The Bull Case for NFTs – Why They Are Here to Stay

Ending with why. [The final post in the NFT season of this newsletter]

[Click here to read the original version of this post on jacobmorch.com]

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Happy monday, dear friends and frenemies,

As mentioned last week, this is the last NFT-specific edition of this newsletter for a while.

Simon Sinek has taught us to Start With Why, so this post should probably have been the first in the series. Alas, I flip the script and End With Why.

More specifically, why I believe NFTs are here to stay, and why I’m bullish on them both as an asset class and as a technological phenomenon.

To balance it out, I’ve also included a very in-depth exploration of the bear case for NFTs, and what might cause them all to flame out and go away.

Let’s get into it.


The Bull Case for NFTs

The Coming NFTification of Everything

NFTs are here to stay, and the future will be full of them.

At some point, you will own NFTs even if you don’t care the slightest about crypto, art nor penguin photos.

Why? Because the future will be tokenized. Almost everything can and will be turned into fungible or non-fungible tokens, meaning almost everything will be turned into some tradable asset on a blockchain.

What kinds of everything, you ask?

  • Communities will be tokenized: To get access to a community, you need to buy and hold a token. If you contribute to the community, you’ll get rewarded with more of the community’s tokens. This aligns incentives between the collective and the invidual, which has been very difficult to do at scale in the past. This has already started with online communities, but it will come to offline communities as well.

  • Physical items will be tokenized: When you buy physical goods, you can also get a digital representation of that good in the form of an NFT. These NFTs can be used as proof of purchase, provide a complete record of who has owned that good in the past and so on. The obvious applications of this is for expensive items like cars, homes, luxury watches and so on, but cheaper goods could follow in the same path. The line between ownership of physical assets and digital assets will get increasingly blurry.

  • Experiences will be tokenized: when you buy a concert ticket in the future, you might get an NFT that proves you attended, perhaps even which seat you sat in. You can then show off your token as proof-of-attendance, and gain social capital in return. Did you collect old flight tickets, Hard Rock Cafe t-shirts or coins from far-away lands as a kid? All of that is coming back, in digital form, through NFTs.

  • Gaming will be tokenized: to get access to a game, you need to buy a token. As you level up in the game, you earn more tokens. This is already here, see Axie Infinity (the behemoth), Rumble Kongs (the new kid on the block) and countless others. Gaming is a ~$90,000,000,000 global industry, and more and more gamers will realise something very simple: I can either pay to play traditional video game A, or get paid to play blockchain-based video game B. The tidal shift from A to B will be enormous. To see a wild example of the implications of this shift, check out this video about people making a living playing Axie Infinity in the Philippines. Here’s a wild statistic: there are now more people with Ronin wallets (needed to play Axie) than people with credit cards in the Philippines.

  • Money will be tokenized: this is now obvious, as Bitcoin, Ether and other currencies have proved their utility and durability. Over time, more and more of our financial lives will be conducted through digital tokens used as representations of value and scarcity.

I could go on and on, but the essential point is this: NFTs are here to stay, and tokenizing and trading JPG photos are just the first mainstream use cases for this wider technological trend.

I can’t possibly imagine most of the use cases or implications of NFTs yet, but I believe there will be many. That’s why spending some time and money on understanding NFTs early seems like a complete no-brainer.

The NFT Market is Tiny Relative to Comparable Asset Classes

NFTs in their current form are the digital equivalent of luxury goods and art. But compared to these analogue counterparts, the value of NFT market is vanishingly small. If NFTs continue to strengthen their position as preferred luxury goods and art pieces for the “internet overclass”, there is enormous room to grow.

Let’s look at both comparisons in more detail.

NFTs versus luxury goods

NFTs are digital status symbols. Rolexes for nerds and internet-first folks, if you will.

The entire NFT market is worth about $4 billion. One single conglomerate in the luxury goods business, infamous LVMH, did $30 billion in sales in the first six months of 2021 alone!

The market cap of LVMH is $376B. The entire NFT market is just 1% of that as of this writing.

What happens to this ratio as more and more of our lives are lived online over the coming years and decades?

What happens to this ratio when more and more of the wealthiest people on earth have made their money online, and prefer to status signal in the digital domain rather than in the physical world?

What happens to this ratio as more and more wealthy, climate-conscious millennials shift their spending away from dead cows (aka: handbags) and historically sketchy stones (aka: diamonds) towards status symbols with effectively zero carbon footprint (aka: JPGs)?

Suffice to say, there seems to be room to grow for digital status symbols.

NFTs versus traditional art

Around $50 billion worth of art was traded in 2020.

To repeat, all NFT trading since the start totals around $4–$5 billion.

If the world keeps getting more and more digital going forwards (I believe it will), there is little reason to expect the traditional art market to be 10x the digital art market in the future. Room to grow for NFTs.

The Fact that We’re Still (Very) Early

August 2021 was a wild month for NFTs. Opensea, the main marketplace for buying and selling NFTs, basically exploded. In fact, Opensea did more transaction volume in August than in all its history COMBINED.

Absolute madness. Check out these charts from Nate, one of the Opensea founders, and notice how every August bar is so steep it almost falls over to the left.

Looks crazy, right? How could this possibly continue?

Well, consider one more chart. Total Opensea traders over time.

This chart tops out at roughly 350,000 users who have made at least one trade. Quite a few people have two or more accounts/wallets, so I bet the real number of unique individual people who have ever made a trade on Opensea is roughly 200,000-250,000.

Two hundred thousand in total. That is practically NOTHING. Not even a drip in the ocean.

To put it in perspective, consider this: there are roughly 56 million milllionaires (in US Dollars) in the world. How many of them do you think will buy an NFT in the next 5 years?

The bottom line seems to be that we’re still early. It’s like the internet in 1997 – it’s clunky to use, some weirdos already have it, and they can’t seem to shut up about it. Most people don’t quite see the point. But give it five years, and the point will be seen by most. Give it five more years, and it could be the most normal thing in the world.

Money is Flooding Into the NFT Market

The amount of capital entering NFTs is enormous, and I expect the inflows will continue to grow in the years ahead. Here are three reasons why:

Old money is coming in. Christie’s and Sothebys have started auctioning NFTs, which legitimises the asset class to “old money” people. More and more family offices, art collectors and Ultra-High Net Worth Individuals are getting into NFTs as we speak, and many more will do the same in the coming years.

Institutional money is coming in. Hedge funds, investment trusts and other traditional finance players are getting into NFTs, just as many have entered cryptocurrencies after many years of skepticism and denial.

Crypto money is coming in. Most of the early crypto adopters haven’t even join the NFT Klondyke yet, but many will soon. Bitcoin’s market cap right now is $866 billion - what do you think will happen when the hundreds of thousands of crypto wealthy people want to have some fun with their gains? NFT spree!

If one or more of these turn out to be true, I believe the capital influx will be like the tide that lifts all boats – “all” NFTs (above a certain quality treshold) should be worth more in the future than today if these hypotheses play out.

In short, I believe in NFTs. But with all that said and done, let’s make this post a little more balanced. Let’s consider the bear case, or what might cause NFTs to disappear into obscurity.

The Bear Case for NFTs

NFTs could very well turn out to be digital Dutch tulips.

That is all.

Thank you for reading.

-Jacob


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Final Disclaimer

This is still not investment advice.