There is a seemingly endlessly growing list of new things to pay attention to in the world of investing. Recently, a new type of asset—the "NFT"—flew on the international radar after a digital artist named Beeple sold an NFT for a record US$69 million at the auction house Christie's.
If you've heard anything about NFTs, it was probably related to blockchain and the record-breaking art sale that helped put them on the map. But if you haven't paid close attention to the world of cryptocurrency and art recently, this acronym might lead to nothing but more questions and confusion.
Fortunately, this guide will help you better understand the basic information about NFTs and better inform any future investment.
What Are NFTs?
The acronym NFT stands for "non-fungible token." Non-fungibility is another word for the uniqueness of any single good or asset. Assets such as cash, cryptocurrency, or mass-produced goods are therefore fungible due to their interchangeability with one another.
A non-fungible token is thus a certification of authenticity for a digital asset. Any piece of unique digital media—such as digital art, videos, or music—qualifies to have its ownership traded as an NFT.
Further Questions About NFTs
How do I know that an NFT itself is for an authentic digital asset? Who verifies authenticity for NFTs? The answer lies within the blockchain. More specifically, the cryptocurrency Ethereum (ETH) supports the bulk of NFTs.
In other words, anyone looking to verify the authenticity of an NFT could go into the appropriate blockchain and extract proof that validates any given NFT. What's more, NFTs sold through prolific online bazaars such as Christie's and NBA Top Shot already have their authenticity vetted and confirmed.
For example, last month an NFT for the original GIF image of the popular internet meme Nyan Cat sold for 300 ETH (approximately US$590,000). Anyone could theoretically download the GIF of the image online and 'own' it, but only those who own its NFT own *the original*. An NFT helps certify the original image so that anyone can verify its originality. This is similar to how collectibles and memorabilia have Certifications of Authenticity for prospective buyers and collectors. The only difference between such certifications and NFTs is their physical and digital distinction.
What Should Singaporeans Know Before Investing in NFTs?
Before anyone decides to ditch their brokerage account and invest in NFTs, there are a few things Singaporeans should know. Like any investment, there is a considerable amount of risk involved. Especially in the case of NFTs, the market's volatility or stability has yet to be seen for the latest crypto boom.
The elephant in the room is whether the NFT boom is driven by actual collectibility or simply the desire to make money. At this juncture, it's important to remember that there isn't any inherent value to an NFT. Value was added only after they were created and speculators subsequently bought and sold them. In fact, "nearly half—47%—of all NFT sales (in dollars) have come [since March 2021]." The following graph highlights the sudden growth in NFT sales following their latest surge in popularity:
The above concern points to the question of whether value generated out of thin air can be sustainable. Some believe the latest NFT boom will instead resemble a "pump and dump scheme," where investors collude to artificially raise the value of an asset before selling and causing the asset's value to return to 'normal.' How should investors know if NFTs are driven by meme-inflated value or if they represent a stable digital asset such as Bitcoin or Ethereum?
Additionally, the artificial scarcity of NFTs is markedly similar to that of currency. Similarly to how a government's tendency to print money can affect the forex market, a hypothetical influx of new NFTs or division of NFTs into smaller shares could depreciate their value and tradeability.
To conclude, it is important to remember that—despite whatever media hype or earning potential associated—investing and gambling are not the same. Although the market for NFTs has already netted individuals millions of dollars, this type of asset has not been observed (or traded at its current volume) long enough to predict any certain outcome.
For this reason, entering NFTs at this time should be viewed as volatile, with the caveat that another explosion in NFT trading could lead to serious profits. For both risk-tolerant and risk-averse investors, creating an investment strategy can help to outline the pros and cons before committing your capital to invest in assets such as NFTs or crypto.