What are NFTs, and Why Should Investors Care?
March 16, 2021
Simon Erickson is a lead advisor for 7investing, where he provides his top stock market opportunity every month. To see a transparent record of all of 7investing’s picks and performance, visit our Recommendations page here.
Demand for non-fungible tokens has been on fire. People have been fighting tooth and nail to get their hands on digital sports cards, comic characters, virtual real estate, and other exclusive collectibles being created and sold entirely online.
To be clear, there are not physical goods that can be bought on eBay (Nasdaq: EBAY) and then held in your hands. NFTs are uniquely identifiable digital assets that are not mutually interchangeable.
That means they are each one-of-a-kind (“non-fungible”) and can be tracked throughout their entire lifetime (“token”). Marketplaces are facilitating the transactions, and the original content creator continue to get a cut of every transaction that takes place in perpetuity. NFTs are typically built upon Ethereum token standards, which involves a legally-binding Smart Contract and a ledger that traces all the way back to the original seller. That eliminates the problem of counterfeit goods, which would show up on the blockchain as originating from a non-authorized seller.
NFTs could have significant implications for the music industry. Recording artists have historically gotten used to only getting paid upfront once they sold an album or a concert ticket. But NFTs could allow for them to sell more exclusive and limited edition music or perks (such as free front row seats for life) to diehard fans, and then collect royalties each time those “golden tickets” exchange hands down the road.
This is exactly what Kings of Leon did. They recently made history by becoming the first band to make an album available as an NFT. And digital payment empire Square (NYSE: SQ) is reading the tea leaves as well, spending $297 million for a majority stake in TIDAL to bring musicians and fans closer together.
The 7investing Takeaway
The short-term headlines about NFTs seem to be focusing on certain items selling for exorbitant prices, such as a video clip of Lebron James dunking that sold for $200,000.
That initial noise will eventually settle down. The longer-term impact is that NFTs will provide content creators a way to derive ongoing royalties from more creative and exclusive offerings. This breaks their reliance on upfront cash-register sales, gives them a new way to connect with their most loyal audience, and lessens their dependent on the music industry’s largest publishers for distribution.
Investors should watch for skyrocketing demand to push the prices of NFTs continually higher. And for the powerful network effect to cause the largest marketplaces to attract more buyers and more sellers.
For even more 7investing coverage of NFTs, check out when we discussed the topic on our 7investingNow livestream on March 9, 2021.