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Now, what the hell’s an NFT?
Everyone’s makin’ so much money
Can you please explain what’s an NFT?
I said, what the hell’s an NFT?
It’s like real-life Monopoly
Everyone’s doin’ it, like Gronkowski
Can you please help me make an NFT?
–Pete Davidson as Eminem, Saturday Night Live.
There has been a surge in interest in NFTs recently that has doubled down into 2022, both online and in people asking people about them in person. The rise in interest echoes the questions I used to get about Bitcoin (BTC-USD). In 2020, probably the most common question I was asked by people was “how do you buy Bitcoin?” (Answer: with Coinbase Pro (NASDAQ:COIN), Kraken, or BlockFi). The second most asked question I was asked was when people wanted to know what the heck Bitcoin was – then it usually took a while to explain how someone could create a digital currency that wasn’t a scam and do so without the involvement of any government. The irony, of course, was that a lot of people who wanted to buy Bitcoin didn’t even care to know about what it is. That’s a shame because BTC could be the most impactful invention of the 21st century.
Now, all the questions are what NFTs are and whether people should invest in them. NFTs aren’t as revolutionary as Bitcoin, but there are some use cases that are worth thinking about. With this in mind, I thought I would compare and contrast Bitcoin and NFTs and offer an outlook on both for 2022.
NFT stands for “non-fungible token“, which means each one is unique, and not fungible like cash is. NFTs are mainly used to put collectibles like art and sports memorabilia on the blockchain. Some cool examples of NFTs are works by the artist Beeple (a.k.a. Mike Winkelmann), who made tens of millions of dollars selling digital art created over the last 15 years, and NBA Top Shot, which took buying and selling collectible trading cards online for NBA fans. NFTs became the subject of what was probably a speculative bubble in 2021. On the darker side, NFTs are prime candidates for fraud and scams by unscrupulous artists and promoters. Also, when certain NFTs change hands for huge prices, the reasonable suspicion is that some of the parties involved might be laundering money with them, or at least moving money out of countries with capital controls (for example, China).
Coinbase published a guide to buying and selling NFTs here. Opensea is the most well-known marketplace for buying and selling NFTs, and most transactions take place using Ethereum (ETH-USD). NBA Top Shot operates its own marketplace that’s popular with sports fans and collectors. Note that NFTs have been used to perpetrate a few different types of scams and frauds, so do your homework before sending money to anyone!
Bitcoin now has nearly 80 million users, and anyone who is interested in owning a store of value that can’t be printed away by the decisions of central banks can invest some money in it. It’s not super hard to use it as a medium of exchange either. The simplest definition of Bitcoin is that it’s like digital gold. NFTs are a new trend towards putting art and collectibles on the blockchain so they can be easily traded. Some of the use cases for NFTs are pretty cool (like NBA Topshot creating an online marketplace for basketball fans all over the world to buy and sell their favorite moments). Others seem like an extension of traditional art (like the work of Beeple). Other use cases are more speculative. A lot of the appeal of NFTs is that they’re something that people can buy and sell and speculate with. Of these two trends, I feel like Bitcoin will have more staying power.
The use cases for Bitcoin are broader and more intuitive, and while NFTs have some solid use cases, they’re more similar to altcoins in that they’re often a vehicle for speculation more than a store of value. People certainly speculate on Bitcoin, but millions of people have adopted Bitcoin and it has institutional acceptance. Crypto has attracted a lot of quick-buck artists who jump on every project, and NFTs are like crypto on steroids with this.
Bitcoin can be used to buy NFTs, but more commonly Ethereum is used in the underlying infrastructure to execute buys and sells. Also, note that NFTs are a branch of the crypto world but are not by themselves a cryptocurrency.
I remain bullish on Bitcoin in 2022 despite having reservations about the stock market at large. I certainly wouldn’t expect Bitcoin to go up if risk assets went into a bear market, but the underlying trends of increased adoption (especially in the third world) against a stable supply mean that the long-term fundamentals should be good for Bitcoin. Bitcoin has pulled back since early November (I thought it might keep going up more on momentum). Bitcoin is obviously a volatile asset, but I would view any significant dips as possible buying opportunities.
With respect to NFTs, their prices are a lot more speculative. Since Bitcoin prices are widely quoted and BTC is fungible, there’s a deep market where you can buy or sell, and you can theoretically arbitrage the difference between prices between different markets. You can lose money by buying high and selling low in BTC, but you’re unlikely to be scammed if you buy Bitcoin on a major exchange. On the other hand, if you have a piece of artwork or an NFT and you pay a bunch of money for it, you might not be able to find a buyer at all. NFTs, therefore, are a lot riskier. As long as you know what you’re getting into then that’s fine, but I’m not sure at this point if NFTs deserve to be considered an asset class.
I previously wrote that I thought Bitcoin would next trade up to the $70,000 to $75,000 range. I’m aware of no adverse developments fundamentally for Bitcoin, and I believe that once the momentum shifts back into BTC’s favor that it should reach yet another all-time high. Nothing is certain, but I like what’s being done with Bitcoin in terms of increased adoption and technological improvements. Investors may want to consider dollar-cost averaging in and out of BTC.
NFTs are interesting and speculative, but I don’t feel that they’re a bona fide asset class. There are some use cases for NFTs, but I would invest in NFTs the way people invest in collectibles like baseball cards, with small amounts of money and when there’s sentimental value. I would not bet heavily on NFTs, although they are worth monitoring. I don’t own any NFTs and don’t have any plans to buy any, but I do own Bitcoin via Grayscale’s Bitcoin Trust (OTC:GBTC).
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Disclosure: I/we have a beneficial long position in the shares of GBTC either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.