this advantage, it isn't quite as safe as using a blockchain to store data.
So this creates a risk. If at some point we become able to store images directly on a blockchain, people might not want old NFTs that use IPFS. In fact, IPFS or even the major networks that NFTs exist on, such as Ethereum, might not exist either. They might have been replaced by some new network we can’t even imagine.
That's just one example of a technology risk to holding NFTs. There are probably others.
Risks involving public opinion
In order for an NFT to have high value, it has to represent a popular brand or icon. But public opinion is fickle. What’s popular today may be irrelevant tomorrow. Bored Apes are all the rage today, but maybe Angry Penguins will be the new fad in 2024. Who knows?
Compared to cryptocurrencies and fungible tokens, NFTs are illiquid. If you have a stash of crypto, you can sell it at most exchanges instantly, and there are always buyers available.
But NFTs may take weeks or even months to sell. So if you have cash that you may need in a hurry, you may not want to invest it in NFTs.
As mentioned before, counterfeiting is a problem in the NFT market. If you buy an NFT not officially issued by the rights holder, it may end up being worthless.
So if you’re going to invest in NFTs, you’ll need to make sure you’re not buying counterfeit ones.
How to Buy NFTs
If you’ve decided you want to buy some NFTs, you’ll need to know where to find them.
Right now, the most popular place to buy NFTs is OpenSea.io. OpenSea is available on both the Ethereum and Polygon networks. So you’ll need either ETH or MATIC cryptocurrencies to make transactions on it.
In case you don’t find what you want on OpenSea, here are a few other NFT marketplaces you can use. We’ll also list the cryptocurrency needed for each marketplace.
- Blockparty.co (BOXX)
- Rarible.com (ETH, FLOW, or TEZOS)
- Binance NFT (BNB or ETH)
- SolSea (SOL)
- Lootex (ETH, BNB, MATIC)
- RandomEarth (LUNA)
All of these cryptocurrencies can be purchased from various exchanges. If you don’t have an exchange yet, just select your country on this page, and browse through the listings to find the exchange you want.
How to Choose an NFT project
There are 1000s of NFT projects out there and dozens launching every day. Which ones should you choose?
The answer first lies in your objectives. Is it purely to make money? Are you wanting to support artists you like? Are you interested in gaming, or do you want to be part of a particular community?
Whatever your answer, it almost certainly makes sense to research the social media presence of the community. For NFTs, the two main places are Twitter and Discord.
With Twitter, you can quickly assess the size of the community in terms of number of followers, when it started, how actively they post, and whether the tone and nature of the posts fit with your interests and value. So if you hear about a project, search it on Twitter, and find it that way, be careful to avoid clone accounts with fake scam projects. The size and the activity should help you establish if it's genuine
The above could well be a fan site and totally fine. But the point is that it's not official, so don't be trusting it and clicking the Opensea link you see there.
Almost always, Twitter accounts will link to a website and a discord channel where you can find more information. Does the website look professional? Is the discord active and friendly? Typically, a discord community will have public areas anyone can read once they verify they aren’t a bot and private ones only accessible to NFT owners who have verified their NFT to the server.
After this, you need to find the marketplace for the NFT–which unless it's not launched will be on a site like Opensea. Here you can see the price of the cheapest item, known as the floor price, and browse the NFTs that are for sale.
Beware of clone accounts here. Ideally you want to follow a link from the real Twitter or Discord channel AND for the project to have been authenticated on the platform; such as the blue tick Opensea gives to established projects. If you just use the search bar, you will see there are so many clones and copycats and similar alternatives that it can be easy to actually find the wrong project.
At this point, you have to make a judgement if the price of these NFTs are in your budget and make sense to you based on what you will get out of it in terms of utility, community, and desirability.
How to choose an NFT
One you have chosen a project you are interested in, how do you decide which specific item or items to buy?
We have gotten this far without explaining what NFT means. It stands for Non-Fungible Token. What this means essentially is that every item is unique. Often the items look different, but sometimes they can look the same. Still, even items that look the same will have a specific ID relating to them, so they are not interchangeable like crypto coins are when 1 Dogecoin is indistinguishable from another.
Obviously, price and personal taste will come into your decision making to a large extent, but it's also worth looking at
Which items are selling in volume and at what price. If you are looking to hold for a long time, then volume may not matter so much. But NFTs are all different and sold separately, so your item may take a long time to sell unless you drop the price a lot. The more you can understand the market, the better. And actual sales activity is far more meaningful than the prices items are listed for (which the owners can pick at a whim without any realistic expectation of being able to sell at that price.)
Trait Scarcity and Utility
Depending on the type of NFT, scarcity of a trait will make it more valuable. We said above that out of 10,000 crypto punks there are only 9 aliens. If you see an alien near the floor price, then that’s probably a bargain.
However, in other situations where—say the NFT is used in a game, some traits may not be that useful even if scarce. It's possible its uniqueness will create a premium on the price, but the underlying usefulness of its traits/skills is probably the biggest driver of price.
There are also other aesthetics that can be a factor. With the traits being randomized, this means that the combinations of traits can be very apt or quite bizarre. For The Shiboshis, there are 22 different clothing traits such as Astronaut, Cowboy, Sailor, Wizard, and it goes on! There are also a similar number of hats and headgear items such as a crown, a halo; but also a wizard hat and cowboy hat. Irrespective of scarcity, a matching wizard hat and clothing would be more desirable that a cowboy hat with wizard clothing.
Millions of dollars are being spent on NFTs every day. But this isn't just some hype-filled craze. NFTs will play a large role in the coming Metaverse and Blockchain Gaming revolutions. And this is all because they are scarce, ownership of them is provable, and they have strong communities plus utility.