It’s time to take NFTs seriously
“$13,000 for a JPEG, lol these kids are so stupid. Boy, are they going to learn.”
— everyone that doesn’t own an NFT
It’s a cool thing to hate on NFTs right now.
It feels like just about everyone’s eating popcorn waiting with anticipation in their eyes for the bubble to burst.
This reminds me so much of the sentiment around Bitcoin back in 2014. I vividly remember having conversations with people about buying Bitcoin back then and 9 out of 10 people either didn’t care or had outright negative remarks.
“Have fun with that magical internet money.”
“Hah, Bitcoin. Just more signs we’re in a bubble.”
Now seven years later many of those same people are excited they can finally own Bitcoin through an ETF in their Schwab account 20,000% higher.
In this post I want to share why I think it’s time we as investors and traders take the NFT and metaverse seriously.
What are NFTs?
Non-fungible tokens (NFTs) are a very broad term that lumps together lots of underlying use cases and utility.
NFTs are simply unique and verifiable tokens on a blockchain. Some examples include:
- Games where the items and characters are NFTs owned by the players
- Tickets to a concert could be sold to attendees as an NFT
- Artists can release their work as NFTs
What kicked off this recent NFT frenzy was the art scene.
Artists finally had a way to publish their work and uniquely prove they were the creators, enforce scarcity, and track all future transfers and sales of their authentic pieces.
This quickly led to crypto investors who value their anonymity to start using the art as their profile pictures to identify themselves. PFP-NFTS, otherwise known as Profile Picture (PFP) projects were born.
The most well known of these projects to date are CryptoPunks and Bored Ape Yacht Club. It is this segment of the NFT market where most of the high-priced mania is coming from and that is the focus of this post.
Image of Bored Ape Yacht Club Apes #0 through #5
NFTs are the modern-day country club
Growing up my dad belonged to our local country club. He ran a small business in our town and, for him, this was a great way to get to know people, network, and hopefully land some business.
We would go there as a family for dinner, and I remember, every visit there was always someone coming to our table to say “hi” to him and talk shop. He never golfed or took advantage of the facilities, it was all about making connections within the community.
NFTs are the modern-day country clubs and buying a JPEG is simply your cost of membership.
Most people are still viewing the PFP-NFTs as just art purchases. But what they’re missing is that by purchasing that art, you have now have an entry ticket to a club with 9,999 other members (even though most projects have a collection of 10,000 unique pieces, many people buy multiple NFTs of the same collection, so unique ownership tends to be much closer to 5,000 people).
NFTs are community
Most of these PFP projects live on Discord.
You enter into their channel, authenticate through a Discord bot which validates you are the rightful owner by checking your crypto wallet (sorry “right click save as” copy cats, you won’t get through here), and you immediately unlock a series of private channels for community members only.
You’ll be warmly greeted by all of your fellow members who bought a dog, cat, lion, or whatever crazy piece of art you collected.
You will feel welcomed, supported, and instantly bonded, because you are part of an exclusive club that you paid money to be in. A club of people who value the same artist, identity, or design that you do.
Most of these projects have a mission behind them.
Maybe it’s charity, maybe it’s education, or maybe it’s all centered around a fun new meme. Whatever it is, there is a mission, a roadmap, and in some cases lots of funds to make these goals happen, since projects earn royalties on all secondary sales of their NFTs.
In these Discord servers, you’ll see members and project leads asking for people with experience in web development, or copyrighting, or community building, to step up and help the project grow.
What’s remarkable is that many people do step up and they do it with great enthusiasm. After all, these NFT holders have pride in their purchase and want to see their project (investment) grow.
Imagine 5,000 diverse people bonded together, with a sense of purpose, mission, and economic incentive. They are all working — and not fake working, watching Netflix in the background all day while muted on Zoom calls — but real deliberate working.
Imagine what a group of motivated individuals like that can accomplish.
NFTs are the only status symbol that matters
When I was growing up, having a nice car and owning a nice watch was the status symbol of success to strive for. That was the way you told the world that you had made it.
Right now, we are transitioning into a world where status is shown by your profile picture and your Opensea collection. It doesn’t matter what car you drive when you’re showing off your verified CryptoPunk as your Twitter profile picture.
If you see someone has a verified CryptoPunk as a profile picture:
- This signals to the world they are an early adopter.
- This signals to the world they are an OG in the crypto space.
- This signals to the world they’re probably worth a lot of money, because to join that country club, you need to have 89 ETH ($353,000) which is the current floor price at the time of writing this.
In fact, the general sentiment across crypto communities is that you sacrifice buying a home, or a new car, or an expensive pair of shoes, so you can afford more digital assets like NFTs.
NFTs are your gateway into the metaverse
Metaverse is another buzz word nowadays that gets thrown around left and right. No one really knows what it means because we haven’t really seen it in action yet.
Ready Player 1 is another illustration of what it could turn into, but regardless of the future that we build, the takeaway is that digital properties and self-ownership is becoming much more relevant and equally as important than anything in the physical world.
NFTs will be your ticket into specific areas of the metaverse.
Want to see the next Snoop Dog concert? He apparently has partnerships with Sandbox and chances are you’ll probably need a specific NFT to get in.
Want to hear the latest Bored Apes conversations or hangouts? Sorry, that’s exclusive to token holders only.
NFTs Risk management and portfolio allocation
Trade Risk is all about responsible investing and what’s critical to understand is that NFTs and the metaverse are at the cutting edge of technology and therefore sit at the highest peak of the risk spectrum mountain.
For that reason, you must tread carefully and responsibly.
Here’s the simple rules and framework that I think can be useful for those of you who want to allocate to this space.
Whatever amount of Bitcoin you own, you should cap your NFT allocation at 5% of that.
I know technically ETH is the unit of currency for NFTs, but I still think Bitcoin is the king base unit of accounting and collateral in this space. A hypothetical digital asset portfolio may look like this:
- 75% Bitcoin
- 20% Layer 1’s (Ethereum, Tezos, Solana, etc.)
- 5% NFTs
Another simple way to think about investing in NFTs is to treat them all as call options. Assume most will go to zero but hope just one of them produces a 50X and pays for the rest.
I do believe the best portfolio composition moving into 2022 will be overweight digital assets, metaverse, NFTs, etc. and by 2023 I wouldn’t be surprised to see family offices, hedge funds, and institutional dollars increasingly allocate to this space.
There will be extreme volatility along the way
Just like getting into Bitcoin early, or frankly any other early stage/high growth company, there’s going to be a tremendous amount of volatility. NFTs will have 75% corrections, some larger more “blue chip” projects might hold up better than others, and plenty will go to zero.
There will be thousands of articles declaring the death of NFTs when these bear markets occur and when the blood is running in the digital streets, you’ll find some value and get a glimpse as to which communities are left standing.
It’s time to take NFTs seriously
What’s hard about this space is that we don’t necessarily have a previous analog or script to understand exactly where this is all going. This is cutting edge technology, culture, and community all mashed together and rushing forward at incredible speeds.
It’s also really hard to appreciate this space until you take the plunge and buy an NFT, join a Discord server, and experience what it feels like to have a front row seat in this developing world.
I’ve placed well over 10,000 trades in my career as an investor and I can tell you none of those experiences equated to what it felt like when I bought my first NFT and started interacting with other token holders.
I was literally shoving the computer in my wife’s face saying “Look at this dog that I bought! Isn’t it so cool?”
It’s a strange new world we live in, but there’s a large movement happening here if you look close enough.
Have fun and invest responsibly.
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