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I was combing back through my CFA textbook and for some reason, I couldn’t find “Buying JPEGs of rocks for $2.6M” as a good store of value.
I guess they have to update the textbooks!
I mentioned non-fungible-tokens (NFTs) back in my newsletter in May when we covered alternative assets, but it’s time for an update.
The market has been on absolute fire.
In August, NFT trading volumes on OpenSea broke records, crossing $3 Billion in monthly volume, up more than 12x from $248M during July (second best month).
If you add the first 12 days of September to this number, it climbs to $4.2 Billion.
If you’re wondering WTF is OpenSea and why are people buying pictures of rocks, you’ve come to the right place.
This week, in <5 minutes, we’ll provide an update on the wacky and wild world of NFTs:
Recap of what is an NFT? 👉 Brief Summary
Marketplace Leader 👉 OpenSea
Art Projects👉 CryptoPunks & Bored Apes
Expanded Use Cases 👉 Loot
How GRIT’s Playing it 👉 Sold my own NFT!
Let’s get started!
1. Recap of what is an NFT? 👉 Brief Summary
When you try to google what is an NFT (non-fungible token), you get the following result:
A non-fungible token is a unit of data stored on a digital ledger, called a blockchain, that certifies a digital asset to be unique and therefore not interchangeable
A bit complicated, so let’s just call it what it is by summing it up in 3 words.
Unique Digital Certificate
If you want to go down the rabbit hole, a great resource that actually seems to be written in comprehensible language can be found here.
Just like when you buy shares in a stock, you get a unique certificate that verifies its authenticity. NFTs however, exist only in the digital world - so you don’t have to worry about storing it for a price, or worry about the condition deteriorating over time.
NFTs are most commonly built and stored on the Ethereum blockchain.
Although there are many different mediums (music, drawings, your own soul) that can become NFTs, digital art is the most recent phenomenon that is being commercialized.
2. Marketplace Leader 👉 OpenSea
Just like any other currency or good, in order to facilitate transactions, a marketplace must exist. Which I find a bit ironic, to be honest…
A lot of crypto enthusiasts point at the concept of decentralization, then you have these exchanges which essentially become points of centralization in order to facilitate exchange. But I digress…
The prominent exchange right now for NFTs is called OpenSea.
OpenSea started back in 2017 with $2 Million in funding then ramped it up raising $23 Million from a16z in April 2021, followed by another $100 Million Series B in July valued at $1.5 Billion.
OpensSea is the largest peer-to-peer marketplace for NFTs and makes money on the sale of NFTs through its platform. It is free to use by buyers of NFTs, and sellers pay a 2.5% commission on any sales made.
All purchases on the website are currently done using Ethereum. A buyer who wants to purchase an NFT on OpenSea must do so using Etherum, and have a digital wallet in order to transact. You can buy cryptocurrencies directly from OpenSea using a credit card.
Now would be a good time to talk about “gas”. On the Ethereum blockchain, gas refers to the cost necessary to perform a transaction on the network.
This transaction fee is a small fraction of ETH commonly referred to as gwei and is used to allocate resources of the Ethereum virtual machine so that smart contracts can self-execute. Think of it as something that covers the computational expense on the network.
The price of gas is determined by supply and demand between the network’s miners and the end users of the network who seek processing power.
One of OpenSea’s early issues is that the Ethereum Blockchain struggled to keep up with the NFT boom at times. The user must pay for the gas to create a smart contract, initialize their OpenSea account, and pay more gas to create the first NFT. These fees are somewhere between the equivalent of US$100 to $150 to create your first NFT but can fluctuate greatly.
Just like any marketplace - the cost of transaction and creation can be very prohibitive, so this needs to be addressed through upgrades of the Ethereum underlying infrastructure.
A feature of OpenSea that I really like is you can see how truly unique each individual asset is as well as a history of transactions. For example, here is Cryptopunk#3783 on sale on OpenSea right now:
You can see (a somewhat limited) price chart, and also history of prior transactions:
As well as information on where the contract address is stored, the properties of the asset, and information on the creator:
You can also view them by top categories.
All in, OpenSea is a blooming marketplace at the forefront of widespread adoption and distribution of NFTs.
However, we also have to mention what happened last week. On September 15, Head of Product at OpenSea, Nate Chastain was confirmed to snapping up the platform’s front-page NFT drops before their general release. This is kind of the equivalent to insider trading and front running; some would argue this executive needs to be removed safeguards put in place to ensure this cannot occur again.
Now, let’s check in with our Outrageous Chartered FinMEME Analyst Dr. Patel!
