Image from Twitter: https://twitter.com/BobbyBonillaNFT

I just bought my first non-fungible token, commonly known as an NFT. If you know me, you may be surprised. I recently wrote a book with Andrew Lo, In Pursuit of the Perfect Portfolio, where we interviewed ten luminaries, include six Nobel laureates, as we traced the development of modern portfolio theory. A recurring theme in our book is the importance of a buy-and-hold strategy that rely heavily on traditional stock and bond index funds. There’s no mention in the book of NFTs, or cryptocurrencies for that matter. So why did I buy an NFT? Let’s start George Mallory’s quip, when asked why we wanted to climb Mount Everest: “Because it’s there.” I was intrigued with NFTs, wanted to learn more, and wanted to see what the process of buying one was all about. When I was young, I enjoyed collecting sports cards. This particular NFT was sports-related, piqued my interest because of a previous blog I had written about Bobby Bonilla, and it sounded fun. If you want to really learn about something then just do it.

NFTs: The Basics
According to Investopedia, NFTs are “cryptographic assets on a blockchain with unique identification codes and metadata that distinguish them from each other.” Let’s parse what this means. Cryptocurrencies, like bitcoin, are digital or virtual currencies that are secured (that’s the crypto part) based on a technology like blockchain (which is like a shared ledger), that makes them almost impossible to counterfeit. Likewise, NFTs are also secured (crypto) assets, but with a graphic component, for example, tied to a piece of art, or a virtual sports trading card. Cryptocurrencies, like regular currencies, are fungible, which means they are all the same value and can be exchanged for one another (a dollar is a dollar is a dollar). NFTs are non-fungible or unique and can be traded. Metadata is data that provides information about other data. Since an NFT represents something, like an image, metadata is used to make the NFT represent the image, such as the name and description of the item. For example, I now own a virtual baseball card, “The Contract #11” and at most there will by 1,193 NFTs related to The Contract — sort of like limited edition prints. (We’ll see later why that the special number 1,193, actually part of a much larger number, 1,193,248.)

Ups and Downs of the NFT Market
According to GarageFarm.NET the genesis of NFTs traces back to the creation of blockchain in 2009 which led to bitcoin, followed by the Ethereum blockchain that allowed for the storage of extra information. In 2014, Kevin McCoy and Anil Dash found a way to let artists claim ownership to original digital art, which they called monetized graphics. In 2017, Matt Hall and John Watkinson created 10,000 pixelated avatars they called CryptoPunks that were issued as NFTs, and they gave away 9,000 for free. A vibrant aftermarket emerged and by the end of the year one was sold for $170,000. In 2021, an NFT of artwork by the artist named Pak, literally a single grey pixel, sold for almost $2 million. Later that year a JPG file by artist Beeble called Everyday — The First 5000 Days sold for a record $69 million, a highwater mark.

According to The Art Newspaper, while $21 billion in NFT assets changed hands in 2021, by June 2022, NFT sales had dropped 92 percent since September 2021 and active NFT wallets dropped 88 percent. Famously, Sina Estavi, who purchased an NFT screenshot of Jack Dorsey’s first tweet for $2.9 million in March 2021 couldn’t attract a bid of over $14,000. However, since April 2022, the ratio of wallet buying to selling has increased, with a shift in the types of collections.

Images from Twitter: https://twitter.com/BobbyBonillaNFT/photo and https://twitter.com/BobbyBonillaNFT/header_photo

Bobby Bonilla, Dennis Gilbert, and The Contract
My NFT purchase was a digital card of Bobby Bonilla — actually, just his silhouette — and the series of NFTs is called The Contract. Bonilla was a major league baseball player between 1986 and 2001, with a respectable career batting average of .279, who appeared in six All-Star games, won three Silver Slugger awards, and was a member of the 1997 World Series champion Florida Marlins. Often prone to errors, legendary Los Angeles Dodger broadcaster, Vin Scully, commented about Bonilla: “Sometimes it seems like he’s playing underwater.” However, what he is best known for, particularly to current New Yor Mets fans, was a contract addendum he signed with the Mets in 1999.

