What Are NFTs and Why Should Real Estate Investors Care?

Sure, the COVID-19 vaccine rollout has been going better than expected, a huge stimulus bill just passed, and the U.S. might be getting a much-needed upgrade to infrastructure in the near future.

But one of the biggest news stories of the past month has been the unprecedented purchase of digital artist Beeple’s “Everydays: The First 5000 Days” NFT through Christie’s Auction House for more than $69 million. (Before October, the artist had never sold a piece for more than $100.) It sounds bizarre, right?

Even Vignesh Sundaresan, the piece’s buyer, founder of the Metapurse NFT project, and a big spender in the space (obviously), recently told Bloomberg, “It’s even crazier than investing in crypto.”

It seems the cryptocurrency entrepreneur is correct. According to Nonfungible.com, the average prices for NFTs dropped by almost 70% from a high in February through early April.

Since this whirlwind conversation—and huge payouts—about NFTs has started, many regular folks and investors have been wondering what the heck this is all about. Wonder no more. Here is a BiggerPockets guide to NFTs.

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What is an NFT?

NFT stands for non-fungible token, which is essentially a unique “thing” that can’t be pirated, counterfeited, or replaced by something else.

Why not? Every purchase of said thing—the digital token—is logged on a decentralized ledger like Blockchain, the record-keeping technology for Bitcoin, so that all transactions are visible to the public.

“Say you buy a Louis Vuitton bag and want to figure out if it’s authentic, if it had a unique identifier on it, like bag 586 that was bought by Sara in 2010, now she’s transferring it to Janine and putting it onto a spreadsheet everyone could see,” explains Janine Yorio, co-head of real estate at Republic Real Estate. That’s what makes it non-fungible (unable to be replaced).

With NFTs, people are transferring all kinds of digital objects: drawings, art, music, $25,000 GIFs. “When you use NFT technology, you’re giving artists and creators a way to track their intellectual property,” says Yorio. “It all happens using blockchain.”

Think of it as the equivalent of a virtual title for a car or a house that gets tracked when it is transferred to every new owner. In many cases, there’s just one actual version of the token, like that vintage car that’s being sold or, say, the Mona Lisa. But NFTs don’t just refer to one definitive version of something. It could also be a trading card or a hand-signed limited edition Andy Warhol, where there are 50 or 500 numbered copies of the same object.

Digital real estate can also fall under the category of NFT. In fact, Yorio is head of the Republic Realm fund, which is a digital real estate NFT fund (more on that later).

Currently, most NFTs are part of the Ethereum blockchain. Like Bitcoin, Ethereum is a cryptocurrency, but its blocks store additional information that supports these NFTs. Other blockchains are able to administer their own NFTs, and some have already started.

Why is everyone talking about NFTs right now?

NFTs have been around since 2015. However, these tokens really started to gain momentum at the beginning of 2021—after nearly a year of engaging in most social interactions online instead of IRL—with the growing acceptance of cryptocurrency, sense of accessibility stemming from the r/WallStreetBets Gamestop debacle, and advances in blockchain technology and expanding marketplaces for selling tokens.

Dapper Labs really began to kick off the trend with CryptoKitties, a game that allows players to purchase, breed, and sell virtual cats, and NBA’s Top Shop, a blockchain-based trading card system that features highlights and digital artwork.

The latter, which was released last fall, started selling at $9 per pack. Similar to old-school baseball cards, as the secondary market for these digital cards developed, the price went up—they can now sell for $200,000 apiece. “That has opened this space and has given rise to what we’ve seen in the past few months,” says Yorio. “It’s about scarcity.”

Anything digital could be sold as an NFT. The New York Times sold a token of a column for over half a million dollars. Jack Dorsey, founder of Twitter, traded the rights to his first tweet for nearly $3 million. And 89-year-old William Shatner sold his own NFT trading cards featuring images from his personal life and career, starting in the 1930s. The 10,000 “packs” (five for $5 and 25 for $25) of around 125,000 digital Shatner cards sold out in nine minutes.

One of the rarest cards in the collection, a headshot of Shatner taken in the aughts, recently resold for a whopping $6,800—quite the ROI. “It’s a phenomenon of rare things being bid up on the internet,” Shatner recently told Forbes.

