Bitcoin. Blockchain. Cryptocurrency. Non-fungible tokens. You can't read the news these days without stumbling across articles talking about these new technologies. If you’re anything like me, I'm sure you have questions… and a lot of them! Are cryptocurrencies and Bitcoins the same thing? How does blockchain technology make all this new stuff work? What are non-fungible tokens—or NFTs—and how can they be bought, sold, or held by investors? Are they really the "world’s best retirement planning tool” like Twitter likes to repeat over and over? Is it too late to invest? And if I don’t invest now, will I be left behind?
It’s all enough to make anyone’s mind spin.
To stop the insanity and gain a little perspective, let’s back up and slow down to a much simpler time and place: 1637 in Holland. But (you guessed it) it wasn’t so simple after all. It was the year of the Dutch Tulip Craze, also known as ‘tulipmania’, which marked the first recorded speculative investment bubble in history. The Dutch Tulip bubble followed the same pattern as the modern-day bubbles we’ve witnessed over the past decades. Like the dot-com bubble and the housing bubble, people got excited about a specific asset (in this case, tulip bulbs) and were willing to pay prices far above the item’s intrinsic value. The price of tulip bulbs skyrocketed because buyers kept buying as prices rose to jaw-dropping heights. At the peak of tulipmania, a single tulip bulb was selling for more than 10x the skilled artisan's annual income. To put that into a contemporary context, an experienced carpenter today earns around $75,000 a year, which would put the price of a tulip bulb at $750,000!
Returning to 2021 and the current craze over Bitcoin and NFTs, I suspect a similarity between tulip bulbs and these new digital assets. Tulip bulb investments were ‘speculative,’ meaning that investors bought in hopes that someone would later pay them a higher price for their investment. That’s quite different than stock investments which have ‘intrinsic value,’ meaning that investors expect the company, its earnings, and the price of its stock to grow over time. Long-term investors focus on fundamentals like intrinsic value. Speculators focus on the opportunity that comes with price spikes. In 1637, people desperately wanted to own tulip bulbs, despite the absence of any real economic value, which drove speculation. Today, many investors feel just as passionate about wanting to own Bitcoin and NFTs. And speculation is running rampant.
Understanding the basics
Let’s start with the underlying technology behind it all: blockchain. In short, blockchain is a decentralized database that has been called the most important invention since the internet. The first product launched using blockchain was the cryptocurrency called Bitcoin which was created as a peer-to-peer exchange that avoided big national central banks. Companies like Bitcoin and Ethereum were early blockchain application developers, and many more are emerging.
Next came NFTs, another type of digital asset built using blockchain applications. The NF in the name stands for ‘non-fungible’ which means each token is unique (unlike Bitcoin and dollars which can be duplicated). Many believe that blockchain has the potential to change the world, and crypto assets such as cryptocurrencies and NFTs are just the beginning of this massive transformation.
The deluge of news stories on NFTs alone illustrates how fascinated the world has become with these digital assets. Because every NFT is unique, it can be used to authenticate the ownership of almost any digital asset—musical recordings, artwork, a chunk of computer code, and more. I read in the Wall Street Journal that Twitter co-founder Jack Dorsey’s first Tweet recently sold as an NFT for $2.9 million. The fact that anyone can go online and read Dorsey’s first Tweet whenever they choose doesn’t matter. Owning the NFT for the Tweet means that the buyer owns the original and unique source code. Think of it this way: I have a beautiful print of the Winslow Homer painting A Wall, Nassau hanging on my wall, but it’s not worth even a fraction of the cost of the original that hangs at the Met in New York City. The difference: the Met holds a certificate of authenticity—just as the happy owner of Dorsey’s Tweet holds for his new NFT asset.
NFTs can be bought and sold by anyone on a growing number of online marketplaces like Rarible and Nifty Gateway. As a buyer, you can pay in real dollars or cryptocurrency. You can buy NFTs as a speculative asset (in hopes that the price will rise) or, like a piece of physical art, you can buy a particular NFT for the simple joy of owning it. (All bets are off on which inspired the sale of the first NFT artwork that recently sold for $69,000,000 or the first NFT house that just sold for over $500,000!)
Should you invest?
It all begs the question: should you invest in Bitcoin or NFTs? And if you don’t, will you regret not investing in an asset class that might skyrocket to even higher heights?
My honest answer is that I have no way to know the future of Bitcoin, NFTs, or any other new cryptocurrency that may come along tomorrow. But I am curious, and I am always striving to gain new insight and understanding. The guidance I can offer is this: if you’re considering Bitcoin of NFTs as an investment in your portfolio, understand that these asset classes will have a speculative role in your portfolio. The role of stocks, bonds, and other more traditional assets in that mix is clear to me, but crypto assets are too new and not broadly understood. The internet changed our world, and blockchain technology and digital assets may well do the same. But is it time to invest?
For me, not yet.
It’s helpful to keep in mind that change is constant. It wasn’t long ago when investors held bonds with physical coupons, paper stock certificates, and dollar bills that were silver certificates. Today, we trust that those assets exist, even though the only evidence we have is digital. Are blockchain, cryptocurrency, and NFTs better mousetraps? Probably. Are they something to invest in today? Probably not. Only hindsight will tell us whether the current buying frenzy will mirror the dot.com bubble of the last century—or if not investing will leave us with a lasting case of FOMO because we were simply too late to the table.
I’m still learning about Bitcoin, blockchain, cryptocurrency, and NFTs. When I am convinced that anything that comes along is truly “the world’s best retirement planning tool,” I’ll be the first to let you know. Until then, I’m happy cuddling up with that Beanie Baby I bought in 1998. It still has the tags on it, so it just might be worth a fortune… someday.