Should I Invest in NFTs?

Jack Dorsey, the founder of Twitter, is selling his first tweet for $2.5 million.

3LAU, an EDM artist, sold 33 NFTs for his album for $11.6 million.

Justin Roiland, the creator of Rick and Morty, sold sketch drawings for $2.3 million.

The list could go on and on.

From the outside, it seems like NFTs are a place for the rich to throw their leftover money at overpriced digital assets.

And from that perspective, that may be true.

However, before you write off the NFT boom as just a bubble waiting to pop, it’s important to understand the true importance and value NFTs bring to the world of creators and digital artists.

(I wrote a more in-depth post on this aspect last week which you can read here)

So if you’re curious about the NFT space and wondering if you should be investing in them, here’s a few things you should consider and ask yourself before taking the leap:

View them as a digital collectible

This may be one of the most important concepts to understand.  I’ve read a lot of articles and tweets to get different people’s perspectives and thoughts on NFTs and it seems like the people who are skeptical of NFTs view them as something to get rich with.  In my opinion, getting rich from being an early investor may be a side effect, but shouldn’t be the true motivation behind buying NFTs.

I personally haven’t bought any NFTs because I’m investing all my money into my business right now, but if I had the money I’d be buying NFTs that I would want to hold onto for years - not try and sell next month for a profit.

It’d be like someone buying Pokemon cards back in the 90s.  At the time, people just wanted to collect them and play with them but now they can be worth thousands of dollars.

If you view purchasing an NFT as a collectible rather than an investment, it shouldn’t matter what happens to the price because you placed value on that item.  If it goes up in price and you want to take profits, great.  If it drops in value, that’s okay too because you bought it as something you value and want to hold on to.

A way to support your favorite creator

Jack Butcher is a visual designer who’s gained a huge following on Twitter within the past year.  He’s released a few courses, yet gives away a lot of value for free on Twitter and through this strategy has built a loyal community.

He recently created an NFT design and it sold for 33.888 ETH (~$60,000).  

Another thing to consider is that not all NFTs are just a single digital asset.  Some creators are pairing their NFTs with benefits such as exclusive access to products or monthly calls with token holders.  Musicians can sell NFTs for an album that give token holders lifetime access to backstage events.  The use cases for NFTs are endless and I’m excited to see how creative they become.

Am I doing this to try and get rich quick or do I want this asset?

I’ll preface this by saying that I don’t fully understand NBA Topshots.  I don’t enjoy the NBA and I personally don’t see the value in owning a clip of LeBron dunking.  There’s certain moments in history like the Iverson step-over that would be cool to own, but I wouldn’t be surprised if a lot of the TopShots lose value over time.

I may be wrong, but it seems like a lot of the popularity and buzz around NFTs is due to people hoping they’ll find the next $100,000 flip.  Stories like Michael Levy, a 31-year old financial analyst, who invested $175,000 into NBA TopShots and turned it into $20 million have people searching for that next big hit.

However, if you love the NBA and want to own clips from your favorite player or team - do it!  Just don’t go in with the mindset that that clip is going to be your ticket to financial freedom.

As a financial planner, it may seem contrarian for me to support such a new, “speculative” space but even more than I believe in NFTs, I believe you need a solid financial foundation first.

Here’s a few areas of personal finance that I believe should be addressed before diving into alternative investments:

Fully funded emergency fund

An emergency fund is the backbone of financial security and is crucial to achieving financial peace of mind.  It’s generally recommended to have 3-6 months of your living expenses saved however after everything that happened in 2020, it may be a good idea to start aiming for 9-12 months.

No “bad” debt

If you have credit card debt or any high interest debt, paying that off should be a top priority.  Having debt hanging over your head not only negatively affects your finances, but it can affect your mental health as well.  Knowing that you’re behind and consistently having to worry about making those debt payments takes a toll.  

Consistent savings

If you’re consistently saving money and you’re ahead of the curve when it comes to investing for retirement AND can safely cover all other possible expenses, it might not hurt to dabble in alternative investments.  However, if you know you’re not where you want to be financially and want to invest in NFTs to try and avoid the time it takes to establish good habits and save for retirement, there’s better uses of your time and money.

Closing thoughts

In a similar perspective to NFTs - with the rise in value and popularity of Bitcoin, more and more financial advisors are beginning to understand and potentially recommend small investments into Bitcoin.  While the recommendations definitely vary person to person, a common percentage some have mentioned is putting 1% of a portfolio in Bitcoin.  So if you have $100,000 invested, putting $1,000 towards Bitcoin may be a safe allocation depending on your situation.

NFTs are slightly different though since they aren’t a currency - rather millions of different collectables, tokens, and pieces of art.

Think of it this way - if you were to ask someone “which painting should I buy?”, everyone you ask would give you different answers.  People would recommend a Picasso or a Rembrandt but a common recommendation would probably be “whichever one you like”.  

NFTs can be viewed in a similar way.  There’s going to be artists and creators who dominate the NFT space and everything they create will be worth a lot of money.  But there’s also going to be millions of pieces that are never worth more than a few dollars.  Just like actual paintings and pieces of art in the real world.

If you’re going into NFTs with the mindset that you’ll find a hidden gem and get rich quick, you’ll probably end up falling short of that dream.

As I’ve mentioned in a couple other articles I’ve written about NFTs, this is not a recommendation to go out and start buying them.  I believe it’s important to be informed about what they are and the risks involved.  If you want to start investing in NFTs, it’s important that you have the basics of personal finance taken care of so you’re not spending money that could be better used elsewhere.  

If you can’t afford to lose the money you want to put into NFTs, it may be a better idea to hold off.

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