Today I’m talking about Non-Fungible Tokens (NFTs).
Specifically, I’m sharing:
- What an NFT is (in plain English!)
- Why they are so valuable
- If this is an asset class retirement savers should take seriously
If you want to know why pixelated drawings and 3-second video clips are trading hands for millions of dollars + what to make of this investing craze, today’s episode is for you.
How to Listen to Today’s Episode
Episode Links & Resources:
- 👉 Get Your One-Time Retirement Plan
- The $69 Million JPEG
- Investment vs Speculation [25iq]
What Are NFTs and Should Retirement Savers Invest In Them
Taylor Schulte: Welcome to the Stay Wealthy Podcast. I'm your host, Taylor Schulte, and today I'm continuing with our technology theme for the month by diving into the world of NFTs or non fungible tokens.
Specifically I'm sharing what an NFT is in plain English, what makes them so valuable, and if this is an asset class that retirement savers should be taking seriously.
So if you wanna know why pixelated drawings and three-second video clips are trading hands for millions of dollars, and what to make of this craze, today's episode is for you.
For the links and resources mentioned, head over to youstaywealthy.com/102.
By now, you've probably caught wind of the $69 million jpeg a digital image that was sold for yes, $69 million in a recent art sale through Christie's, which is an online auction company. This was a new record for artwork that exists only digitally, and it's the third-highest auction price achieved for any living artist.
If that doesn't already sound crazy, this $69 million jpeg was essentially just a collage of other digital images taken by the artist known as people, 5,000 pictures that you and I can grab screenshots of for free, thrown into a collage that sold for $69 million.
If this story is new to you and you want to hear more, check out the short episode that Planet Money did on the topic a couple of weeks ago. I'll be sure to link to it in the show notes. But the reason I'm sharing it with you today is because this image, this jpeg that recently sold and set records is an NFT or non fungible token.
Let me break down this confusing term in plain English before we go any further. A non fungible asset is something that can't be quickly exchanged. A relatable example might be a valuable baseball card or a wine collection, or a piece of land or even a classic car. And unlike a $20 bill, which is fungible, you can't quickly and easily swap your $50,000 wine collection for cash.
A token, the T in NFT is simply a type of virtual currency that lives on the blockchain, and it represents a specific asset such as a digital image like the $69 million jpeg. So if we put all this together, an NFT is simply documentation of ownership of something that is one of a kind, or sticking with our jpeg example, documenting ownership of the original version of something because just like there are replicas of the Mona Lisa, it's quite easy to grab screenshots or make copies of digital images.
So by minting a digital file or image or video clip as an NFT, the owner is able to prove that it's the original file. Note that the NFT isn't the actual piece of art. The NFT is just a unique piece of code that identifies and proves that the art in question is what the owner or the seller says it is, that it's not a replica or a copy, it's the original or one-of-a-kind version.
You can almost think of it as a serial number that identifies your refrigerator or your iPhone, right? Nobody has the same iPhone serial number. The numbers are unique, which allows Apple or anyone really to identify all the manufacturing info for your phone and help troubleshoot issues or find specific parts for your refrigerator.
In that sense, an NFT is a serial number for digital pieces of art. It could be an image, but it could also be a music file. It could be a video, or even a virtual plot of land. Yes, virtual plots of land exist and people pay real money for them. Don't even begin to ask.
So now that you know what an NFT is, let's now talk about why they exist and to start, let's address the two main issues with physical collectibles.
So physical collectibles the first issue is that they're hard and often costly to verify their authenticity. For example, there aren't many people on this planet who have the skills and expertise to identify a fake Mona Lisa from the original. It's hard and it's costly to find someone to verify authenticity.
The second issue with physical collect collectibles is that it's hard to track a physical object's ownership history. For example, if you buy a rare baseball card, it's just about impossible to know the lifetime journey of that card and how many times it's changed hands and who else has owned it throughout time.
Now, if it's hard to verify authenticity and track ownership of something physical, it's even harder to track something that lives in digital form, given how easy it is to make copies of, of images, music files, videos, etc. And that's where NFTs and blockchain technology come into play.
By publishing digital assets on the blockchain, the owner, the owner of that digital asset, creates a verifiable record of its authenticity. It also enables the digital asset to be tracked throughout its ownership history, so potential buyers can see who has owned it, how many times it's changed hands, and what has what it's been bought and sold for over the years, just full and complete transparency without friction or costly experts involved.
So now that we know what an NFT is and what problem it's set out to solve, why the heck are they so valuable? Why are images that can be downloaded, screenshotted, or even recreated, being bought and sold for millions of dollars? And by the way, it's not just a few things that's sold for millions of dollars that I'm referring to, to date, NFT collectibles have cleared over 400 million in sales volume, and that's increasing every single day.
