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Would you pay millions of dollars for digital artwork?

Welcome to the world of NFTs, or non-fungible tokens.

Just this year so far, about $1.3 billion of NFTs have traded through Ethereum network, dwarfing the activity last year.

The biggest transaction was an NFT purchased for $69.3m dollars.

Sounds unbelievable? Let’s find out more about this hottest new asset class.

 

What Are Non-Fungible Tokens (NFTs)

Firstly, to understand what fungible means, let’s look at the concept of normal fiat currency.

If you have a $10 bill, that bill is fungible, because it is completely interchangeable with any other $10 bill. Every bill has the same value, and there is nothing unique about it.

Similarly, cryptocurrencies like Bitcoin are also fungible, meaning 1 Bitcoin (BTC) is interchangeable for any other Bitcoin and has exactly the same value.

On the other hand, NFTs, which rely on special token standards like ERC-721 (using blockchain technology) to ensure uniqueness, are non-interchangeable and each token is unique.

In this way, NFTs are like digital artwork or collectibles because they are one-of-a-kind, and ownership is locked to one particular person (the owner/buyer), making every piece a unique and limited-edition piece of work.

“Think of it like a digital passport that comes with an asset,” said Nadya Ivanova, chief operating officer of BNP Paribas-affiliated research firm L’Atelier. “They allow for this trust and authenticity to be established in a way that we haven’t been able to do before, whether it’s with physical assets or digital assets.”

 

How do NFTs Work?

NFTs are actually cryptographic tokens with unique identification codes and metadata that make them unique.

Created on a smart contract platform such as Ethereum, these tokens are unique and cannot be replicated.

This means that when you buy an NFT, you are essentially buying lines of code on a blockchain.

But these lines of code do have value.

They represent proof of ownership and authenticity of these digital artworks and assets, that this asset you own is uniquely and authentically yours.

This blockchain, which is a type of decentralized record-keeping on a public ledger of blocks, means that the whole world knows who officially owns the NFT.

And because it is decentralized, multiple records are stored all over the place, so it is impossible to hack the network to “steal” ownership of the NFT.

Since an NFT’s uniqueness and ownership can be easily verified, and they ensure strong property rights which cannot be stolen, they can be efficiently traded on the secondary market.

As a result, this new asset class can empower creators, such as artists, developers, in a variety of new ways that weren’t possible before, allowing them to monetise their creations more directly.

 

The Different Types of NFTs

Back in 2017, we saw the first NFTs in projects such as CryptoPunks and CryptoKitties, where blockchain technology was used to sell online collectibles.

Since then, the industry has bloomed into a wide variety of new use cases and industries, with a market exceeding $1b dollars.

NFTs can be used to tokenize just about anything, and so far some of the most popular NFT use cases have been:

  • Gaming assets (Axie Infinity, Gods Unchained, Sorare)
  • Attendance receipts / Event tickets
  • Subscription badges
  • Digital art (Async Art, Rarible, SuperRare)
  • Blockchain domain names (Unstoppable Domains, Ethereum Name Service)
  • Tokenized insurance policies (yEarn’s yInsure tokens)
  • Tokenized luxury goods, e.g. wine
  • Digital music (Mintbase, InfiNFT)
  • Virtual real estate (Cryptovoxels, Decentraland)
  • VR wearables

 

Samples of Most Expensive NFTs Sold

Here are some recent samples of NFT artworks and related products that have been sold, proving that this is a potential multi-billion dollar or trillion-dollar market.

  • NBA’s Top Shot NFT-based trading card system – $230m in sales
  • “Everydays: The First 5,000 Days” by Beeple – $69.3m
  • CryptoPunks #7804 and #3100 – $7.6m each
  • CROSSROAD by Beeple – $6.66m
  • Collection of 10 digital artworks by Grimes – $6m
  • First Tweet by Jack Dorsey – $2.5m
  • Exclusive NFT version of their latest album by Kings of Leon – $2m
  • CryptoPunk #6965 – $1.54m
  • Auction Winner Picks Name by SSX3LAU – $1.33m
  • Not Forgotten, But Gone by WhIsBe – $1m
  • Hairy by Steve Aoki – $888,888.88
  • THE COMPLETE MF COLLECTION by Beeple – $777,777.77
  • Nyan Cat by Chris – $590k

The founder of Twitter, Jack Dorsey, recently auctioned his first tweet ever on the Twitter platform to raise money for charity.

The tweet, which said “just setting up my twttr,” was first published on March 21, 2006 and was sold for $2.9m.

 

Are NFTs a Scam? Why Would Anyone Buy NFTs?

When you buy an NFT, what you are getting is a unique cryptocurrency token on the blockchain.

Some NFTs have only one version, so it is like owning the authentic version of a famous artwork such as the Mona Lisa.

However, things can get a little confusing here.

Because there are also NFTs which are digital versions of the reprints, kind of what you see in Pokemon cards where each card is printed multiple times.

But for each NFT, there is still a unique “watermark”, which is the code, so if yours is the original or limited edition, then the property rights or IP of the digital asset belongs to you.

