I received a text from my friend John. “Have you minted your Moonbird yet?” My first thought was, “What’s a Moonbird?” I quickly learned that Moonbirds are an NFT project from the Proof Collective and as a holder of a Proof Collective pass, I could mint (create) a Moonbird NFT before everyone else. This was a big deal because the demand almost always outstrips supply on hot NFT projects, pushing up resale prices after the mint happens. I logged into the Moonbirds website, connected my Ethereum wallet with Metamask, and minted my two free Moonbirds.

Each Moonbird NFT has unique characteristics (background colors, body color, eye shape, headwear, etc.) and some of those characteristics are rarer than others. One of the Moonbirds that I minted ended up having a golden body and “Legendary Professor” feathers, making it the 32nd rarest Moonbird that was minted (out of 10,000). Offers to purchase my golden Moonbird started coming in immediately. 20 Ethereum. 44 Ethereum. 61.89 Ethereum. 75 Ethereum. And finally, 100 Ethereum. Someone was offering me $300,000 for a digital picture of a bird that I got for free. You could buy a Lamborghini for that amount of money. Wild!

Let’s back up a little bit.

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Last summer, I began hearing about non-fungible tokens (NFTs) on Twitter and on the Modern Finance podcast. NFTs are essentially digital tokens that live on the blockchain which provide proof of ownership of something. Cryptopunks and Bored Ape Yacht Club made headlines as the first projects with tokens selling for six and seven figures. For the first few months, I dismissed the trend of NFTs as a bunch of speculators trying to get rich off crypto projects. Then I started to see some smart people that I knew experiment with NFTs and pouring thousands of dollars into various NFT projects.

Over my Thanksgiving break, I decided to learn everything there was to know about NFTs at the time. I learned about the protocols that allow NFTs to be traded, the platforms that people use to buy and sell NFTs, and the most popular NFT projects of the time. I also setup a MetaMask wallet, transferred some Ethereum into it, and bought an NFT of a watch. Within days, I bought a VeeFriend on the recommendation of Joe Bartmann for 15 Ethereum (which I later flipped). I was intrigued to say the least.

After the holiday weekend came and went, I realized that trading NFTs requires constant attention and a ton of research to get in on the best projects before they blow up. I knew I personally didn’t have time to jump down the NFT rabbit hole daily, but Joe was already deep in the NFT rabbit hole. We worked out an agreement that I would put up 150 Ethereum in a wallet for him to trade with, in exchange for 20% of the profit generated from trading.  Since then, we got in on a few projects early, including CloneX, Grails, Moonbirds, Proof Collective, and World of Women. Joe has skillfully traded in and out of various NFT projects and generated us a healthy profit. It’s hard to tell exactly what the portfolio is worth, but we think it’s worth around 350 Ethereum right now.

The biggest win in the portfolio was purchasing a Proof Collective NFT immediately after the mint for about 2 Ethereum. I knew that Kevin Rose had a unique take on NFTs after listening to his podcast and had done very well investing in Solana after hearing about it early last year on his podcast. The Proof NFT has since shot-up to 75-90 Ethereum depending on the day and has allowed me to mint both Grails NFTs and Moonbirds NFTs for free. I haven’t sold my Moonbird because I think there is still upside on the project because of the roadmap that the Proof team has discussed.

Will NFTs be the future of ownership? I have no idea. Will most NFT projects go to zero after a couple of years? Most likely. Is there a speculative bubble in NFTs? Almost certainly. Will NFTs ever come back after the bubble pops? I think so. Is there a near-term opportunity to trade NFTs for profit? We’ve clearly demonstrated that’s the case. The key will be to take out our cost basis in Ethereum before there is a major correction.

Here are my key observations on NFTs today:

  • NFTs are still a very small market. As best as I can tell, the market cap of all NFTs make up about 2.5% of the entire crypto market. The entire crypto market has a market cap of one or two large tech companies. If you visit Coinmarketcap, there isn’t a single NFT token in the top ten list of cryptocurrencies by market cap.
  • It’s still early days. Getting into NFTs in 2022 feels reminiscent of getting into online businesses in 2006 and cryptocurrency in 2012. A relatively small number of people are involved. There are high barriers of entry in terms of technical knowledge needed to get involved. There is a ton of potential, and many people are skeptical.
  • You must pay close attention. The NFT market is moving fast. New concepts, projects, and tools come out on a weekly basis. If you take a week off from following NFTs, you may miss a major mint that you were eligible for. The key is to follow NFT thought leaders on Twitter, participate in Twitter spaces calls, and listen to podcasts such as Bankless and Proof.
  • The value of an NFT project is tied to the strength of its community. Successful NFT projects that hold their value over time have very active Discord communities and a strong presence on Twitter. If no one is talking about an NFT, it’s not going to be worth much. NFTs are a true supply-and-demand market and the price of an NFT is a direct reflection of community interest in that NFT.
  • Big projects get bigger. Small NFT projects from relatively unknown players in the NFT market tend not to skyrocket in value in the way that many would hope. As best as I can tell, most of the price appreciation happens when you are an early holder of a project that was well-known from the beginning.
  • Most NFT projects have no value, now or in the future. People love to talk about how 99% of NFT projects will be worthless five years from now, but it turns out that 99.8% of NFTs already have no market value (according to the Milk Road Newsletter). Like with cryptocurrencies, most NFT projects will shake out and disappear over time. There will likely be a handful of Ethereum or Solana-level NFT projects that become a big deal and may even represent what the future of ownership looks like.
  • Speculation has run amok. Many of the people in NFTs right now are speculators, much in the same way people were heavily speculating on which cryptocurrency would be the next Bitcoin in 2017. Whenever a shakeout occurs, most of these people will leave the market. The people that remain will be the builders that continue to innovate on the technology through the next cycle of interest and speculation.
  • We don’t know the endgame for NFTs. There’s a lot of experimentation happening with NFTs right now, and nobody really knows where NFTs will show their true utility. Most NFT projects are little more than technology demonstrations at this point. Most promised utility of NFTs haven’t yet been realized. Personally, I believe that NFTs could eventually eliminate the need for car titles, house deeds, and event tickets. If “who owns what” is permanently stored on the Blockchain for everyone to see, we may no longer need legacy indicators of ownership.

NFT Resources and Tools: