You may have heard of the term “NFT” recently. It has become a bit of a household name over the past year. If you’re like most people, you may have done a quick Google search to see what it is about, but that probably didn’t help much. Non-fungible Tokens (NFT) are not exactly easy to understand at first glance. Today, we will explain what they are and why they have garnered some investment hype.
What is an NFT?
NFT stands for Non-fungible Token. Let’s break it down. "Non-fungible" means something is unique. One in existence. If you know much about rare collectible items, you might have heard of the 1964 GI Joe Prototype. There was only 1 ever made. And while there can be copies created, there will only ever be 1 original. It is said to be worth $200,000. That's an example of non-fungible.
The word “Token” speaks to the digital aspect of it. Put it together, and you have an NFT, a unique, one-of-a-kind digital asset.
While this could be anything digital that you can place a unique stamp on, right now, we are seeing this being used for digital artwork.
At this point, you might be asking, “if it is digital, can’t it just be copied and pasted?” That’s true. It can be. However, the blockchain technology used by cryptocurrency has helped introduce this new stage of digital art by allowing for an original digital art piece to be adequately certified as the original.
In other words, up until now, we lacked the technology to put a unique stamp on the original creation of a digital asset. It'd be like taking that GI Joe and being unable to prove that it is the original which would essentially render it worthless. Now we have that ability in the digital world, as showcased through cryptocurrency's blockchain technology.
If Vincent van Gogh were to paint Starry Night in today’s era, maybe he would do it on a Macbook, sign it with a digital stamp using blockchain technology, and sell it for millions. Could someone then copy/paste the digital image or screenshot it and own a copy of it? Sure. But they can do that with physical art as well. The value comes in holding the original copy and the bragging rights to it.
Now that you have a basic understanding of what NFTs are, let's look at the investment side of it. There are three different parties of people interested in NFTs. The creators or artists, the buyers, and the investors.
Digital artists didn’t have a way to sell their art for what it was worth in the past because it was so easily duplicated. We now have the technology to keep the original digital art piece intact which creates so much more value for the artist.
As the world becomes more and more digital, it seems fitting that art would follow suit. The value of art has always been somewhat subjective and in the eye of the beholder. There’s value in owning something no one else can. The idea of exclusivity is something that, at a basic level, humans have always valued. This is why autographs have to be authenticated before they are sent to the auction, why people wait in line to be the first to get their hands on the new iPhone, or why a Babe Ruth rookie card has so much value.
Where there is something of value being created, and there are buyers that see the value, there will also be investors – those who speculate on the future value of the art and buy / hold / sell in the future at what they hope will be a profit.
Should I Invest in an NFT?
Now that you have a basic understanding of how NFTs work, a brief comment from us on whether they are worth investing in.
If you read the news, you will find stories of people making sometimes millions of dollars selling or investing in NFTs. While there are unique stories like this, we strongly believe long-term serious investors should stay far away from NFTs -- especially right now. At this point, no one really knows if NFTs are here to stay, or if they will be like beanie babies, Tickle-Me-Elmos or Furbies (remember Furbies??) and placed into the museum of passing fads.
Regardless of whether or not NFTs are here to stay, the current system is a complete mess. OpenSea which is the most popular marketplace for NFTs recently reported that over 80 percent of NFTs created on their platform were plagiarized works, fake collections, and spam. While creating a digital asset that is truly non-fungible is the idea, in reality, sadly there's a long way to go to make this a reality for digital artists.
At Summit, "investing" in an NFT is about the equivalent of purchasing a lottery ticket. Purely speculative. That said, we do not tell our clients they can't purchase a lottery ticket, but we do let them know the odds of winning so they do not purchase it with the expectation that this is part of a long-term investment strategy. The same thought process applies here. If you are going to purchase an NFT, use the money you not only can afford to lose but expect to lose. There are methods to fund your retirement dreams that contain a far higher likelihood of success.