Thursday, March 4, 2021

The Fast-Developing World of NFTs

By Berna Barshay

► The non-fungible token ('NFT') market is moving at warp speed...

In the past few weeks, transaction volume in NFTs has been exploding. These sit at the intersection of finance, technology, arts, and culture... and they're starting to go mainstream.

For the uninitiated, an NFT is a unique digital asset for which ownership records are held in an online ledger – a database that lives somewhere in the cloud.

Cryptocurrency, like bitcoin, is the most well-known digital asset. But what distinguishes NFTs from cryptocurrencies is their non-fungible nature, meaning that they're unique assets and not interchangeable.

Bitcoin is fungible... everyone who owns one bitcoin owns the same thing. An NFT by definition is one-of-a-kind.

An NFT can be art... music... a video clip... a virtual pet... or even an asset that lives in a video-game world.

Most of the trade in NFTs is happening in cryptocurrencies, specifically ethereum.

As with unique physical assets – such as art (e.g., paintings), collectibles (e.g., baseball cards), and scarce objects (e.g., a Stradivarius violin) – the value of an NFT is determined by how much someone is willing to pay for it.

This type of "value is in the eye (or wallet) of the coveter" is what determines the price for any asset, in the physical or digital world...

The market decides if a company is worth 100 times its earnings or 10 times its earnings. You may disagree with the market's assessment and choose not to pay the going price, but the price today is what it is.

I remember when hedge fund manager Steve Cohen paid $8 million for a dead, preserved shark in a tank, created by the artist Damien Hirst. The purchase was widely mocked... but the shark was worth what the highest bidder was willing to pay for it, at least in that moment.

That's how markets work, even when the price the buyer pays reflects a value that isn't universally understood or widely shared. This is particularly true with non-fungible items, like art, which are highly personal and emotional purchases.

In the past week, we've had a whole bunch of 'formaldehyde shark' moments in the world of NFTs...

Last week, digital artist Beeple was in the news when one of his digital art pieces sold for a record $6.6 million. Beeple is a workhorse who has been posting one digital painting per day to his Instagram account, not missing a day in more than 13 years. The Beeple 10-second video clip had been previously purchased by an art collector for $67,000 last October. That's a stunning nearly 100 times return in less than six months, before commissions and fees.

To give you an idea of what a Beeple looks like, here's his creation from three days ago, which happens to be market-themed, titled Bear Market...


And the Beeple NFT isn't a one-off. Last Sunday, singer – and partner of Tesla's (TSLA) Elon Musk – Grimes sold almost $6 million worth of digital art in under 20 minutes.

The same day, electronic-music artist 3LAU sold 33 digital albums for more than $11.7 million. These were the first digital tokenized album sales on record.

Over in the world of sports, NBA Top Shot is blowing up... and it was reported that the company saw $10 million in sales in just 24 hours after a recent release of NFT packs of short basketball video clips.

As of late February, "crypto art" sales had just surpassed $100 million... and this is an asset class that barely existed before last summer. Now we are only four days into March, and the market is closing in on $200 million in sales.


The motivations behind the different players vary widely...

I stayed up way too late last night to listen to a Clubhouse room that featured many of the biggest names in NFTs: the aforementioned Beeple and 3LAU, along with the technologist and entrepreneur Roham Gharegozlou, whose Dapper Labs developed NBA Top Shot.

Both Beeple and 3LAU were passionate about NFTs as a way of democratizing their art and creating a closer connection to fans.

Beeple seemed almost pleasantly shocked by the unbelievably rapid appreciation in value of his artwork. After toiling away making no money on his creations for years, he's an overnight success more than a decade in the making. He also seemed truly thrilled that dedicated fans – many of whom were able to purchase his digital paintings for just $1 – had been able to flip them quickly and make hundreds of thousands of dollars.

One thing that differentiates NFT art from traditional art is every time an NFT piece sells in the secondary market, the artist gets a commission on the sale. When Beeple's piece exchanged hands for $6.6 million in February, the artist got $660,000. Quite the windfall... and a gamechanger for the digital artist, who until recently made no money on his art and instead survived doing work commissioned by commercial clients.

With this kind of money at stake, creators of all types are waking up to the opportunities.

On the other hand, 3LAU – the artist who has probably made the most money from NFTs so far – was emphatic in his belief that these are durable assets... that there are people buying NFTs because they really want to own them, as opposed to wanting to make money on a fast flip. He offered his personal ownership of a Beeple NFT as proof... He could easily resell it now for a six-figure profit, but explained he intends to own it forever, and pass it on to his children. Sounds like exactly the same attitude one might have with a Rembrandt or Picasso.

Of course, there will be flippers. Any red-hot market will attract traders.

And there will also be artists looking to better monetize their work, especially in a world where musicians only receive $3 to $5 per 1,000 streams on Spotify (SPOT). 3LAU said he was hearing from many of the artists in the Spotify Top 10 since his album sale... and said to expect a lot of NFTs to be coming down the pike in the next 60 days from premier musicians and athletes.

If this feels non-intuitive, you're not alone...

The part I struggle with is the non-exclusivity of some of these purchases.

Somebody may own the $6.6 million Beeple NFT, but that art still lives on the Internet. I can freely look at it, and so can you. The purchase doesn't grant exclusive access.

But as someone in the room pointed out, there has been an explosion in availability of high-quality prints of the Mona Lisa in the past 20 years. Does that mean the original is worth less now? Actually, it's quite the opposite.

Even understanding this, the lack of scarcity of access to the source material that comprises these NFTs remains a potential stumbling point in the durability of their value to me. If everyone can access the item and I get no cash flow stream from others accessing it, what's the point of owning it? It's not exclusive, and it's not income-producing... so why own it? According to all the folks in the Clubhouse room, the joy is in the knowledge of ownership.

