What Do New NFTs Mean for Bitcoin's Future Valuation? | The Motley Fool .

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New non-fungible tokens (NFTs) from Bitcoin known as Ordinals continue to generate a tremendous amount of buzz, hype, and speculation. But what impact will they actually have on the valuation of Bitcoin (BTC 0.44%)?

From one perspective, Ordinals could be the key to unlocking new value on the Bitcoin blockchain. From another perspective, though, Ordinals could be a major distraction from the core purpose of Bitcoin, which is to become a new form of digital money. In a worst-case scenario, Ordinals might make Bitcoin less attractive for institutional investors and invite unwelcome regulatory oversight.

The Ordinals phenomenon

While Ordinals are not NFTs in the traditional sense, they enable creators to "inscribe" content directly into individual blocks of the Bitcoin blockchain. The maximum size for an Ordinal is just 4 MB, but that is still enough space in order to squeeze a tiny game, photo, or image into a Bitcoin block. Previously, these Bitcoin blocks only held financial transaction data, but now some of them will include Ordinal data as well.

To date, more than 260,000 of these Ordinals have been created, and they have transformed from an interesting conversation piece into a real phenomenon. A single Ordinal (Ordinal Punk 94), for example, recently sold for $214,000. By way of comparison, that's more than the current price of a CryptoPunk NFT on the Ethereum (ETH 0.75%) blockchain.

Gold NFT coins.

Image source: Getty Images.

In short, there's potentially real money to be made here, and that is going to incentivize 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 that figure.

Even if Bitcoin only gains a 10% market share of the overall NFT market, that could 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 the Bored Apes

My concern, however, is that the market for Ordinals is already becoming a bit too frothy and speculative just two months after being created. Case in point: Yuga Labs -- the creator of the Bored Ape Yacht Club and CryptoPunks NFT collections -- is now going to issue a new 300-piece NFT collection for Bitcoin called TwelveFold. While Yuga Labs says there will be no added utility for these NFTs (such as VIP access to Bored Ape Yacht Club events), it's almost certain there will be heightened demand for these NFTs simply due to their novelty and the potential to flip them for a huge profit.

Adding Bored Apes into 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, full stop. But if Bitcoin now offers NFTs, that argument becomes a lot 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 the Bored Apes might 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 gets Bitcoin mixed up with regulators.

Moreover, there is a very real risk that adding NFTs to Bitcoin might dissuade risk-averse institutional investors. How are large pension funds and endowments going to react when they find out there are tiny photos or videos potentially inscribed into their Bitcoin holdings?

For me, it would be like opening up my leather wallet and finding out that someone had drawn tiny cartoon figures next to the serial numbers on my U.S. fiat money. Yes, it's still money, and yes, it still works, but wouldn't you feel a bit silly carrying it around with you 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 take the rosy view of things and say the NFT market is worth $20 billion, that's still just one-sixth the size of the global remittances market, where Bitcoin is playing an increasingly important role.

The value of other markets where Bitcoin is gaining market share are measured in the trillions of dollars, not billions. For example, Bitcoin is viewed 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 probably won't move the needle when it comes to valuation. While there has been plenty of commentary saying Bitcoin NFTs could make Bitcoin even more valuable than it already is, my basic take is this: If you're buying Bitcoin because of the NFTs, you're 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.