But back to why they're so valuable, what, why is a video clip of LeBron James Dunking worth $200,000 when you and I can watch the same clip for free a thousand times on YouTube? Well, to be fair, we could say the same thing about a baseball card or a famous painting or really any other physical collectible. What's the difference really?
Like what's the difference between having the original Mona Lisa hanging on your wall versus a really good replica, or what's the difference between an original Hot Wheels car that's literally made of metal and plastic but it has a six-figure value and the answer lies in intrinsic value versus extrinsic value.
The intrinsic value of a Hot Wheels car, ie. you know, the cost of the metal and the plastic, it might be a few cents, but the extrinsic value could be a hundred thousand dollars or more. And extrinsic value is derived from five main things, authenticity, scarcity, in particular, transferability, immutability, and utility.
And while we could dissect each one of those factors contributing to extrinsic value, the reality is that an NFT or any physical collectible for that matter, is simply worth what someone else is willing to pay for it. And with more people stuck at home due to covid plus the recent boom in cryptocurrency, NFTs have generated a ton of interest and driven those prices up.
Also, major institutions like Christie's and Nike and Time Magazine, their involvement, lens credibility to the space as well as investors and, and forward thinkers that people follow, like Mark Cuban who's invested in this space.
Another interesting point that someone brought up recently is that non fungible assets do tend to thrive during times of uncertainty and economic turmoil. For example, rare physical coins saw their value spike during the Great Depression and Black Monday, and even in the '08 '09 recession.
So it's not totally uncommon for people to turn towards non fungible assets during times of uncertainty. It's also not uncommon for these non fungible assets to quickly become fads and bubbles, which can result in people losing a lot of money.
Which leads me to attempting to answer the last question today, which is, what does all this mean to retirement savers? Should you be investing in NFTs? I, is this an asset class that you should really be considering first, like any investment or asset class, there will always be people who get lucky, make a lot of money, make headlines like the $69 million jpeg and cause you to start questioning your decisions and wondering if you're missing out on an obvious opportunity.
Some of these people that got lucky will leverage that luck to write books and sell products and go on TV and look like a genius, but most will likely learn the hard way that repeating that type of luck over and over again is very, very difficult.
As colleague Josh Brown recently put it,
It starts with a trickle and looks, smells, tastes, and feels like easy money, which attracts lots of attention. Ie. buyers lots of attention attracts more sellers, more product creation, more marketing, bigger waves of product, larger dollar amounts per product, etc. It spirals out of control until all the demand has been met, and then it keeps going until everyone is soaked with product and every ounce of liquid has been rung out of the rag.
Second, if it sounds too good to be true, it probably is, and it doesn't take a PhD to figure out that buying a digital photo for $69 million or a three-second video of LeBron James for $200,000 doesn't quite add up.
And NFTs just like gold or tulips during the Tulip mania in the 16 hundreds NFTs are speculative assets. It doesn't mean that you shouldn't invest in them or that you can't make money, but I would just argue that you should treat these assets accordingly.
Unlike a stock or a bond, these speculative assets lack cash flow and are purely dependent on what a future buyer might pay for them. Kanes wrote that speculation is quote, the activity of forecasting, the psychology of the market attract attaching hopes to a favorable change in the conventional basis of valuation.
As trend Griffin at 25 IQ puts it, quote, if your game is forecasting market psychology, you are not an investor. So in short I personally don't advocate for people to rush out and start allocating hard-earned dollars earmarked for retirement to NFTs.
Just like I wouldn't suggest that you do it for any other speculative asset, that doesn't mean that you can't speculate and make small investments that won't jeopardize your plan in an attempt to learn and have a little fun and maybe get lucky once or twice.
It also doesn't mean that NFTs are a joke and that we should laugh at them that we shouldn't take them seriously. In fact, quite the opposite. The underlying technology is fascinating and the use cases are, are very obvious and prevalent, but what we're seeing right now in terms of valuations likely isn't sustainable.
Like all collectibles, the future price is based on supply and demand. Kind of like what Josh was just talking about. The demand for NFTs right now is huge, and the supply, you know, maybe we'll call it mediocre. So for those two reasons alone, it's possible that in the short term we see this trend kind of continuing, but that's a speculative statement.
So in summary, I don't think NFTs are, are going anywhere. They serve a purpose and the underlying technology, the use cases, it, you know, it, it's fascinating, but I would be careful about treating this any different than another speculative investment or non fungible asset, and I would set your expectations accordingly.
For the links and resources mentioned today, head over to youstaywealthy.com/102.
Next week on the show, I'm coming back down to Planet Earth and I'm capping off our month-long technology theme by talking about robo-advisors what they are and what to make of all the different robo-advisor solutions out there. I'll of course also be sharing some of the major pitfalls to watch out for if a robo-advisor is a, is fitting for your situation.
So thank you as always for listening, and I will see you back here next week.
Episode Disclaimer: This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.