NFTs: Are Investors Missing Something?
Welcome to the brave new world of the non-fungible token. For many digital artists, it’s a promising new direction that allows them to make money on their work for the first time. But while some investors sing the praises of NFTs, many remain skeptical that it’s another fad—or worse, a bubble waiting to burst.
Should you be skeptical of NFTs? Are they worth investing in? Here’s a closer look at NFTs for savvy art investors and a look at whether NFTs might be the right fit for your financial goals.
What is a Non-Fungible Token?
A non-fungible token, or NFT, is a type of cryptographic asset linked to a blockchain, representing a real-world object such as a piece of art. NFTs are bought and sold online, often with cryptocurrency, and like cryptocurrency, all NFT transactions are recorded on their associated blockchain.
Fungibility refers to the ability to be interchangeable. Currencies are the classic fungible asset. If you had a $10 bill, for example, you could exchange it for two $5 bills, ten $1 bills, or any combination of other cash that will still be considered equal to $10. On the other hand, a non-fungible asset is unique and not interchangeable with other assets.
NFT vs. Cryptocurrency
Both cryptocurrency and NFTs are based on blockchain technology. NFTs often require cryptocurrency to buy and trade, so the players in the crypto and NFT space are often similar.
The main difference is that cryptocurrency is, as its name states, a currency. Like other currencies, cryptocurrency’s value is is purely economic and its value is fungible. AKA, within a particular crypto asset, one coin has the same value of another coin, 1 $BTC = 1 $BTC.
NFTs don’t work that way. They are non-fungible and have a value that is created beyond pure economics. Like a Picasso or a Renoir, every NFT is designed to be completely unique, with a unique digital signature to verify its authenticity. This means that one NFT is not equal in value to another, and one NFT cannot be traded for another as an item of equal value.
How Do NFTs Work?
NFTs depend on a blockchain to enhance security and keep a permanent record of transactions. To create, or “mint,” an NFT, the creator would upload a digital file – an image, music or other digital file – to a marketplace. That marketplace would then create a unique identifier and add it to a blockchain to verify, store, and track the token.
Once minted, the NFT can be sold, kept as record, or destroyed. Generally, NFTs are purchased with digital currency, but not every NFT marketplace requires this.
One of the most common misconceptions about NFTs is that the NFT always refers to the asset itself. NFTs represent ownership of the asset, either a physical asset or a unique code linked to or associated with a digital asset’s metadata.
NFTs depend on smart contracts. Smart contracts refer to computer code that automatically executes a transaction when specified conditions are met. For example, a smart contract could stipulate that the original creator of the asset will receive a percentage of all subsequent sales of the NFT.
When used for digital art, NFTs create digital scarcity. The unique signature of every NFT, along with its transaction history on blockchain, creates a one-of-a-kind artwork with provenance, like a physical painting. For these digital images, the public may be able to view the asset or take a screenshot, but the NFT proves which digital image is the original and can prove ownership.
That means digital artists can sell the verified original version of their work and the work can build reputation over time as it passes through verified collectors.
Are NFTs a Good Investment?
So, are NFTs a good investment? It depends on your risk profile, preferences, and goals.
On one hand, NFTs have radically altered the market for digital assets. The introduction of ownership guaranteed by digital token supported by a blockchain has broadened the market for digital assets. The non-fungible aspect can be appealing to investors, both from a property rights perspective, and because it can be enjoyable to know you are the exclusive owner of a one-of-a-kind asset.
NFTs differ from traditional investment assets and even traditional art sales because of its decentralized nature. NFT creators and collectors can interact directly, allowing them to set their own terms of the transaction without third-party involvement. This could potentially allow creators to retain a larger share of the profits from sales.
Additionally, NFTs are not only jpegs or music files. NFTs simply represent ownership over an asset. This could be applied to improve the overall efficiency of the digital economy. As the NFT landscape changes and develops, there is a potential for general improvements to digital asset retention and sale.
Why Some Investors are Skeptical of NFTs
Like other investments, NFTs come with financial risk and the potential for price volatility. However; because NFTs are not regulated as investment securities, individual purchasers may not be warned of potential risks prior to purchasing as they would for traditional investments.
The new technology utilized for NFTs presents its own risks. Firstly, the market is still nascent meaning that there is a lack of federal expertise around the rapidly changing digital landscape. This can present legal issues, privacy concerns, or cybersecurity risks.
With any art investment, you have to think beyond buying the work. You have to think about how the collection will evolve—in other words, how you’ll make money on it through the sale. There are several unknowns in the NFT market, including:
- What NFTs will still exist in five, ten, or fifty years
- How technology advances will change the market
- What regulatory challenges will arise
For investors, the two greatest challenges right now are the continued existence of the NFT market and the continued existence of the asset itself. Like a stock, NFTs need a specialized market to trade, and without them, those assets can’t deliver value. More pertinently, because NFTs are entirely digital, it’s possible for an asset to vanish into thin air if it isn’t stored properly, if it isn’t supported on new technology, or if the investor loses access to the asset.
Invest in the Art Market Through a Proven Asset
While we have no way of knowing whether a non-fungible token will be part of the art conversation in years to come, we do know one thing: the art market has staying power as an investment. And on our platform, everyday investors have the chance to engage in the highest performing part of the market by purchasing shares in authenticated multi-million-dollar artworks and collecting dividends when we make a sale.
Ready to put art to work for your financial goals? Fill out your membership application today to learn more.