Non-Fungible Tokens! (NFT’s)... Is it a bubble?
Updated: Apr 8, 2021
What is an NFT?
The latest crypto asset to grab the attention of the public has been Non-Fungible Token’s or NFT’s for short.
The same technology that the Bitcoin network runs on applies to NFT’s, the exception being that instead of the blockchain minting new bitcoins, it will create scarce individual collectables. The key word here is individual, because each NFT is meant to be unique, unlike a currency, where uniformity is very important. For example, if you were to accept a payment of 100 US dollars you would want to know that every dollar is worth the same amount, that way you know exactly how much you are getting. However, when it comes to art or, in this case, digital collectables, the value of these assets vary from unit to unit. Just like a painting, there is a high level of subjectivity to the item's value.
The implications of this technology are immense as it can be applied to virtually any form of collectable. For example, the one that has many people excited is NBA Top Shot, a platform where you can trade digital basketball moments. Examples of moments include Lebron James dunking in the NBA finals and Luka Doncic hitting a game winning 3 pointer. Basketball, the world's 3rd most popular sport, with 2.4 billion fans world wide has a huge fan base (Sports Show, 2021). Taking this into account, it becomes clear why a digital collectible like NBA Top Shot will start to become a part of the fandom as fans aspire to own a piece of the game's history.
Although a promising area, not all NFTs are created equal. Some will have a harder time than others keeping their value. A good example of this would be Logan Paul's Pokemon card or Taco Bells NFT. Projects like these have caused many to lose sleep as the prospect of NFTs being a bubble seems increasingly likely.
Is it a bubble?
The buzz around NFTs is very real and is causing many to worry that the market is being inflated by people who don't understand what they are buying. Andres Solanot, the Head of Business Development at Figment, has said that “With all of the excitement around NFTs, the question that needs to be asked is: are the current NFTs being bought going to realize their potential or is it all just a dream?” The answer: yes and no. Yes, it’s likely that NFT’s like NBA Top Shot will have long term value as they have a massive fanbase behind them. However, will NFT’s such as Logan Paul’s Pokemon card and Taco Bells taco themed NFT succeed in the long term? Maybe, but I highly doubt it!
A large part of these NFTs value come from their scarcity, so when buying an NFT make sure you understand what the edition size is. Some digital collectables are limited edition, meaning no more of that collectable can be minted ever again. Others have a continuing count, so if the creator of the NFT decides they want to mint 10,000 more of the collectable, diminishing the rarity of the item, they can do so at will.
My advice: take a carefully researched approach towards buying digital items and ask yourself the age old question, why would someone buy this? You'll find that you will remove 95% of the NFTs in existence from the conversation. Have fun digitally collecting!