Are NFTs the Next Tulips?
The frenzy of NFTs are all over the front pages. It’s wonderful to see so much artistic creativity erupting. But are NFTs the next version of failed ICOs or are we onto something sustainable.
The British left a legacy of jurisprudence and culture on Hong Kong despite their departure in 1997. I love the English references in Hong Kong like Admiralty, Prince Edward, and Victoria. Intentional or not, it was a cultural fusion of East meets West and, in its wake, the experiment made Hong Kong a leading financial center and tourist hotspot.
Similarly, an important group, the Dutch, left an indelible mark upon the Big Apple. The stock exchange was a Dutch invention in 1602. The exchange then was a new concept and was a further progression of the existing central markets. Although tulips were one of the first large cap products then, corporate stock trading would soon follow. The Dutch brought this to New Amsterdam, which was renamed to New York when the British took over. Besides the NYSE, the charming and distinct names of the Dutch still exists all over the area. The Bowery, Breukelen (Brooklyn), Gansevoort, Haarlem (Harlem), and Stuyvesant, my alma mater, just to name a few.
What is an NFT?
NFTs are unique digital certificates assigned to an asset that are stored on the blockchain for authenticity and ownership verification. These assets can be both digital or physical, such as real estate in the latter case, but I want to focus more on the digital kind for this article. I have written previously about tangible assets which you can read here.
Fungible means interchangeable or equivalent. A dollar is fungible to any other dollar. Same for bitcoin and all other fungible token, coin, or currency. However, NFTs are unique and are not interchangeable. If you wanted to trade one NFT for another, you will have to liquidate it, and then purchase the other NFT and make up any difference.
The key point is that the NFT represents unique, transferable ownership. The tokenization of the asset just makes it easier to store, buy, sell and trade the asset. The tokenization of the asset and the cultivation of their liquidity efficiently unlocks their true value in what was a market that did not exist before NFTs.
What can be tokenized
NFTs can be used to represent virtually any type of real or intangible item, including:
- Tangible assets such as real estate, physical and digital artwork, automobiles
- Collectibles
- Sports and popular culture memorabilia
- Virtual items for video games, e.g., weapons, avatars, and skins for World of Warcraft
- Music and videos
- Intellectual property (IP) for a book, film rights, screenplay, domain name, trademarks
The above list is just scratching the surface but let’s get into some real interesting examples. Last week Christie auctioned off “Everydays: The First 5000 Days,” by Mike Winkelmann for $69M. That deal really put NFT’s onto the headlines. The popular Nyan Cat Meme was sold for a bargain price of $587,000. CryptoKitties is another popular NFT usage with a record price of $170,000 for a virtual kitty. The interesting thing about CryptoKitties is that you can use your kitty to mate with another kitty to breed an offspring which may have hidden recessive genes not exposed in the parent. Future offspring can bring additional royalty fees up the ancestral lineage.
Twitter founder, Jack Dorsey, is auctioning off the first ever tweet, as an NFT, and the bid as of this writing is $2.5M. Here is copy of that tweet: “just setting up my twttr”. The quotes are NOT included. Anyone can still retweet it from their own account. But only the owner of the NFT can really retweet it. Or can they? Since it is originally from Jack, is that right transferred with the ownership? And can the owner delete the tweet, making it permanently lost? This remains to be ironed out, but at least the NFT can be created has already attracted a lot of attention, read $$$.
How to Create an NFT?
Creating an NFTs takes little to no technical knowledge. Choose an NFT platform such as OpenSea, Rarible, or Mintable. I listed Ethereum-based blockchain platforms but there are others. Connect your wallet, such as MetaMask since we are using Ethereum as an example. Then click on Create, upload the file, which is the underlying digital asset, and add a description. Pay the gas fee from your wallet. The NFT is essentially created.
On many of the marketplaces, you also have the option to include special traits and attributes to increase the scarcity and uniqueness of your NFT. Creators even have the opportunity to include unlockable content that can only be viewed by the purchaser. But on simple straightforward NFT’s even this step is not needed. Now you can list the NFT on the marketplace. That’s it.
Once the NFT is purchased, the owner has the digital rights to resell, distribute or license the digital asset as they please. The only caveat is that the creator can program in limitations in the NFT’s code for how it gets used, such as the asset cannot show up on a specific platform, like a TV network, according to Shidan Gouran, co-founder of Gulf Pearl, a merchant bank in the blockchain sector. NFT creators also have the opportunity to earn royalties off of future reselling transactions.
In the case of the first tweet, it will still exist for on Twitter for other users to see, but only the sole owner gets the “bragging rights” of owning the digital asset.
Are NFT’s the new Tulips?
NFTs is the modern twist of stamp collecting. If you idolize a specific player, there’s a great sense of pride in owning an associated piece of limited memorabilia. Video games and their virtual accessories will remain a big market. But notwithstanding the tangible assets side of NFTs I do not believe that they make a sound investment. I would definitely not compare NFT’s to the ICO market of the 2017, which for the most part where thinly veiled scams, although some ICO’s are legit and successful. Ethereum is one.
Regardless, NFTs represent a leap in unlocking value and in creating a new ecosystem. Even land ownership is a fairly new concept in human history and development. How quickly has our mindset changed. Will NFTs be created if someone discovers a new star, nebulae, or black hole? Will ownership provide naming rights? Can you imagine corporate ownership such as the BlackRock Black Hole? There lots of regulatory and legal questions that are yet to be developed.
The market will shake out new and fruitless NFTs. Tangible assets such as real estate, physical artworks, and many IP’s will stay relevant. Collectibles will retain their fans, although it remains to be seen what their mature valuations will be. Others will go the way of the tulips, but they are still pretty flowers. The Dutch spirit remains.
