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NFTs: Investment Boom or Bust?

In the span of the last two months, a digital piece of art sold for nearly $70 million, Jack Dorsey, CEO of Twitter, sold his first tweet for $2.8 million, and a digital Lebron James basketball card went for $208,000. What do these three massive sales have in common? Each transaction was for a non-fungible … Continued

In the span of the last two months, a digital piece of art sold for nearly $70 million, Jack Dorsey, CEO of Twitter, sold his first tweet for $2.8 million, and a digital Lebron James basketball card went for $208,000. What do these three massive sales have in common? Each transaction was for a non-fungible token (NFT), and together, they signal rapidly growing interest in the cryptographic asset marketplace.

Starting with the basics, what is a non-fungible token?

An NFT is a type of digital, cryptographic asset which exists on blockchain. Fungibility refers to interchangeability – assets like dollars, gold, and even Bitcoin, are fungible, because each unit is worth the exact same amount, and is thus readily interchangeable. On the other hand, each unit of a non-fungible asset has its own unique value and thus is not readily interchangeable – think of assets like property, artwork, and other collectibles. [1]

NFTs derive their value from their uniqueness. Each NFT has its own identification codes and related data within the blockchain to distinguish itself. It is impossible to replicate an NFT, which helps to create rarity among NFTs akin to that of traditional and tangible collectibles.

While there are several possible use cases for NFTs, the market is currently largely focused on collectibles. In particular, the popularity of digital artwork NFTs has skyrocketed in 2021. Artists are excited about this new market, as NFTs eliminate the need for intermediaries like art brokers, thereby increasing market efficiency. Artists can now post their artwork on digital marketplaces like OpenSea where anyone in the world can browse and purchase using blockchain-based cryptocurrencies, like Ethereum. [2]

But when you buy an NFT, what do you actually get? In the case of digital collectible NFTs, you are getting not only the digital piece of art, but also the NFT’s unique code and data on the blockchain. The value of the NFT comes from its unique identifiers. You are not, however, getting any intellectual property rights to the piece of art – those still belong to the artist.

Instead, much like physical pieces of art or baseball cards, you are paying to own an “original” or collectible item. For example, when Jack Dorsey sold an NFT of his first tweet, the buyer received a unique token on the blockchain that cannot be replicated. But that does nothing to change the fact that anyone with internet access can look at the tweet, screen shot it, or save a picture of the tweet on their phone.

The concept may seem nebulous to some, but its not so different from physical collectibles. It’s widely accepted that certain early edition baseball cards have inherent value to collectors. If someone were to simply take a picture of one of these collectible cards, that would do nothing to decrease the value of the original card, and similarly, would not suddenly give value to the picture someone took of it.

Of course, rarity alone does not necessarily equate to value – actual interest within the market participants of owning the NFTs is also essential. But it is yet to be seen whether this is what makes NFTs such an interesting and risky investment opportunity.

Many people are currently buying NFTs speculatively, not to own them long-term, but rather with the aim of selling them at a profit sometime in the future. While some NFT purchasers have already made huge sums of money in this way, it remains to be seen whether the current NFT craze will endure, or whether this is a passing fad brought on by the uncertain and unprecedented circumstances we’re all currently under.

In sum, NFTs present an equally intriguing and risky investment opportunity. If you are interested in the market, you should approach the decision to invest with extra care as the NFT market continues to develop and additional use cases and capabilities are explored.

Sources:

[1] https://www.investopedia.com/non-fungible-tokens-nft-5115211

[2] https://www.nytimes.com/2021/03/11/arts/design/nft-auction-christies-beeple.html

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