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3. Art Projects👉 CryptoPunks & Bored Apes
Spotting the next big thing is a difficult thing to do, especially in such an obscure asset class.
Are all these being collected by actual people? Or is it a source of money laundering?
Probably a mixture of the two, but let’s take a look at adoption by starting at the top of the list of the highest volumes trades on OpenSea: CryptoPunks. When you go into the price and volume history or the entire….dare I say it… “Asset Class” over the last year, you get a chart that looks like this:
So, there are definitely spikes when something sells for a stupid high amount. But the chart is generally up and to the right, which is what you need to happen as a marketplace.
Then when you go into the top sales by ether value, you get sales that look like this:
The underlying utility of these assets is scarcity. You, and only you, OWN THIS ASSET that MIGHT appreciate.
When CryptoPunks were created, there were exactly 10,000 of them. This reinforces the scarcity component because there cannot be more unique units added to the collection. Think of it as a deceased artist’s collection, there will be no new Da Vinci paintings.
They also have unique attributes that some could see as valuable. For example, there are 6,039 male Punks and 3,840 female Punks. A total of 696 wear hot lipstick, while 303 have muttonchops. There are 286 Punks with 3-D glasses, 128 rosy-cheeked Punks, 94 Punks with pigtails, 78 Punks with buck teeth and 44 beanie-wearing Punks.
What started out as an experiment, became a movement, and once broadly adopted and facilitated by OpenSea became a collector’s dream.
Another project I will quickly touch on is the Bored Ape Yacht Club, AKA Bored Apes.
A common theme amongst these projects seems to be how many are available. Just like CryptoPunks, there are only 10,000 Bored Apes in existence, and these really exploded in popularity in April, with certain high profile athletes changing their display pictures on Twitter to Apes that they bought.
Right now, the lowest cost for a Bored Ape is around USD$80,000. Another example of a successful project.
4. Expanded Use Cases 👉 Loot
If you’ve been following my newsletter for a while, you know another area that I’m very interested in is the gaming space and how it’s enabling the creation of a metaverse.
There’s a project in the NFT space that I can see having awesome cross-over impact into this space: Loot.
Loot is randomized adventurer gear generated and stored on a chain. Stats, images, and other functionality are intentionally omitted for others to interpret. Think of it as a loose game of dungeons and dragons but using online unique digital assets.
Anytime you give a kid a sandbox to play it, they will just putz around and dig holes. But if you give them pre-existing castle-like plastic moulds, they will fill the mould with sand, turn it upside down, and now there is a castle turret. That it was Loot is trying to do with hardcore nerds online - give the tools to create awesome worlds. Kind of sounds like Roblox (which I own!) or Minecraft but with an NFT twist. Very cool
This is an actual listing, right now, with over 10 bids over USD$20k on it:
But where it gets interesting is the description of how rare each item is:
If not very many other players have the plate mail of Fury - you might just be indestructible! Now think of what these assets can do if tournaments build on Loot are held for prizes where the winner gets $500k in Ethereum…
5. How GRIT’s Playing it 👉 Sold my own NFT!
I went through the NFT selling process with Rarible, mostly so I could understand the space much better. Back in May, I minted this NFT:
I collaborated with D-Snow who has made many custom art pieces for celebrities like Drake, Fetty Wap, Sean Paul, Bad Bunny, etc… The purchaser has a collection of over USD$400k in another type of NFT asset class!
I also recently bought the ethereum dip. I have been buying the Purpose Ether ETF. My average cost is $15 and I will keep dipping in ; )
I think there is a particular idiom that holds true here:
“Price is what someone else is willing to pay”
Unfortunately, this is much closer a “greater fool theory” than it is a free-wheeling equilibrium set by supply and demand, but as transaction volume increases, the closer to true price discovery we get.
Until next time. Always Yours. Incessantly Chasing ROI,
-Genevieve Roch-Decter, CFA
P.S You better buy bitcoin before the FED does ; )
What else we Grittin’ On?
FOX. Did you catch Genevieve talking about BUYING THE DIP on Fox Business this week? Let’s just say she wasn’t shy about her love for stocks.
STRIPE. Now, all grown up as one of the biggest startups in the world, they’ve got plans to go public as early as next year with a value north of $150B.
URANIUM. Uranium is making a late-season push for Commodity of the Year, fuelled by a combination of institutional and “smooth brain” buying.
GAMING. The pandemic last year served as a massive tailwind for the industry, but the momentum hasn’t let up with a year-to-date total at $37.9B.
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