This might sound absurd in the eyes of some, but it’s currently highly celebrated by artists and collectors who see it as a new source of income.
So, what on earth are NTFs?
NFTs, like cryptocurrencies, are transactions stored on the blockchain. But the difference is that an NFT is a “non-fungible token”, unlike cryptocurrencies. Most currencies can be called fungible, including cryptocurrencies like bitcoin: if you exchange one bitcoin for another, you still have the same asset, the same value. The same applies for a dollar: it’s called the fungible property of money.
The creators of NFT wanted to do exactly the opposite: a transaction stored on the blockchain that is non-fungible, therefore completely unique. The idea is to be able to use it as a certificate of authenticity associated with a digital or physical object.
So, if I make a drawing, I can create an NFT which represents the certificate of authenticity of my drawing. So, if someone one owns the NFT, he really owns my drawing.
In general, anything digital can be made into an NFT, whether it’s music, art, or an X-ray of William Shatner’s teeth (yes, that’s a thing). But the key thing of course is that those images or digital artworks CAN be replicated, so for these assets to be NFTs they need to be digitally “certified” and converted to non-fungible or unique assets. This is done using blockchain.
The excitement, as with cryptocurrencies, is in nature of being unique or finite. The blockchain acts as a form of a guarantee that the assets can’t be reproduced.
This is the reason NTFs are really exploding in the traditional world of art, because like the original pieces of paintings, you can’t make any more originals. This is the reason Beeple’s collage was sold for a whopping $69 million by Christie’s auction house.
So, can I just duplicate something I have and sell it?
Uh, no. Here is the thing, anyone can copy-paste a digital file and claim ownership, but as explained, the NFT makes the file unique. People are paying millions for NFTs because their ownership can be verified and the asset, while you can copy it (as you would photocopy a painting), you can’t replicate it.
In real life, pretty much anyone can own a photo or print of the Mona Lisa, but only one original and authenticated piece exists.
How do NFTs Work?
NFTs are commonly created using the Ethereum blockchain platform. Ether, which is the cryptocurrency on the Ethereum Blockchain platform, is quite different from other platforms. It’s supports creation, buying and selling of digital assets like NFTs though what are called smart contracts.
The Catch with NFTs.
Just like with real life collectibles, NFT assets come with some risks. While the NFT assets can be verified, there is no way of telling if they will increase or even maintain their value. There is also a chance that all these buzzes around NFTs may die out leading to a disappointing valuation in future.
Other than the future uncertainties, there are also serious philosophical and legal questions yet to be addressed in the NFT market, making the future even more unpredictable.
There is a growing risk of using NFTs as a tool of investment. While the subject and concept are fascinating, we just don’t know much yet about the staying power of the NFT assets. We may argue that digital currencies have risen in popularity and acceptability, it’s important to remember that they, too have yet to go mainstream.
If investing in NFTs is something you’re considering, keep in mind that they are relatively new and the technology around them is quickly evolving. Liquidity and regulatory changes are also important factors that may adversely affect the future of NFTs.
If you need any further advice and guidance around the NFT subject, feel free to contact us. In the meantime, just don’t allow the fun and craze to distract you from focusing on your financial strategy.
1 – The Verge, March 11, 2021