NFTs Explained | AWM Insights #97
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Episode Summary
What is a Non-Fungible Token and should you be buying or creating them?
NFTs and Web 3.0 have the vision to return ownership and value back to creators and their communities, but can that vision turn into a reality? After seeing news headlines like one of Beeple’s NFTs selling for $69 million, there are a lot of questions floating around this relatively new technology.
In this week’s episode, Brandon Averill and Justin Dyer are joined by Erik Averill to discuss how NFTs work, why they are not a get rich quick scheme, finding the true value in the technology, and where they might fit in an investment portfolio.
Episode Highlights
(1:01) What is an NFT? Should I create an NFT? Should I buy an NFT?
(2:26) Always understand what you’re investing in. This goes for NFTs, too.
(3:00) An NFT is a non-fungible token. A dollar bill is a fungible. They are all the same. Non-fungible would be if President Biden signed it specifically made out to you. This makes it one of a kind and unique to you.
(4:28) NFTs offer the promise of being the only one of its kind in existence.
(5:52) Beeple’s NFT sold for 69 million dollars. But it’s more than just a digital image.
(7:10) You are buying more than a digital image when you buy an NFT.
(8:05) This is not a cash grab or get rich quick scheme. If you approach NFTs that way you will not have a good investing experience.
(9:11) Web 3.0 is the redistribution of ownership back to the community. Creators and the community want to cut out the middleman.
(10:10) Beeple’s digital art is directly comparable to the physical art world. Just like the Mona Lisa is valued highly by the art community.
(11:15) Signaling within the Web 3.0 community is driving a lot of these headline grabbing prices for NFTs.
(12:05) NFTs like other collectibles (art, wine) will not end with good results for most investors.
(12:55) Buying an NFT is buying into a community of people. This community can be where the real value is to NFTs.
(15:00) There is extreme hype right now in NFTs and crypto. Top Shot is one example of that.
(17:05) There is a ton of innovation that will change the landscape and disrupt many current competitors in the NFT space.
(19:00) Be aware of copyright protection. As a creator, you want to ensure the value you have created comes back to you.
(21:15) The technology is incredibly young but the innovation within technology is tangible to so many.
(22:22) Applying the principles of other investments to NFTs is crucial. Investing in NFTs must be done in the same way as other assets.
(23:38) Gary V, one of the biggest crypto supporters, believes 98% of them will go to zero.
(25:00) It’s an exciting space but any money put into NFTs should be coming out of your speculative/entertainment bucket.
(27:13) Picks and shovels. Investing in the companies that stand to benefit from creating NFT communities is a great way to gain exposure.
(27:25) Returns only come from the top decile in venture. With private investments and NFTs this will likely be happening here too.
(29:40) With NFTs, we would rather be good than lucky. What kind of value is being created? How do you create a community? Think of it like a business and how you can do the work to capitalize on the NFT business.
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+ Read the Transcript
Brandon Averill (00:00):
Hi everyone. I'm Brandon Averill, one of the partners at AWM where we advise people in creating multi-generational flourishing families so that we can solve that shirtsleeves to shirtsleeves financial epidemic. And this is a front row seat with a AWM's chief investment officer Justin Dyer, myself, as we discuss some of our clients' most pressing financial questions. This is AWM insights and let's dive right in. Hey, everybody. Welcome back to AWM insights. It's a special episode today. We got a special guest. He's special in a lot of ways, but we'll get into that another time. We got Eric here joining us, our resident NFT expert. I'm going to throw expert on him, but really what we're going to get into today's, special episode, we're going to deviate from what we've been talking about because we've just been getting flooded with questions. What is an NFT? Should I create an NFT? Should I buy an NFT? And we just felt like it was a good time to maybe get back to the basics, talk a little bit about what is an NFT?
Brandon Averill (01:10):
I think a lot of people don't even know what the acronym stands for. So we'll get into that. We're going to get into, why they're important, why the technology is probably here to stay, might be world changing, but how do we actually see where the puck is going? What do we do with this? Should we be involved as investors? Is this a purely speculation play? So without further ado, we'll jump on in, we got Justin here as well. So, Justin and I will play probably the more skeptical viewpoint of this, but Eric maybe jump in for us, like lay the land out. I know you've gotten a little excited and dug deep here. So what in the world is an NFT?
