An Introduction to NFTs

When I was in elementary school back in the 1980s, I went to my first sleepover with a group of six other boys. We stayed up late, ate tons of junk food, and secretly watched a movie that was highly inappropriate for second-grade boys. That movie which I can still quote entirely, is the Mel Brooks classic Spaceballs. The irreverent spoof of that other colossal space movie franchise set in a galaxy far, far away contained a scene that still leaves me in tears to this day when they enter hyperspace. Rather than a formal calculation for the speed of the craft, they have four levels “Light Speed,” “Ridiculous Speed,” “Ludicrous Speed,” and finally, “Plaid.”

In the last year, we have seen oil prices trade at negative prices, natural gas and power prices trade into the stratosphere, and the overall markets keep making new all-time highs despite the pandemic’s economic fallout. But what is happening now in the emerging NFT market feels like we have gone from light speed and vaulted over “ludicrous” and into “plaid.”

Until a few months ago, I had no clue what an NFT was, let alone how far it would come in such a short period. NFT, or Non-Fungible Token is akin to a famous work of art like a Rembrandt painting or the Resolute desk in the oval office. There are numerous reprints available for sale, but only one original. The NFT takes the same approach, only applying it in the digital world. While millions of people share funny pics or videos from the internet, there is only one “original” file and the owner of the NFT. The NFT market uses Ethereum (2nd largest cryptocurrency) to ensure that the tokens are unique and can’t duplicate.

Recently a virtual art piece titled “Everyday: The First 5,000 Days” was sold as an NFT by auction house Christie’s by the artist Beeple for an eye-watering $69 million. From the NBA to actor William Shatner, other organizations and companies have been active in the NFT market. Watching people throw money into these new type of investments is undoubtedly fascinating, and have many people calling this a bubble.

This whole situation leaves many (including me) scratching our heads and asking, is this a new paradigm, or is it just another fad that will come and go?

These stories lead one to believe that this could be another chapter in a long line of investment fads going back hundreds of years. Unlike past crazes that have been reserved for one particular item like tulip bulbs and beanie babies or specific sectors of an economy like the housing market, the NFT market could be any digital file of anything that you care to imagine. So the possibilities for its future appear at the moment to be limitless.

While the outcome of this latest trend is yet to be determined, history has shown that there are very few winners during these periods and many that will end up losing their hard-earned dollars by making these types of “investments.” In this particular case, it would appear that the winners are the holders of these “assets,” selling them to a public that is hoping that a pair of digital sneakers will be able to generate a profit someday. This is the epitome of the greater fool theory, wherein the only way to make money is to find someone willing to pay a higher price and hope that you can get out before the supply of fools runs out.

I’m confident this will get even crazier as the weeks and months go by, but just as in the movie, when the ship went from plaid back to normal, it wreaked havoc. It is best to treat this like a good comedy movie, sit back, grab some popcorn, and enjoy the show.

Nathan Smith is the Portfolio Manager with Rather & Kittrell.