For example, the “Nyan Cat” meme is freely available to anyone who wants to download a copy of it, but none of these downloads are the ‘real’ Nyan Cat NFT worth 300 ETH.

In the jargon of the art world, the difference is like owning an original versus owning a replica.

In the art world, one of the biggest problems is fake artworks.

However, because of blockchain technology, it is impossible to sell “fakes” of NFTs, because anyone can easily check the online public ledger to see who owns the real original NFT.

So in a sense, it is actually safer than physical artworks.

 

How Much is an NFT Worth? What Are the Risks?

How much should you pay for an NFT, or how much should you sell one for?

Just like dealing in valuable art pieces or collectibles, this answer is tricky because the value is totally dependent on supply and demand.

An art piece or collectible is only worth as much as what the next person is willing to buy it for.

So using that as a benchmark, you want to look out for things like artist reputation, scarcity, and provenance, including the origin and past transactions.

You can try to benchmark it against other similar pieces by the same artist, or other products in the same genre, but at the end of the day, the worth is determined by the market.

Hence, you want to make sure there is still interest and other buyers for your NFT, should and when you decide to sell it in the future.

The biggest risk is that should the NFT craze turn out to be a bubble, kind of like a game of “pass the bomb”, then you don’t want to be the fool left a bunch of worthless NFTs which you paid a lot for.

Since this is still the early phase, the risk of this is less, but the risk of a potential bubble increases if prices for popular NFTs keep increasing exponentially, akin to the Tulip Mania.

Another risk is that because NFTs are transacted in cryptocurrencies (ETH), the prices of NFT are very likely tied to the price fluctuations of cryptocurrencies.

So if you have noticed, there are sort of 2 different segments of NFTs. One is the super expensive NFTs of rare digital artworks or collectibles, while the other is the more “down-to-Earth” retail market for common folks to sell or access useful products and services.

For the former, just like the market for valuable artworks and collectibles, I feel that it is somewhat of a playground for rich investors to speculate, and not really meant for the typical retail investor.

 

How to Create & Mint NFTs

However, even though you don’t have millions of dollars to speculate on NFTs, you can still take advantage of this trend by creating and selling your own NFTs.

If you have already tried uploading photos or videos on social media platforms like Facebook, Instagram, or Tik Tok, then you already know how to create “digital artwork”.

The difference is that after creating your artwork, there is one extra step called “minting” to turn your creation into an official NFT.

To do that, you can use one of the many NFT minting platforms around the Ethereum ecosystem. Each has its own pros and cons, and different fees.

DIY (do-it-yourself) minting platforms like OpenSea, Rarible, InfiNFT, Mintbase, and Cargo let creators easily and permissionlessly mint their own NFTs.

On the higher end, there are some exclusive membership-only NFT minting platforms to which creators have to apply and be accepted before they can mint through these platforms, such as SuperRare and Async Art.

Once you have decided on your platform, you will need to upload your artwork, fill in a description, and decide whether you want to create a standalone or edition-based piece, your asset’s royalty percentage, unlockable content, etc.

Finally, you will need to make payment via ETH (Ethereum) for the approval and minting process to commence.

 

How to Buy and Sell Non-Fungible Tokens (NFTs)

Now that you have created your own NFT, the next step is to find a marketplace to sell it.

Thankfully, there is already such ecosystem set up, with open marketplace platforms like OpenSea, Nifty Gateway (art), Decentralland, Enjin (games), Yellowheart (concert tickets), NBA Top Shot (NBA collectibles), SuperRare (art) and Rarible where you can list your NFTs for sale easily, depending on which category your NFT falls under.

Payments are done via Ethereum (ETH) as well, so you will need to connect your wallet to the platform, in order to buy or sell any NFTs.

 

Criticism of NFTs

What are some of the current drawbacks of this NFT system?

High Transaction Fees (Ethereum Gas Price)

If you recall in the previous segments when we talked about minting, buying and selling NFTs, there were transaction fees involved.

One problem is that these transactions fees can be quite high.

As most NFTs are on the Ethereum blockchain platform, each transaction requires the payment of Gas: the fee charged for processing a transaction or contract on the Ethereum blockchain network.

This fee is denominated in gwei: a small fraction of ETH.

Hopefully, as the market matures, and more competition comes in, the fees for these transaction costs will fall as well.

Environmental Impact

Currently, Ethereum still operates on the “Proof of Work” architecture that requires mining, which consumes a large amount of electricity and leaves a large carbon footprint.

To put this into context, the amount of electricity that the Ethereum network consumes rivals that of countries like Ecuador with a population of about 17.4 million.

Since almost all NFT transactions involve ETH, this will undoubtedly contribute to the usage of the network and electrical consumption.

Hopefully, Ethereum will be transitioning to a more eco-friendly “Proof of Stake architecture” soon, although progress has been slow since this idea was first put forth years ago.

 

Concluding Thoughts on NFTs

Currently, the NFT transactions attracting all the hype are the super expensive transactions similar to valuable artworks or rare collectibles.

While these garner the headlines, the more relevant applications NFTs could lie in empowering independent creators such as artists and developers to directly monetise their creations.