Erik Averill (01:53):
Yeah. Well thanks for calling me special. Great introduction by an older brother, but I would say, of course I am the dreamer and I am the visionary, so I do get excited about the web3 space and to start off, I think what we're saying in the thesis right for the audience is we do believe that this is a very valuable conversation and something that we should all be educating ourselves around. The first move is not to put money into it, it's actually to educate yourself. And that's a principle of any type of investing is you better understand what you're investing in and so that's where I get excited about it is to steal, the quote from Wayne Gretzky, "it's not skating to where the puck is today. It's going where the puck is going in the future." And that's the intent of this conversation is to say, what is the opportunity in the land ahead of us in the NFT space.
Erik Averill (02:53):
And so as Brandon talked about, I think definitions are super important. So what is an NFT? It's a non-fungible token. And what does that mean, as you have these conversations of NFTs or Bitcoin, Bitcoin is an example of something that's fungible, meaning every single Bitcoin is exactly the same value, they're interchangeable, whereas something that's non-fungible is something that has a unique aspect about it that cannot be replicated. So I guess the physical world the way we would think about this is something that is fungible is like a dollar bill, right? $1 bill is the same as every other dollar bill. One's not more valuable than the other, whereas maybe a concert ticket that you buy that has a specific seat on a specific day.
Erik Averill (03:51):
There's only one of those that is created that is non-fungible or what you can think about as a dollar bill is that, if President Biden signed a dollar bill with a specifically made out to you, now that's gone from something that's fungible to a one of a kind and unique. And so that's really what we're talking about is a non-fungible token. It's a digital representation of something that is unique and really what is the important part of NFT or the promise of it that people are getting excited about is it's really a certificate of authenticity that you own something that nobody else in the world does. And so that's really the power or the promise of NFT. Justin, Brandon, I'll let you kind of jump in from there if I've missed anything from basic definitions.
Justin Dyer (04:49):
I would just add one thing to know when we're talking about basic definitions is the NFT, the token we're talking about lives on top of blockchain technology. We're not going to go down that rabbit hole, but blockchain is really the foundational technology that is shaping web3. That's what a lot of the cryptocurrencies we talk about and hear about Bitcoin included live within, and then a token, an NFT specifically lives within that or on top of that, technically on top of that at blockchain technology.
Brandon Averill (05:23):
Yeah. I mean, it's a great place to start. I think getting that definition out there of what we're actually buying and we've had some big news events. I think people largely put NFTs on the map, right? He sold one of his artwork, a collection of different photos in one piece, and he sold this NFT. So again, going back, this was one specific piece of art that was attached to one specific NFT sold for, I think it was $69 million and people lost their minds and it's like okay, great. What are we talking about? We're buying pieces of art on the internet. And I think really a lot of people stop there and never go deeper. They stop there and go shoot. This is like buying a baseball card. I mean, unfortunately my mass produced 1980s and nineties card collection. I took them over to the card shop the other day. They're not worth anything, pretty sad moment.
Brandon Averill (06:22):
But I started looking in the case and you've got the more recent card collections are through the roof right now. And I think there's a lot of elements to why that's happening. I think there's a lot of elements to why people are paying $69 million for a piece of art created by people. And then we get these Bored Apes popping up and I think people reduce communities like the Bored Ape Yacht Club into, "hey, you're just buying a picture of an ape and you get to change your profile pick, what's the big deal." So Eric, I'd like maybe you to dig in a little bit more here, because I know that's not the whole story.
Brandon Averill (07:05):
We're not just buying some digital image or if that's what you're doing, you probably are getting ripped off. I think this is a time where we do have to be skeptical or at least cautiously optimistic. We've got to do our homework because if you're just truly thinking you're going and buying an image, you probably are getting ripped off quite frankly, but there's a lot more to it. So maybe talk a little bit Eric about maybe the current environment, but what are some of the benefits you should be looking for? How do you start to evaluate, "hey, is an NFT something that I should be buying and participating in?" And then we can obviously move into, "hey, should I actually be creating an NFT?" Because I know a lot of people listening have that question top of mind for them.
