Whenever I try to explain NFTs to someone new, the response is always the same: A raised eyebrow, a look of disbelief mixed with a pinch of disgust, and suppressed laughter.
Then, the same question every single time: “Why would someone buy that?”
Although NFTs may be ethereal and intangible – and difficult for collectors of physical art to understand and appreciate – I believe they can have value. According to Reuters, more than $25 billion worth of NFTs changed hands in 2021, so plenty of other people think they have value, too.
On that note, I think there are at least three good reasons to buy an NFT — and one big reason not to. But first, what is an NFT?
The Short Version
- You might want to buy an NFT to support an artist’s work, feel the joy of collecting art in an exciting new medium or brag to your friends that you “own” a popular meme.
- Although they’re interesting products, NFTs shouldn’t generally be considered investments.
- With a slim-to-none chance that a given NFT’s value will outpace an index fund, your money is better stashed elsewhere.
What is an NFT?
NFTs, or non-fungible tokens, are unique data strings that live on the blockchain. Specifically, most of them live on the Ethereum blockchain. That was the first blockchain to allow for the storage of non-fungible data in 2015.
These one-of-a-kind data strings can be legal documents and medical records. However, one of the first applications – the “storage” of digital artwork – is so popular that it’s become synonymous with the term NFT itself.
If a digital artwork lives on a website, it can be copied and pasted with impunity. But if it’s uploaded to the blockchain as an NFT, there’s only one. That becomes the “original,” thus, it can fetch a higher price from collectors.
When you purchase an NFT on a marketplace like OpenSea, it gets added to your crypto wallet. You (typically) don’t receive anything tangible or even the copyright. You just get the right to say, “This Bored Ape is mine.”
In a way, NFTs are like certificates of ownership for digital art that lives on the blockchain.
Now, to echo 63-year-old Tom in my Toastmasters club, “Why the f*** would someone buy that?”
Three Reasons Why You Should Consider Buying an NFT
The decision to buy an NFT might come down to how you value art and collectibles, It might also be influenced by how you measure yourself against your peers.
1. To Support the Artist
NFT sales do something objectively positive for the world: they generate an entirely new income stream for artists. The digital artist Beeple had never sold a print for more than $100 until his NFT of the collage Everydays: The First 5000 Days sold for $69 million at Christie’s.
The accidental stars of internet memes may not be artists per se. But they’re just as entitled to compensation for their creations. Case in point, the internet rejoiced when 21-year-old Zoë Roth sold her ubiquitous meme Disaster Girl for $500,000 to pay off her student debt.
NFT prices don’t always hit six figures. Still, many artists make a nice side business out of selling them for around $250 a pop. Sure, they only net $150 since it costs around $100 to mint each NFT – but the cost of curating an NFT gallery on OpenSea isn’t too far off from the real-world cost of renting a booth at an art show.
Although NFTs have generated income for some artists, they’ve become a massive headache for others. No discussion of NFTs is complete without mentioning the rampant fraud that plagues the marketplace.
The problem is so bad that Cent, the marketplace that sold Jack Dorsey’s first Tweet as an NFT, has suspended sales until they have a solution to protect the copyright owners.
So, before you purchase an NFT from an artist you like, be sure to verify its authenticity at the source. See if the artist has directly linked to that NFT collection from their social media accounts, or better yet, just ask them to verify its authenticity:
Assuming that the NFT is legit, buying it – whether it’s for $200 or $20,000 – will surely make the artist’s day and support their business.
Find out more >>> How to Buy and Sell NFTs
2. For the Joy of Collecting Art
As humans, we have been collecting art for millennia, proudly displaying it in our homes for our guests to admire.
Perhaps that’s why we as a species struggle so much with the concept of NFTs. What’s the point of having art that you can’t hang anywhere?
However, paying real-world money for art that you can’t touch isn’t novel. Gaming monetization firm DMarket estimates that players bought and traded $40 billion worth of in-game cosmetic items in 2020 alone, far outpacing the NFT marketplace. And those cosmetics weren’t always unique or resellable like NFTs are.
“Perhaps that’s why we as a species struggle so much with the concept of NFTs. What’s the point of having art that you can’t hang anywhere?”
OK, so the market values digital art. The question remains: why?
If you purchase art purely for the feeling of knowing that you own it, then NFTs provide the same value as physical art. NFTs often come with limited copyright uses. So nothing stops you from printing and displaying them in your home.
You can also display your NFTs in your own virtual art gallery. Then they can be seen by millions–not just the visitors to your home.
Virtual art galleries may become more prevalent as we enter the metaverse — where even the most hard-nosed skeptics may be impressed by a hallway full of Bored Ape NFTs. By then, we may even have the technology to verify an NFT’s authenticity in real-time. That's a feature that doesn’t exist in the physical art world.