I was about to "OK, Boomer" myself in the wee hours of the night (despite being Gen X), but then a couple light bulbs went off for me...

People want to own these digital assets in the online world for the same reason they want to own assets in the physical world: messaging, reputation, and prestige.

Folks with unlimited assets can choose to project very different messages with their choice of car. What they're projecting into the world will vary wildly if they choose a Tesla... or a BMW... or a Hummer... or a Ferrari. These are all expensive cars, but they make very different statements. Wealthy buyers could instead choose to buy a Honda Accord or Toyota minivan, despite being able to afford a Ferrari. That is also a message.

We send messages to the world with what we buy and display in the physical world, so why not in the digital world as well?

With so much time spent online in the last year, this was the perfect time for NFTs to take off...

The interest in building a persona – and owning things – in the digital world has been bubbling up for years and is a direct descendant of what has been happening in the gaming world for years. But with so much time spent online in the past year, the desire to own digital assets was probably dragged several years forward by the COVID-19 crisis.

It seems like a near certainty that the rise of NFTs will change the art world. Digital art is here to stay, and NFTs provide a route to more direct and generous compensation for artists while providing the potential for a closer connection between the artist and the collector/fan.

Christie's is already getting in on the action, holding the online auction for a digital collage of Beeple's works. Bidding for Everydays: The First 5000 Days runs through March 11 and the highest bid currently stands at $3.5 million.

The NFT space is of course ripe for scams and charlatans – and you see them cropping up online already. But legitimate fortunes will likely be made here as well.

A few companies will likely make a mint becoming the widely accepted registries for NFTs – the digital vaults for the code backing all these assets held in the cloud. Exchanges will also likely prove highly profitable... Leaders right now in this space are private companies such as Nifty Gateway, Foundation, and Zora.

Most fascinating about this space is this sudden interest in ownership from generations best known for eschewing ownership in the physical world. Millennials and Gen Z were supposed to be all about the sharing economy. Why own a car when you can Uber? Why buy a formal dress when you can Rent the Runway?

A generation that doesn't own a single DVD but instead streams the world's content at its fingertips suddenly is motivated by pride of ownership?

It's a stunning reversal. And if NFTs continue to grow in popularity, it could mark a turning point in generational attitudes about ownership... which would be a big deal with broad implications across the digital – and physical – worlds.

Switching gears, it's the last call for the free cannabis special event tonight...

Join my colleagues Tom Carroll from our sister company Stansberry Research and Whitney Tilson tonight at 8 p.m. Eastern time to learn more about the exciting developments in the cannabis sector... and the many catalysts on tap for the industry in 2021.

The event is free to attend, but you must sign up in advance. Click here to register.

In the mailbag, notes from many cannabis fans... including one doctor...

Do you think NFTs will prove a durable alternative asset class... or do you think these are mostly scams? Does the value of some NFTs make more inherent sense to you than the value of others? I know for me, the pitch for an art NFT resonates more than one for music, as an example. Do you own or would you buy an NFT? Share your thoughts in e-mail to [email protected].

"I have been working from home during this pandemic. I am a physician, and my specialty is psychiatry and addiction medicine. I completed my residency at New York Medical College in 1988, at height of the AIDS epidemic.

"We were asked to work from home to avoid getting COVID-19. Nevertheless, I still contracted the virus and received Monoclonal antibody infusion, as I have medical issues placing me at a high risk for complications. It worked, but now I have post viral syndrome. COVID long hauler. I also have medical issues that resulted in chronic pain that is frequently disabling.

"I can't take anything for pain. No opiates, Tylenol, Motrin... especially Motrin, as this could further damage my kidneys. I take CBD for pain. I have also tried THC gummies with the CBD, and it was quite effective. I only take the THC combo rarely when the pain is severe. Maybe once or twice a month. I like to be sharp and productive, even at my age of 64.

"I don't drink, no nicotine, no recreational cannabis. I like to read, especially my financial newsletters that I subscribe to...

"There is a multitude of suffering individuals who have chronic problems with pain, depression, substance abuse, and suicidal thoughts. COVID has made it worse.

"I hope THC will get legalized so those that suffer could get relief. The medical profession with Big Pharma started promoting opiates in the 80s and 90s. As a result of massive opiate overdose deaths, physicians have stopped prescribing these pain medications to individuals who need them in small doses, for fear of losing their licenses. Yet, those patients, suffer even more, and I have seen many pain patients take their lives because they could no longer tolerate their chronic undertreated pain.

"I hope that Cannabis is legalized in our country. I don't think there will be more individuals using it, as it is already readily available in the black market. These are my humble opinions. Please respect my anonymity. Thank you." – Anonymous

Berna comment: I'm so sorry to hear about your long-hauler COVID and other issues with pain... I'm glad the CBD and THC are helping. I think you make an excellent point about how the abuse of opiates led to their elimination in legitimate use cases. I once experienced this myself.

"Use it for sleep – THC. Use CBD to prevent cancer returning." – Susan K.

"I walk frequently and noticed some weakness and soreness in my left knee. I saw an ad for gummies called Hemp Chucks and bought some. Without a doubt, my knee issues were reduced to the point where I felt none of the previous issues and returned to playing golf at age 81." – Thomas S.

Berna comment: Thomas, it's fantastic that this product has you back on the golf course. Thank you for sharing this. I have many friends who have had similar experiences with joint or back pain relief from CBD or THC.

Not to compare anyone to a dog... but cannabis oil was a complete game changer for my nearly 16-year-old chihuahua. He would barely walk 15 feet a year ago, and now he can climb a double flight of stairs!


Berna Barshay
March 4, 2021