Erik Averill (07:54):
Yeah. It's a great place to start. First I would want to say, this is not a cash grab. If your intent is a belief that crypto or NFTs is a get rich quick scheme, you are approaching it the same way of buying a lot of ticket. And as we know, that is the tax on the uneducated and at times just poor communities that are hoping for that ticket that we know is not in our favor. The probabilities don't add up. Yet, it's really exciting. Right. I think we've all, years ago when we saw the Lotto get to a billion dollars. I mean, I don't know about you, I bought a few tickets. Even though I know statistically that was a really poor investment decision, it's because it was speculation, it was entertainment.
Erik Averill (08:54):
And so I think first and foremost, what we're talking about is, we on this podcast, our audience and who we are, we are long-term investors. And what we are trying to do is put our money into something that is going to reward us as owners, it's called value creation. And I think if we take a step back is that's the big promise of what web3 is, is web3 from just a statement, is about the redistribution of ownership back to the community. It's cutting out the animators and the big platforms that have essentially been taking all of the profits from the creators in the community and what the big promise of web3 is saying, you know what, no, the creators in the community, that's where the money and the profit is going to lie and exist and we're going to cut out essentially the middle man.
Erik Averill (09:50):
And so that's the exciting promise of it. But what underlies that right there, is it's actually about looking for value creation and looking for ownership. And so I want to kind of break down the way to approach NFTs. So first Brandon covers this conversation about people. He had a 10 second video that sold for 6.6 million and then he has this work of the 5,000, all of digital images that sold for 69 million. That's no different than in the tangible world right of the Mona Lisa or the big auction house of Christie's. There are certain pieces of art in the physical space that are super valuable, but at the end of the day, that value is really derived off of just what somebody's willing to pay. There's no intrinsic value right of the Mona Lisa, but society has deemed it super valuable.
Erik Averill (10:51):
And so this is where we would say it's really a signaling inside of a community. And so the reason we would say somebody pays a lot of money for a statue or the Mona lease or the XYZ in the physical space, is it sets, right? It's signaling. It's not here to judge if it's right or wrong, but at a certain wealth level, it's like, "I'm so rich, how do I tell you I'm richer than you are," more important in this hierarchy of society. So I'm going to drive a Bentley, right? I'm going to be able to buy a piece of artwork for a $100 million because I can. And so I think that's first and foremost, when you start to approach, there are certain signaling things going on inside of the web3 communities. And from our standpoint to be abundantly clear, this is not where we think a good investment is.
Erik Averill (11:43):
We do not think that a good investment as a long-term investor is to buy something in the physical world or in the digital world, that is really more about a social signaling. We would say, that's a preference if you love art, you love wine, you love collectibles, great. That gives you some intrinsic life happiness in addition to, hey, it might be a good store of value over time, but that's really the clarity and so we would say for most investors, if you are just buying a digital image of something, don't expect good results. Where we do think the bigger opportunities what Brandon started to talk about was, the NFT technology could be this amazing gift when it starts to talk about activating a membership or a community or a tribe. And so when you think, "oh, someone's just buying this picture that they can put on their social profile of this Ape or this Kid-E-Cats, or XYZ, that's not what they're buying.
Erik Averill (12:52):
They're actually buying into a community of people that this becomes a representation, think about a membership card, right? Like it's a member's only jacket that I'm now a part of this community and the way I identify no different than a biker gang. I put my Hells Angels jacket on and that signifies to the world that I am a part of this community. And we can start to talk about how value starts to get created inside of an economy or a community of people. And that's where the big investment opportunity as is, can you partner with the right founders, the right companies that know how to activate a tribe, add value to it and you as an owner of type of community, is that community becomes more valuable as an owner, I reap the rewards and I take that ride into value creation.
Brandon Averill (13:45):
Yeah. Justin I want you to dig in here, but really quick I want to set the stage. We just heard the rosy picture. And I think we probably all on this call believe that might be where it's going, but we're not there yet. And I know Justin, you're about to hit on a little bit of that, so I'll let you get in here.
Justin Dyer (14:01):
Yeah. I agree with you, Brandon. I think the general picture that is being painted right now has a very plausible probability of actually coming to fruition. What we say on this podcast time and time again, is by no means can we predict the future? We're really speaking theoretically here and say, "hey, there's a really wide range of outcomes." So by no means, are we saying, it's going to go down this route definitively and want to make sure we're saying that, but there is some pretty cool potential here for sure. But as Eric and I think Brandon even mentioned, this is a perfect time and we do this with any investment opportunities to really, really make sure you're educating yourself and not just getting caught up in the hype cycle.
Justin Dyer (14:50):
So we talked about or Eric mentioned the signaling aspect of what's going on. There's also signaling combined with hype, extreme hype right now, because we've been in this really interesting two or three year period where you could say some things are looking like bubbles. That's really hard to predict beforehand. And that's added to this signaling component, whether it's the value of cryptocurrencies into some of the values in NFT sales that have actually happened. I was looking, just preparing for this, looked at the top shot sales. So top shots, NBAs, NFT platform, and that platform itself had a ton of hike in early 2021 February, right around the February timeframe. And you look at its monthly sales graph. I mean it spiked tenfold and it's come back down to much more reasonable levels. It hasn't gone away because there's interesting value potentially there.
Justin Dyer (15:46):
So again, just combining the signaling aspect of it with the hype cycle is also a good thing to take a step back and think about. And then again with respect to educating yourself, I hope we'll post it in the show notes. There's a great blog post by this guy, Moxie Marlinspike, who's a CEO or founder and CEO, although he just stepped down of an encrypted communication platform called Signal and he's done a bunch of other startups and pretty well respected in the tech world, Silicon valley, et cetera. And it's fascinating, it's a little technical, but it's a fascinating read. And really what he exposes is, hey, everything that Eric has talked about, yes, I see that potential, but no way is the technology there to totally support it today. And so that's a critical question.
Justin Dyer (16:40):
You need to bridge that gap. Like, hey, all this stuff is incredible, web3, the potential, et cetera, et cetera, but what's actually needed to bring the technology up to speed. I think a lot of people think the technology and the legal protections are already there and nowhere near are we in that environment? It's not to say we can't get there, but one thing you can see is that there's a lot of innovation and development that has to happen. Vitalik Buterin actually responded to this blog post specifically. So if you don't know who Vitalik is, he's one of the founders of Ethereum, but really the face of the Ethereum network, which is probably number two to Bitcoin, I would say.
Justin Dyer (17:25):
And he basically responded and said, "hey man, all your critiques are valid," but we can get there. It's basically been an issue of funding shortfall, which is kind of laughable, because there's so much money chasing all this. In any case, essentially just giving you some examples of what he highlighted. Just again, it is little technical, but it's really simple. He went and said, "I'm going to experiment with creating an NFT using the basic NFT protocol." What you can do is create an NFT. That looks one way. If it's being accessed from a specific IP address, we all have our unique IP addresses and so if you logged in from one computer you have, you would see one image. If you logged in from a different computer you had on a different network, you would see a different image. And then if you actually downloaded that NFT, you would see a poop emoji. And this is the NFT protocol.
Justin Dyer (18:19):
And then basically he said, whoever's hosting that because really what an NFT is, is more so a URL, you're buying a URL. You don't necessarily own that image 100%, you're buying an URL in most cases. That image can disappear based on the hosting technology or hosting platform. So again, not to say that we can't solve for this or there's nothing to it. It's just again educate yourself, know what you're buying, the devil's in the details, on the copyright side of things as well. Especially if you're considering a building an NFT in your own image and likeness, make sure you're partnering with the right people. Bored Ape Yacht Club, I touch, I came across this article we can dig it up as well. I believe this is the case, but the actual artist that created the main image there, isn't seeing any of the money from those resale and resales.
