Updated: Nov 3, 2021
There's a lot about the world that I don't understand right now. In a weird way, I kind of enjoy that. I'm curious by nature and have a tendency to venture deep into the rabbit hole when presented with something new that perplexes me. One of the most dumbfounding recent developments has been NFTs (Non-fungible tokens). I've spent some time diving into this bizarre and complicated world, so I figured I'd share my thoughts in case you're like me and have been completely confused by all of the hype surrounding NFTs. Let's dig in... According to Wikipedia (lol yes this is happening), an NFT is a "unit of data stored on a digital ledger, called a blockchain, that certifies a digital asset to be unique and therefore not interchangeable."(1) I chose this definition because I think it highlights the confusion that most of us have...pictures are not inherently unique, and based on recent market activity NFTs do appear to be completely interchangeable. For the purposes of this post, I'm going to leave the definition at that, but if you're interested in learning more specifics about NFTs there are endless articles on the internet. I'll leave it to the blockchain experts to explain the in's and out's of NFTs while I focus on what's probably on most traders/investors minds: Are they here to stay? My short answer: Yes, I believe they are. "But Horse, you've been so critical of crypto and NFTs on Twitter, how could you say this?!" That's true. But just to make sure we're on the same page, this post isn't about crypto per se but rather NFTs specifically. I won't defend any prior comments I've made about the sector, but I'll simply say this: As a trader, if there's a market I want to understand it...and I've learned a lot since making the effort to understand NFTs. Ok, let's rewind the clock and discuss how I got here. I started by making some NFTs as a joke, mainly because I was curious about the entire process from end-to-end. Making the NFTs was easy (because mine were not good), but putting them up on a marketplace is where the fun started. After some basic research, it appeared that OpenSea (https://opensea.io/) was the place to be. I paid the fees and opened a "store" of sorts, listing my NFTs for sale using Ethereum, the native cryptocurrency for OpenSea's marketplace. I won't go into the details here, but let's just say it's not hard to do and costs roughly $200 USD. According to the crypto community my fiat is basically worthless so why not throw a couple Benjamins into this, right? During my brief time on OpenSea, I naturally started exploring this vast, weird new marketplace. The first thing I noticed was the staggering amount of money changing hands in Ethereum. There's no denying it's an active exchange, and as a trader this piqued my curiosity even more. How were people valuing these simple, often pixelated images? Why were some more expensive than others? What makes an NFT desirable by the masses? From there it didn't take long before I was face-forward sliding down the NFT rabbit hole into some of the weirdest corners of the internet. I simply had to know. The curiosity was killing me. Who were these people paying insane amounts of ETH (sometimes into the millions of USD) for cartoon pictures of monkeys and cats? This is where I went off the deep end. I started binge researching. Allow me to explain (in very simplistic terms) how this game works. To purchase an NFT you can either buy one from an exchange (like OpenSea) or you can roll the dice and "mint" one off the exchanges directly from the creator. Honestly, minting is some crazy shit. Essentially, you send crypto directly to the creator and if they aren't total scumbags they send an NFT directly into your crypto wallet. Collectors may keep them there, but it seems like many people are taking their new NFTs to an exchange after minting and listing it for sale (at a markup of course) to the general public.
So the question of "what makes an NFT valuable" still remains...and this is where the rabbit hole gets quite deep. I think it's safe to say the majority of NFT marketplace participants are trading. Sure, they may call it investing but let's be real: They are definitely trading. In order to be good at this particular type of trading you've got to do some leg-work and research to figure out which "projects" (aka a individual/team releasing a bunch of NFTs in a collection) are going to be popular. Then you have to find out when the release date is, attend the release (go to their website), mint the NFT, hope they aren't scamming you, pay the eye-popping gas fees (the cost to transact on the blockchain) to list on an exchange, and hope you've listed it with a price that attracts a buyer. The initial listing of freshly minted NFTs on an exchange is a highly volatile environment from a trading perspective. The spreads tend to be quite wide. Sellers obviously want to attract interested buyers, but how is "fair value" determined? I'll tell you how. The old fashioned way: A market. Prices deemed too low are "swept" up, raising the "floor price" of the NFTs (these are terms the kids are using nowadays). The market is quickly and efficiently made...but not without natural volatility. With a trading background in my veins, I was fascinated watching this process. It's akin to an IPO. "Insiders" (those that took the gamble and minted the NFTs) proceed to dump their "shares" on the marketplace, and buyers and sellers scramble to try and determine the floor price. The initial buyers then relist for a higher price, often at breakneck speeds, to lure the next person in. Typically, this game of music chairs repeats until the hype dies down and someone's left holding the bag...at which point that sucker will say "I just really like the artwork" (lol stfu). Naturally, I had to get in on this. So I did. I started researching and took the plunge minting some NFTs and trying to make a market. Truthfully, it was during the process of researching that my entire view of NFTs changed. To do proper NFT research, you've got to get into the weeds. Most projects have a Discord group associated with it, where interested buyers/owners can congregate to discuss the project (i.e. relentlessly post about if they are going to make it or be poor tomorrow). If you don't know what Discord is, it's a platform that started for video game enthusiasts but morphed into a vast array of interests over time. For the NFT community, it's probably THE primary source of hot news and information. Before I knew it I was deep into seedy Discord groups reading messages from "CatLover69" wondering WTF happened to my dignity. But this is when things started to really click. The main reason why I think NFTs aren't going anywhere isn't because of the money, it's the community.