Image from Twitter: https://twitter.com/BobbyBonillaNFT

Bonilla’s agent was Dennis Gilbert, a former minor league baseball player and a successful insurance professional, who became an agent in 1980 by forming Beverly Hills Sports Council. The firm represented baseball stars Barry Bonds, Jose Canseco, George Brett, Mike Piazza, Brent Saberhagen, and Danny Tartabull, among others. Bonilla’s 1991 contract (during his first of two stints with the Mets) for $29 million was the richest in baseball at the time.

What was memorable about the 1999 contract addendum, which the NFT website refers to in quotation marks as “the most famous sports contract of all time” (a quote that I couldn’t find anywhere else) was the deferred salary nature of the contract. In 1999, his last year with the Mets, Bonilla agreed to have his $5.9 million guaranteed 2000 salary bought out in exchange for annual payments of $1,193,240.20 for 25 years starting on July 1, 2011. Incredibly, 23 years after agreeing to the new deal, to the chagrin of Mets fans, Bonilla is making more than about one-third of the current active and injured Mets players. Every July 1st is now known in infamy as Bobby Bonilla Day.

In return for foregoing the $5.9 million in 2000, Gilbert was able to negotiate a guaranteed return for Bonilla of 8 percent, an incredible risk-free proposition, much greater than risk-free investments (Treasury bonds) in 1999. There’s an interesting story as to why the Mets’ owner, Fred Wilpon, agreed to such lucrative terms for Bonilla. The Wilpon family was heavily invested in a fund that for more than a decade was providing steady returns of over 14 percent, and so by offering Bonilla an 8 percent return, Wilpon felt he was still way ahead. Unbeknownst to the Wilpons, the fund, managed by fraudster, Bernie Madoff, was actually a Ponzi scheme and would collapse in 2008.

There are so many elements of this story, and hence the NFT, that I like. The idea of owning a baseball card reminds me of card collecting in my youth, as I cheered on the 1968 expansion team, the Montreal Expos and their first star, Rusty Staub, “Le Grand Orange.” The contract itself is a brilliant example of opportunity costs and the importance of understanding time value of money. I became aware of the NFT when I stumbled across a news story about a recent auction of the addendum to Bonilla’s contract for $180,000, the contract that keeps on giving!

The NFT Buying Process
As someone who is not known for trying new things, and is far from an early adopter, it took me about five hours, including background research and rookie mistakes, to make the NFT purchase — it probably shouldn’t have taken more than an hour. After going to the NFT website I downloaded “How to Buy? The Contract — User Guide v1.0.” This was a 42 page “quick reference” that was labelled “confidential and controlled copy” on each page (I was baffled why a publicly available document was labelled as “confidential and controlled”).

The first thing I needed to do was to setup an NFT wallet in which to store my NFT. According to The Ascent (by Motley Fool) in their article Best NFT Wallets for 2022, an NFT wallet is “a cryptocurrency wallet that supports the blockchain protocol NFTs are built on.” In the case of The Contract, I needed to obtain 177 MATIC coins, estimated on the website to cost around $85. According to CoinMarketCap, Polygon MATIC is the 14thlargest cryptocurrency by market capitalization (dogecoin, created as a joke, is the 10th largest).

I was glad to see that, according to the article, the top NFT wallet was MetaMask, which was recommended in the User’s Guide. To install the MetaMask browser extension, the suggested browsers were Chrome or Firefox. Before adding it there was a popup warning that “The extension can: read and change all your data on all websites, display notifications, modify data you copy and paste.” After I hesitated at this stage, I proceeded with a leap of faith that the wallet was legit. I then watched a 95-second video on “securing your wallet.” I had to create a password, and then was assigned 12 words as my personal “secret recovery phrase” that I could use to backup and restore my account. If I lost or forgot this phrase, then it would be like losing my NFT.