Justin Dyer (19:16):
So again, the devils in the details, copyright protection is a really important piece of it as well. There's nothing to stop me currently from grabbing. Let's just say an image of LeBron creating an NFT from it and then selling that NFT. Now LeBron could go to the NFT marketplace and say, "hey, take that down." And they would probably listen, but that's the policing mechanism where these more centralized platforms like a YouTube, they already have these copyright protections really, really well defined. And it is a centralized platform. So they're actually, there was an article this week talking about YouTube actually getting into NFT marketplace for their creators and that's a really interesting combination where they have some of these core protections in place for creators. That's a little bit more mature again, centralized. So they can move a little bit faster versus where you go to open sea or something like that and it's fully decentralized.
Justin Dyer (20:20):
And by design they're not going to build this process to make sure copyright is legitimate and the image is what it says it is. And so that again, that's just something to keep in mind. I will add on this kind of decentralization or decentralized topic. This is more of a web3 critique, where everyone says, hey, this is the amazing thing here is that, it's going to be decentralized. Creators are going to realize their value and blah, blah, blah. And then at the same time, we're talking about exclusive communities where you have to pay hundreds of thousands of dollars to be a member. I mean, it's a Country Club, right? Where I think those two things are completely contradictory to each other in a sense.
Justin Dyer (21:06):
So summing it all up, I think the tech is still incredibly young. I think we've gotten ahead of ourselves. And the cool thing about what we're seeing is, it's the first time I believe that technology, the innovation within technology is so directly tangible to so many people. Usually, it happens within a very kind of isolated part of say, Silicon valley in recent history. But now we're seeing this and it's exploded everywhere. Anyone can touch it, anyone can participate in it, but that brings with it pros and cons, right? People get up, caught up in a hype machine. People fail to really understand what's going on because this is so young. And at the same point in time too, the legal system hasn't necessarily caught up with what is going on within these. Let's just call it digital assets, largely speaking. Does existing copyright law recognize that you own an NFT and "have a copyright claim on that." These are all really important questions as well.
Erik Averill (22:14):
That's all super helpful and great warnings to take a step back as we listen in on this conversation is, we as investors who we would say, hopefully we're the smart ones. We're trying to learn from the truths and the principles that have led to success over and over and over again, of creating multi-generational wealth in value creation is, it's never a binary yes or no. It's am I taking the appropriate risks with the appropriate type of money or time or capital. And so if we go back to money as a tool to pay for the things that are important, one of the most foolish things we can do is take money that we know we need to achieve the life we want or to pay for the things that are important to us, take that money we already have and go risk it in something that statistically means we will lose it, right? Like that is not a wise decision.
Erik Averill (23:17):
So the bulk of our wealth, the same principle applies that we don't advise clients that don't have the appropriate liquidity or staying power to take their money and go invest in venture, let alone seed round in venture. And so I think this is a really good analogy as Gary V who is by far one of the biggest supporters in the NFT space, or just the crypto space, saw a tweet by me the other day, he said, yeah 98% of what we exist today will go to zero. It will absolutely go to zero, no different than the dotcom world. There will be 2% of companies that change the world. And so I think there's that belief I want to get in on the next Amazon. Well, if we go down history lane a little bit here, and we go to what happened in the dotcom era, first, we're talking about a company that was already publicly traded in Amazon.
Erik Averill (24:18):
Really when we're talking this NFT crypto space, this is more like seed stage or series a venture, but Amazon during the dotcom crisis had dropped close to like 90% nobody was looking back then going, you know what? This is the company that I want to dump all my money into, because it's going to change the world. No, it was this falling knife that a drop 90%, people are probably thinking this company's going to implode. And the reason I say that is just, it's really hard to predict who we're going to be the 2% that are going to change the world and that you're going to have this amazing run and make billions and millions of dollars and go to the moon. So what we are saying here is it's a super exciting space, we should get highly educated on it, but any money that you put into it really should be coming out of your speculative/entertainment, slush fund, not your money that you need to secure your family's future.
Justin Dyer (25:23):
Yeah. I just want to hit on that too. You mentioned venture and we participate in the private markets and venture specifically. We have investments that are specifically related to this space. It's more of a pick-and-shovel type approach. We talk about that quite a bit too, where these are companies that are building the technology, the platform that are going to go to, let's say the athlete community or any type of membership community and say, hey, we have a platform, let's just call it a computer code platform, software technology, to bring it to common parlance that you can use company ABC to engage better with your members. You can pay us a fee or we can take a piece of, I don't know what the business model's exactly going to look like, but you could see any one of these taking shaped fee, percentage of transaction volume, et cetera, et cetera.
