They’re the two hottest commodities on Wall Street today. And yet this time last year they looked like either a bad investment or you’d never heard of them. Both are worth your attention today. But which is the better investment: non-fungible tokens (NFTs) or bitcoin? Here’s a breakdown of NFTs vs. bitcoin.
NFTs: Fad or Here to Stay?
According to a study by Citi, the contemporary art market produced an average annual return of 7.5% from 1985-2018, versus a 10% annual return in stocks over that same period. NFTs are, of course, a different animal; they’re the digital art market, and the art can be anything from a painting to a LeBron James highlight reel to the first-ever tweet from Twitter CEO Jack Dorsey.
Formed in 2017, NFTs had been growing steadily for years but not enough to capture mainstream society’s attention. Three years ago, the NFT market was worth an estimated $42 million, according to Forbes. In 2020, the market had grown to $338 million in value, up 705%. But since the calendar flipped to 2021 … my goodness. Through February, there had been 150,000 NFTs sold for $310 million. The market has only accelerated since – enough to become a front-page fixture in the financial headlines.
But is it too much too soon? While NFTs may well be the future, this kind of run-up in just a matter of months – fueled by the boredom from people being at home for the last year, thanks to Covid – has all the makings of a bubble. In fact, it feels an awful lot like bitcoin in early 2018…
Bitcoin: Back with a Vengeance
A little over three years ago, bitcoin was the hot new digital commodity, with prices soaring from less than $1,000 at the start of 2017 to more than $19,000 by December of that year. Look what happened next, courtesy of Coindesk.com:
After topping out above $19,000 in December 2017, bitcoin prices came crashing back to earth, falling to as low as $3,200 by the following December. They were still only in the low $5,000s by March 2020. Then, the post-Covid-crash market rally ensued, and bitcoin prices started to spike … and spike … and spike. Today, one bitcoin is worth better than $59,000, up from $34,000 at the start of 2021. The furious rallies in bitcoin and NFTs have gone hand in hand this year, at a time when stocks have been up and down.
Is this bitcoin rally more sustainable than the 2017 one? Maybe. Or, at least, I doubt bitcoin prices will lose more than 80% of their value in the next year the way they did in 2018. I also don’t expect bitcoin to rise another 800% either. A correction of some kind is likely coming, and it’s sure to be fairly steep. But the long-term trajectory of bitcoin is up.
NFTs, on the other hand, are a relative unknown compared to bitcoin. The NFT market is about four years younger, and this is its first major, attention-grabbing spike. Soon – perhaps very soon – the buying frenzy will come to a screeching halt, and the value of non-fungible tokens like the “Beeple” collection (sold for $777,777!), LeBron James’ highlight reel (sold for $208,000!) and Jack Dorsey’s virgin tweet (sold for $2.9 million!!!) will come down, maybe way down.
The question is: how long will they stay down? If the NFT buying and selling pattern follows bitcoin’s eight-year trajectory, the retreat could last a couple years, and likely be quite deep and painful. But like bitcoin, I doubt NFTs will just fade into oblivion even if the bubble bursts.
NFTs vs. Bitcoin: Which to Buy?
The easy answer to the above question right now is “neither.”
As the above prices reveal, NFT investing is primarily a sandbox for the super-rich, and prices will have to come down, considerably, until NFTs can be more accessible to the masses.
Bitcoin has more history and an encouraging chart, but it too has become quite frothy. Could bitcoin prices be higher still at year end? Sure. But there’s almost certainly to be some selling pains along the way. If you didn’t invest in bitcoin three months, six months or a year ago, you’ve missed out on most of the latest rally.
Your best bet is to wait before buying either bitcoin or an NFT. If stocks are your specialty, then you should stick to stocks, as we often do here at Cabot. The recent pullback offers an attractive entry point once this two-month tug-of-war between the bulls and bears is settled and the bulls finally gain the upper hand again, which seems likely given the coming post-pandemic recovery.
And as I mentioned earlier, stocks tend to beat all other assets over time; that 10% average annual return is better than any contemporary art, bond, currency or cryptocurrency return you’re likely to find over the last 35 years.
Over the next 35 years, it’s possible bitcoin or NFTs will outperform stocks. But I wouldn’t make that bet.