The huge potential also lies in the myriad of products and services which businesses (both small and large) can create or tie-in with their existing offerings in the offline world.

This means that in a couple of years, many of these products and services could become commonplace in our lives, unlocking a trillion-dollar market opportunity.

Now that I have shared all you need to know about NFTs, what do you think of this new asset class? Is it a bubble or is it here to stay?

Let me know in the comments below!

Recently in this stock market crash I have been getting this question a lot, and I think it applies not just to this market crash, but to all large market corrections in general.

So, is it better to sell everything in your investment portfolio, or to hold on till the market recovers?

In this video, I share my thought process on how I make my investment decisions for my long-term investment portfolio, and I offer you two important pieces of advice which you can use to strategize your own investment portfolio.

In deciding whether to cash out, you need to determine if you are using an active or passive investing strategy.

If your portfolio strategy is passive investing like dollar-cost averaging, or annual rebalancing of an all-weather portfolio, then whether the market is up or down should not have an impact on your strategy, and there is no reason to change your portfolio strategy and panic sell just because there is a market crash.

If your investing strategy is more active, such as value investing, or asset rotation, and you are good at it, then by all means follow your strategy of rotating your assets into safe haven products like cash or bonds.

The problem that most people face is that they do not have a portfolio strategy in the first place. And if this is the case, then should you hold on to what you have, or sell it in case it goes lower?

In the past 50 years, the market has only corrected 30% or more about 5 times, and only 50% or more about twice. So we need to think about this in terms of a trade-off between upside vs. downside potential.

If the market has already corrected 30%, and you did not manage to liquidate your portfolio earlier, at this very point in time, how much lower can it go? Another 20-30% more?

But if you sell off and it recovers to the previous highs before you can buy back in, the gains you will miss out are 40-50%.

So you need to decide if the downside risks you are avoiding is worth the potential gains that you could miss out on.

Another major consideration is whether you are currently adding to your portfolio (cash inflow), or drawing out from your portfolio (cash outflow). This will determine how aggressive your portfolio strategy is, and I will talk more about it in the video.

Enjoy the video, and remember to “like” and “subscribe”!

With many momentum-based trading algorithms in the market nowadays, corrections tend to be sharp and vicious, leaving many traders and investors shell-shocked and unprofitable.

As a market participant, what is your strategy when approaching such a market? What is the best way for you to take advantage of this opportunity?

Enjoy the video, and remember to “like” and “subscribe”!

In a bull market, everyone is a genius because it does not take any skill to get great returns.

However, the real test of your portfolio is during a market crash or crisis. How will it fare if the stock market drops 50%?

If your portfolio is anti-fragile, it will actually benefit from such market volatility, and give you opportunities to buy assets on discount.

Enjoy the video, and remember to “like” and “subscribe”!

Recently, during an interview, I was asked this question, to suggest a possible portfolio allocation for people in their early 30s, with $250k of investible cash to start with. Here is my answer in full:

If you only have $250k to start with, I would suggest a diversified approach of various asset classses to maximise returns:

  • 25% allocated to cash (war chest)
  • 10% to wild bets
  • 20% to trading account
  • 20% to commodities
  • 20% to businesses, startups, angel investments
  • 5% to stocks, REITs, ETFs

Currently, the bulk of the holdings is in cash, since the market is pretty “risk-on” at the moment with much political and economic uncertainty about trade wars and real wars. Hence, I only included minimal stock holdings, as the stock markets (S&P 500)are at 10-year highs, so I will wait to buy in at a lower price should the opportunity arise.

One important factor is the 20% allocation to trading account, as this generate monthly cashflow from stocks/forex trading to continue growing the total portfolio size aggressively, which can then be allocated to other asset classes within the portfolio.

10% to cryptocurrencies and startups is considered a “wild bet” which could be a zero or hero; lastly 20% to businesses is for people who have some prior experience to invest directly in businesses, or start their own. Personally, my portfolio includes several businesses, including a cafe and pub.

I have allocated 20% to commodities, as commodities are likely at their cycle low. The GSCI (Goldman Sachs Commodity Index) is one of the main benchmark for commodity prices, and the (GSCI/S&P 500) is used to measure the prices of commodities relative to stock prices. Currently, this measure is at a 50-year low, which suggests cheap commodities as a potential investment.

I have excluded real estate from this sample portfolio, as I do not include “own stay” property as an investment asset, and $250k is too small for any major property investment. For my own portfolio, i have invested in several properties as I feel that the Singapore property market will continue to rise for the next 5-10 years.

I have also excluded fixed income, as for Singaporeans, the CPF (SA account at 4%) is pretty much similar to a “risk-free” high-yield bond, hence it serves well as the fixed income component of the portfolio. For my own portfolio, i have hit the minimum sum, which will provide a good safety net for retirement. For non-Singaporeans, any pension/retirement scheme which offers a fixed payout would serve the same purpose.

I hope this has provided you a good template to start building your portfolio, but do keep in mind that ideally you should be looking to rebalance your portfolio every 1-3 months.