Most of the talk surrounding NFTs has been focused on their ability to become a new form of art collecting, especially since esteemed auction house Christie’s began offering the fully digital works last month. This is why someone paid nearly $390,000 for this 56-second video clip by musician Grimes and someone else bought this video by Beeple for $6.6 million, both of which are available to view on the web for free.

Where’s the value in NFTs?

It is hard to understand why something that can be viewed for zero dollars is fetching such a high price tag. The technology that’s being used and the reasons individual buyers are spending so much on these tokens are both new and somewhat complex. However, the underlying elements that are fueling the NFT market have been around for ages: fandom, creator royalties, and, as Yorio mentioned earlier, scarcity.

The current craze has many wondering whether these tokens will continue to hold their value or see their worth fade away like Franklin Mint coins, stamps, or most Beanie Babies. There is some evidence that the craze may already be fading fast. But “that’s true of any collectible,” says Yorio. “You can say the same of a Ferrari or Andy Warhol. Collectibles ebb and flow in popularity—it’s about a confluence of different things that we probably don’t know where we sit today.”

How does this relate to real estate?

While much of the conversation surrounding NFTs has focused on the tokens as an evolution of fine art collecting, there’s a segment of investors who want to buy a piece of these digital worlds. Yorio’s fund brings together pools of investors to buy parcels of virtual land in various metaverses.

The concept is a mix of capitalism meets science fiction meets regular old real estate. Kind of like live video games—some of which have dabbled in adding new virtual experiences to their core games—these virtual worlds are essentially a shared space on the internet where people get together to play, work, and socialize via customized avatars as a virtual representation of themselves.

The whole thing is difficult to understand for anyone who isn’t into sci-fi. The best example of a metaverse is the virtual world illustrated in the novel and movie Ready Player One, where the protagonist escapes the real world for a virtual world. Another way to think about it is an evolved version of the video game The Sims.

Right now only a handful of metaverses exist, and they’ve been increasingly offering users digital experiences that are closer to real-life events—fueled, in part, by the stay-at-home orders of the pandemic.

In April 2020, the online game Fortnite hosted a virtual concert by rapper Travis Scott that brought in more than 12.3 million simultaneous viewers. More recently Domino’s has made it possible to buy pizza from a virtual shop in the metaverse Decentraland and have it delivered to a real-world address.

Since the NFT boom hit, values of land parcels in Decentraland have skyrocketed. The digital world gives users a space to create an avatar, interact with one another, and participate in all kinds of activities, from concerts and art shows to building a home or business on their own plot of virtual land. When the virtual community launched in 2017, developers sold them for around $20 per parcel. Now, those same parcels can sell for anywhere from $6,000 to more than $10,000.

Like the numbered Andy Warhol prints or limited edition Shatner cards, there is a finite supply of these parcels available for purchase. But, unlike those collectibles that would most likely be locked up in someone’s home or become the stuff of bragging rights on the web, corporations are beginning to see potential in their ability to market to consumers through these shared spaces.

As the number of users in these metaverses has grown, brands have been increasingly interested in connecting with those users inside of these virtual worlds where they’ve been spending their time. “It’s not necessarily advertising, like stationary billboards,” says Yorio. “It’s more like events in virtual worlds where things happen. You might have a DJ and opportunity for free swag or a famous person pop in with their avatar: It’s an interactive way for a product or company to connect with users in an immersive virtual environment.”

Hundreds of millions of users hang out in metaverses everyday, but there’s still a huge part of the global population that has no idea these worlds even exist. However, as these spaces continue to grow, selling real-life products to people in those worlds will become a very cost-effective way to market things, says Yorio, which is why parcels are selling for such astronomical rates. “Digital real estate prices are still up nearly four times in four months,” she says. “Real-world real estate doesn’t usually (ever) do that.”

Will virtual parcels continue to appreciate at the same rate? It’s hard to tell. However, folks like Yorio are very intrigued by the prospect. “People have been playing in virtual worlds like Sims for 25 years now,” she says. “This is just adding crypto to something that’s widely used and already very well-loved: I believe it’s an interesting asset class to consider.”

Like all investments, getting into NFTs requires a fair amount of research, starting with trying to understand the market by tracking historical trades on different asset classes. OpenSea, which is the largest NFT marketplace in the world, is a great place to research and shop for all kinds of NFTs ranging from art and trading cards to virtual worlds like Decentraland and digital sports memorabilia. And it’s important to trade in one’s area of expertise. So, if real-world real estate or, say, William Shatner, is your forte, that might be the best place to start.

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