Justin Dyer (26:21):
That's a pick-and-shovel. These are businesses that are building value add platforms within this space. And those to Eric's point earlier, that's where it gets from an investment standpoint, really interesting. We want lasting value, not speculative value where it's really dependent on what the next guy's going to pay. They have a customer base, there's a market size, a conceivable market size that they can go out to and sell a product again, using this interesting technology that can be really, really beneficial to create communities to benefit both the company creators and people who want to engage with that community. That's the cool piece of it and we do see that being a pretty interesting place to invest within.
Erik Averill (27:08):
And as an example of that pick-and-shovel, so I think this is where for you as our listeners, that a lot of you are our clients and you hear us talk a lot about this pick-and-shovel, right? And taking advantage especially through the venture space, which we know this is returns only come from the top decile, which means you better have access to the right companies. So what we're encouraging so many of our clients that we have the privilege to partner with and we happen to have this unique experience is we just talked about NBA Top Shot, like this thing when all the rage. Well, who owns that? What platform is that on? Oh, it's on not even the Ethereum blockchain, right? It's on Flow. Well, Flow's built by who? Dapper Labs. Well, who invested in Dapper Labs? Andreessen Horowitz, Google ventures.
Erik Averill (28:03):
And so all of a sudden it's like, wait a second if I'm invested into Andreessen, theoretically, they're taking that money and investing in this space and they do it every single day. And Dapper Labs is also diversifying their bets. It's not just NBA Top Shots. It's the UFC, it's these other products and innovations. And so, when you're in early technology or early companies, the original thesis actually doesn't end up being what the business is. Ride sharing for the college kids turns in to lift an Uber for the world. And so I just think that there's this pick-and-shovel mentality for us is really, this is long-term value creation. And what we would say is, putting the odds in your favor.
Brandon Averill (28:56):
Yeah. I'll tie a bow on this. I mean, I think it's been a fascinating discussion. We might have to bring it back about, especially as the technology continues to evolve, but at the end of the day, hopefully what you're taking away from this is that NFTs are not a get rich scheme. If you think you're buying some image and you're going to flip it and turn it into some sort of value, you're probably not making a very wise decision. You might get lucky. There will be people that certainly get lucky and buy the right image and that happens in the short term luck happens, but like Eric's hit on, Justin's hit on throughout this podcast, we'd rather be good, then be lucky, because that wins over time. And so when you're looking at these NFTs, I think, the good analogy is it's a business, you need to make the same type of evaluation.
Brandon Averill (29:52):
What is the value that's being created? How do I take that value? Are those lessons and say like, okay, I think this is going to actually provide value to myself or to somebody else and maybe that's your reason for purchasing an NFT. And then if you're thinking about, we got a lot of athletes listening in, if you're thinking about, hey, I want to launch my own NFT and it's not about getting one of your highlight reels and creating an NFT of it and then you get to sit back on the couch and collect cash. It's about how do you create a community. That's what it's going to make it successful. If you can create a community, you're willing to put in the work, which, I hate to be skeptical, but really ask yourself and be honest with yourself, are you willing to do special interactions with people, jump on a discord and actually interact or go to dinner or host a dinner or send out unique memorabilia.
Brandon Averill (30:53):
If you want to create value like that and put the time in, then the NFT platform might be a fantastic way for you to capitalize on that. But anyways, at the end of the day, what you're really looking at is a lot of noise in this marketplace. There are some fantastic opportunities, but you have to do your homework to get there. If you're not willing to do that, you might as well walk away because you're more often than not going to lose your money if you're not willing to put the work in. So we'll end there, we'll come back on a fascinating conversation in the future on this I'm sure. But in the meantime, head over to AWMinsights.com, drop us an email, let us know what you thought of today. Any other topics you want us to hit on? If you want us to expand on this, et cetera, and until next time, own your wealth, make an impact and always be a pro.