What do new NFTs mean for Bitcoin’s future valuation?

New non-fungible tokens (NFTs) from Bitcoin known as Ordinals continue to generate a huge amount of buzz, hype and speculation. But what impact will they actually have on the valuation of Bitcoin (BTC -0.08%)?

From one perspective, Ordinals could be the key to unlocking new value on the Bitcoin blockchain. However, from another perspective, Ordinals can be a major distraction from the core purpose of Bitcoin, which is to become a new form of digital money. At worst, Ordinals could make Bitcoin less attractive to institutional investors and invite unwanted regulatory oversight.

The ordinals phenomenon

While Ordinals are not NFTs in the traditional sense, they allow creators to “write” content directly into individual blocks of the Bitcoin blockchain. The maximum size for an Ordinal is only 4MB, but there is still enough space to squeeze a small game, picture or image into a Bitcoin block. Previously, these Bitcoin blocks only held data about financial transactions, but now some of them will also include Ordinal data.

To date, more than 260,000 of these Ordinals have been made, and they have transformed from an interesting conversation piece to a true phenomenon. A single Ordinal (Ordinal Punk 94), for example, recently sold for $214,000. In comparison, it is more than the current price of a CryptoPunk NFT at Ethereum (ETH -0.20%) blockchain.

Image source: Getty Images.

In short, there is potentially real money to be made here, and it is going to motivate even more entrepreneurs and innovators to develop the market for Bitcoin NFTs. By some estimates, the total value of the NFT market is now worth close to $20 billion annually, with Ethereum currently dominating the lion’s share of this figure.

Even if Bitcoin only achieves a market share of 10% of the total NFT market, it can get investors excited about the future growth prospects of Bitcoin. After all, some forecasts now call for the NFT market to explode in value, to nearly $200 billion, by the year 2030.

Bitcoin meets Bored Apes

However, my concern is that the market for Ordinals is already getting a little too frothy and speculative just two months after its creation. Case in point: Yuga Labs – creator of the Bored Ape Yacht Club and CryptoPunks NFT collections – is now going to release a new 300-piece NFT collection for Bitcoin called TwelveFold. While Yuga Labs says that there will be no additional utility for these NFTs (such as VIP access to Bored Ape Yacht Club events), it is almost certain that there will be increased demand for these NFTs simply due to of their novelty and the potential to flip them for a large profit.

Adding Bored Apes to the Bitcoin discussion complicates matters considerably from a regulatory perspective. Until now, Bitcoin has avoided the scrutiny of regulators, who generally acknowledge that Bitcoin is the only crypto that should not be regulated as a security. Bitcoin is a digital currency, period. But if Bitcoin now offers NFTs, that argument becomes much harder to make.

Keep in mind that there is already an SEC investigation into the Bored Ape Yacht Club NFT collection from Yuga Labs. The SEC claims that Bored Apes may actually represent an unregistered securities offering.

So what happens when Yuga Labs issues the new TwelveFold collection for Bitcoin? It would be a shame if Yuga Labs somehow mixes Bitcoin with regulators.

Also, there is a very real risk that adding NFTs to Bitcoin could deter risk-averse institutional investors. How will large pension funds and endowments react when they find out that there are tiny photos or videos potentially written into their Bitcoin holdings?

For me, it would be like opening up my leather wallet and finding that someone had drawn tiny cartoon characters next to the serial numbers on my American fiat money. Yes, it’s still money, and yes, it still works, but wouldn’t you feel a little silly carrying it around all day?

Will Ordinals Change the Way Investors Value Bitcoin?

The current size of the NFT market pales in comparison to other markets where Bitcoin is making its presence felt. Even if you look at things and say the NFT market is worth $20 billion, that’s still only one-sixth the size of the global money transfer market, where Bitcoin is playing an increasingly important role.

The value of other markets where Bitcoin is gaining market share is measured in trillions of dollars, not billions. For example, Bitcoin is seen by some investors as a form of “digital gold”. And the value of the world’s physical gold supply is approximately $12 trillion.

Long story short: NFTs are unlikely to move the needle in terms of valuation. Although there have been many comments saying that Bitcoin NFTs could make Bitcoin even more valuable than it already is, my basic assessment is this: If you are buying Bitcoin because of the NFTs, you are doing it all wrong. Bitcoin is a fantastic long-term buy, not because of NFTs, but because of its role in key financial markets where it is becoming increasingly mainstream on a global basis.