3. For Bragging Rights
Speaking of Bored Ape NFTs (which are now selling for $1 million-plus), some people just buy NFTs to say they have them.
And hey, who am I to judge? Some rich people do horrible and selfish things with their money. By comparison, paying $590,000 for a flying rainbow pop-tart cat is pretty innocuous.
Plus, even if the anonymous buyer purchased Nyan Cat for self-serving reasons, the high-ticket sale ignited a firestorm of media attention, stimulating NFT sales for countless smaller artists.
My favorite “buy-it-so-we-have-it” NFT collectors are Dubai-based 3F Music. They aren't shy about showing off which NFTs they’ve added to their impressive collection. That collection includes a bevy of Bored Apes, Disaster Girl (yep, that was them!) and the Charlie Bit My Finger video.
If you ask me, though, the centerpiece of their collection – the one they paid $1 million worth of Ethereum for – is the NFT of the New York Times playfully satirizing NFTs.
Naturally, the most brag-worthy NFTs, like those representing famous memes or pieces of internet history, are also some of the most desirable. Remember: $590,000 wasn’t an offer for Nyan Cat — it was the highest bid.
So, yes, bragging rights alone may be the flimsiest reason to buy an NFT. But it becomes more justifiable at lower prices.
For example, let's say that you and your friends worship Salt Bae (ironically or otherwise). Paying $140 for an NFT of him doing his thing might be worth it for you to hold it over your friends' heads.
Now, bragging rights and supporting artists are all well and good. But is there a monetary reason why you might want to buy an NFT?
Well, aside from the NFTs that include extras like concert tickets and opportunities to meet their maker, there isn't a good dollar-for-dollar reason to buy an NFT.
Hang on, wait — what about as an investment?
Oh yeah, people do that. And they shouldn’t.
One Big Reason Why You Shouldn’t Buy an NFT
As previously mentioned, NFT trading volume reached $25 billion in 2021. But, what’s even more interesting is that the resale market reached $15 billion.
This tells us that either NFT investors are exiting the market en masse or making tons of money. For example, let's say you bought a Bored Ape NFT in July of 2021 and flipped it in February 2022. In this case, you would have made an incredible $90,000 profit. Not bad for just a half-year of “HODling.”
Does that mean that NFTs are good investments? No. It just means that a few “investors” got lucky.
As the old saying goes, hindsight is 20/20. Without P/E ratios, sector performance, float, or any other predictive analytics at our disposal, it’s nearly impossible to pick a “winning” NFT that’ll be worth double tomorrow.
“Does that mean that NFTs are good investments? No. It just means that a few “investors” got lucky.”
Speculative investments are primarily driven by hype, who is a fickle mistress. Sure, the Snoop Dogg NFTs are selling for $12,000 today. But they could be worth just $1,200 (or $120) tomorrow as the market moves on to the next celebrity collection.
When you purchase an NFT with capital gains in mind, you bank on someone in the future buying it at a higher price. That higher price needs to outpace the APY of an index fund where your money could’ve been appreciating in relative safety.
Like art in the physical realm, most NFTs won’t appreciate or retain much of their value in the long term. By their very nature of being non-fungible, i.e., unique, each NFT’s potential buyer pool is more limited than even the Ethereum you bought it with.
Corporate-Branded NFTs Won’t Do Investors Many Favors
The other wild card is the incoming tidal wave of corporate-branded NFTs. Adidas, Pizza Hut, Ubisoft, Taco Bell, and more have all expressed plans to introduce their own bespoke NFT collections shortly.
That’s great for NFT-awareness but not so great for long-term value. History tells us that when a speculative market gets flooded with too many products at once, supply outstrips demand and values plummet.
The same thing happened to baseball cards in the 1990s. Too many big players entered all at once, pouring cards into the market until there were no rare cards left. The sports card marketplace only corrected itself once three out of the five major cardmakers pulled out of the market which reduced supply.
Interestingly, Bitcoin has remained immune from corporate dilution for one simple reason: a built-in system of checks and balances. You can’t pour Bitcoin into the marketplace — you can only mine it at a steady, controlled trickle.
NFTs don’t have such safeguards in place. There’s nothing stopping an oversupply of new product to dry up an already-shallow buyer pool. And that puts the long-term value of today’s NFTs at severe risk.
The Bottom Line
NFTs are cool, cutting-edge products that are worth buying if you’d like to support an artist, collect art within an exciting new medium, or simply want to brag to your friends that you own a popular meme.
But without historical data to help predict future behavior and value, and a market that's about to get flooded by corporate NFTS, there are better places to stash your money if you’re interested in capital gains.