These weirdos are having a BLAST geeking out over the newest NFTs...and guess what? There's a LOT of these weirdos. (+1 now, HorseFat's coming in hot) For many people, it's not just about flipping jpegs (I mean it totally is but "friends we met along the way" yada yada). NFT creators have become extremely clever and have found ways to leverage the most basic of human emotions: The need to belong, the need for identity, and the hope of experiencing greatness.
The Need to Belong
I think history has made it pretty clear that our species is plenty willing to pay enormous amounts of money to feel like we belong to something bigger than ourselves or something more prestigious than our current situation. Examples include private clubs, country clubs, societies, etc. It's tough to put a price on that basic human desire, and it's definitely not limited to the nerds. For example, I'm an avid golfer and over the years I've seen some wild social groups develop around golf-related brands. Look at Tyson Lamb. He makes custom golf products (e.g. ball markers, divot repair tools, etc.) that sell for INSANE amounts of money and there's now entire social groups dedicated to discussing, trading, and generally geeking the f*ck out about his newest products. Nerds and golfers aren't typically associated, but in this case we see the exact same behavior exhibited between NFTers and middle-aged men wearing awful pants.
The Need for Identity
One of the interesting things I've noticed NFT projects doing is "ranking" their NFTs and giving them unique characteristics that make one more prestigious than another. Yes, on the surface it looks like 10,000 nearly identical pictures of cats or pixelated punks, but the subtle details (often down to a single pixel) separates one NFT from another. By ascribing rank to the NFT, the owners assume rank within the social group, much like tribes of wild animals or our society at large. If you spend enough time on the NFT Discords you'll notice the dynamics between higher and lower "ranked" owners start to unfold. It's really quite fascinating. The minting process is typically randomized, meaning when you mint an NFT from the creator you don't know what you're going to get. Buyers pray for an NFT of the highest rank possible because 1) it'll be more valuable on the secondary market and 2) it comes with a sense of rank and position within the social tribe. Cast your eyes away from my greatness you 9999/10000 ranked peasant, how dare you gaze upon my Top 100 ranked NFT. Stuff like that, but with more heart and humor. People eat it up. They long for it, which leads me to the final observation...
The Hope of Greatness
Say I minted a turd; a low ranked POS and I'm now stuck in my shame and embarrassment (and likely a jpeg that won't fetch shit on the exchanges)...what do I do now? Well that's simple, you pay to mint another one or move on to a different project in the hopes of hitting the NFT jackpot. This point is super important to understand the entire NFT game. Yes, the creators are pulling on natural human emotions to create a community, but they are also pulling on wallets in the process. There's always tomorrow. There's always another minting. There's always another project. One day, maybe I'll hit the big one that gains me the respect of the localized community AND a piss load of ETH on OpenSea. To summarize, when human psychology is intertwined with gambling you've got the perfect combination for a fad that outlives fad status and endures. I don't see NFTs going away because I don't see people going away.
"So Horse, should I get involved?" Here's the thing: While I don't see NFTs going anyway, I still don't think it's a smart "investment" right now. Why? Basic supply and demand. Because creators have so brilliantly managed to tap into the power of human psychology, the number of new NFT projects is rapidly expanding. With more and more choices there's bound to be some degree of natural dilution in the marketplace and prices will probably fall. If you're a true collector, that's a good thing because some of the prices right now are truly astronomical. If you're a trader that's also a good thing because the barrier for entry might be lower and when there's a market people will always trade...you'll still be able to make money trading cheaper NFTs.
The other critical thing to consider from a trader's perspective is liquidity. You think Lean Hogs is bad? Try holding an pixelated diseased Lama. The liquidity in most of the "hot" NFTs is okay right now, but it’s still the biggest risk to getting involved. It's not easy to get out of a position. If the amount of new NFT projects expands at a rate greater than the buying audience then liquidity will only get worse. This fact should not be ignored. All in all, they aren't going anywhere and you could argue they're just going to get more popular as creators branch into other forms of media and more people are exposed to the trend. I fondly remember the comic book frenzy because one of my first businesses was flipping vintage comics for profit. While that sector has had its share of booms and busts it's STILL HERE and still going strong. I wouldn't be surprised to see a "bust" in the NFT world, but NFTs themselves aren't likely to die out. I'm a trader. I trade momentum. I ride waves. One of the WORST things a trader can do is write something off as "stupid" because they don't understand it...that's a great way to miss out on some wonderful trends. Rather than writing them off as "dumb" like I did, I'd encourage you to learn more and educate yourself. What makes them popular is what makes us human...that's not a fad I would fade.