I now had an empty wallet, and so I needed to purchase 177 MATIC coins to put in my wallet. The User’s Guide recommended I use MoonPay, launched in 2019 and billed as “a simple and secure software solution” for buying cryptocurrencies. I had to prove who I was by uploading a copy of my driver’s license as well as a selfie, and I was all set. I then set about purchasing 177 MATIC coins. I first tried doing that with a credit card but got a message suggesting I would have better luck using a debit card. This is what slowed me down because the default setting on my debit card was to not allow online purchases, so I had to phone my bank to temporarily change that setting.

Here’s where I made a rookie mistake. I had purchased exactly 177 MATIC coins, but I didn’t account for the “gas fee” or transaction cost that MoonPay charged. It was very small, only 0.0026 percent, but it meant that I had to buy more MATIC, which meant another call to my bank. And then I found out that the minimum purchase was around $40, so I ended up with more MATIC than I needed. Furthermore, despite the claim on The Contract website, the value of MATIC had decline, and so I ended up paying around $175 for the 177 tokens, more than double the estimate (MATIC’s value had dropped from a peak of around 2.88 USD in December 2021, to 1.69 USD in March 2022, and then to around 0.94 USD in August).

Once I had enough coins, I went back to The Contract website to purchase the NFT. I appeared to be successful, but when I went back to look in my wallet, I could see that I had used 177 MATIC (plus gas fees) but couldn’t see the NFT. After some online searches I found out that I needed a mobile version of MetaMask (instead of the desktop version) to view the NFT. I needed to link my existing account, which meant copying a long string of characters that were part of my account name, and then my 12 secret recovery phrase words. Finally, I was able to view my NFT!

Photo of Beanie Babies by Stephen Foerster

What I Learned
When I reflected on what the appeal is of NFTs, I wondered if NFTs are just the latest fad, like beanie babies that were popular in the 1990s. Created by Ty Warner, who was apparently as obsessed with perfection as Steve Jobs, the $5 plush toys were one of the first internet sensations, reselling on eBay for markups of more than 1,000 percent before crashing. We purchased well over a hundred beanie babies for our four children and still have some of the McDonald’s promotional beanie babies in original packaging. I don’t think we ever expected to get rich by buying them, but the children enjoyed collecting them at the time. With an apparent softening in the NFT market in 2022, perhaps the analogy to beanie babies may become more apt.

The upside of an NFT collection is that authentication is no longer an issue. There’s a permanent record of my minting of The Contract #11, at 2:34pm on August 15, 2022. Unlike the beanie baby fraud that occurred when they were near their height of popularity, there shouldn’t be any such issues with NFTs.

The process of buying NFTs is, in my opinion, in need of streamlining. I certainly appreciate the need for checks whenever online financial transactions occur. But there seem to be so many different protocols for creating wallets and purchasing NFTs. For example, why did The Contract require the use of MATIC coins instead of, say, bitcoins or something else? I have no idea.

I was struck by how important trust is in the NFT market and in cryptos in general. I now own an intangible object that was purchased with digital currency that resides in a virtual wallet, and only I have the key to unlock that wallet. I purchased coins from an online service that knows who I am — is my personal information safe with them? The creators of my wallet have only been around for a few years. What will happen with my wallet if they are no longer around?

Are NFTs a suitable investment for your portfolio? In my opinion, far from it. You take a huge risk by buying art or rare bottles of wine because you’re betting that the price will go up. Alternatively, buy and enjoy art that you like. Buy wine that you’d like to drink. The same goes for NFTs. If collecting gives you pleasure, then NFTs may be a fit for you — for your personal enjoyment, but not as an investment. If nothing else, I have something to display if/when the metaverse becomes a thing. But I’d also encourage you to be a lifelong learner, and try new things, including NFTs. Just don’t expect to get rich. And let me know if you’re in the market for cute beanie babies.

Stephen Foerster is a co-author, with Andrew Lo of MIT’s Sloan School of Management, of In Pursuit of the Perfect Portfolio: The Stories, Voices, and Key Insights of the Pioneers Who Shaped the Way We Invest, Princeton University Press.