NFTs are attracting a lot of attention in recent months and most recently a digital clip art of a rock was sold for 400 ether or equivalent of US$1.3 million in August 2021. This particular Rock is part of a brand named EtherRock which is a digital JPEG of a cartoon rock image built and sold on the Ethereum blockchain. There are only 100 EtherRocks in existence and the scarcity is what, at least in theory, driving the value in recent months.
Source, CNBC, 2021
According to transaction record, an EtherRock was traded for close to US$100,000 in early August, which in itself is already an astronomical amount, has again traded hands within weeks for US$1.3 million – a 13x surge in value for a “digital art”. Most recently, even major corporation such as Visa has announced its investment into NFT space, so, in a world of meme-stock and unprecedented crypto-mania, investors may now ask what exactly are NFTs and is this new asset class actually worth considering?
Source: CNBC, 2021
What are NFTs?
- The word NFT stands for “non-fungible token” which is a unique and irreplaceable cryptographic whereby the ownership is in the form of a digital certificate on a blockchain such as Ethereum. A NFT is unique with a traceable ownership that ensures the authenticity and scarcity that could potentially carry collectible value to some buyers. NFT can represent various physical assets such as photos, videos, audio, paintings, or any kind of digital data that are transparent, verifiable and easy to trade on the blockchain.
- NFTs started in 2017 with Crypto Kitties (a digital game on the Ethereum blockchain) and CryptoPunks (first NFTs) and have gradually increased in popularity in recent years. The market hit full throttle in 2021 whereby total NFTs transaction by value in February 2021 alone was already US$360 million, a 44% increase to the entire transaction value of 2020.
- Some recent notable record NFTs transactions:
Christie’s auctioned an NFT of 9 virtual rare CryptoPunks for a record of US$$16.9 million;
The first tweet on Twitter of the co-founder and CEO of Twitter Jack Dorsey was sold for just under US$$3 million;
Canadian singer-songwriter Grimes and wife of billionaire Elon Musk sold her digital artworks for around US$6 million which includes a 50-second video NFT valued at about US$$400k;
NBA’s Top Shot has generated more than $230 million in selling NFTs of NBA highlight videos, in particular, an image of Lebron James dunking was sold for over US$200k.
Source: CNBC, SCMP, Techcrunch, 2021
Source: Techcrunch, 2021
- Whether or not NFTs are worth considering as a collectible item, these enormous prices have certainly attracted media attentions. Whilst this new asset class’ rapid development exhibits similarities of traditional art collectibles, its intrinsic and physical values remain difficult to grasp for a traditional investor.
What should investor consider before considering NFTs?
- The first key concern for investors is the substance of the ownership. NFTs are digital certificates that are stored on the blockchain whereby a digital proof of your ownership is encrypted and recorded. However, when compared to traditional art collectibles, whereby ownerships are physical, this is not the case of NFTs. Physical artworks have physical presence which are easy for investors to grasp and place a value upon. In substance, any digital copy of the NFT on the internet can be replicated which is in substance identical to the authentic digital file owned by the buyer - a copy is literally as good as the original. So, what is truly protecting the scarcity of NFTs?
- The legality of ownership is also another concern as there are currently insufficient legal protections surrounding ownerships on the blockchain. Will the judicial systems protect intellectual and commercial rights of the NFTs that you own? How can the “scarcity” of a digital item, that can theoretically be mass-produced, protect its value and ensuring copyright and royalties be appropriate monetized and governed?
- Last but not least, NFTs are typically sold via intermediate platforms such as OpenSea which have equally short operating histories as the crypto market itself. Similar to the concerns to blockchain exchanges, NFT exchanges are also highly susceptible to future regulatory reviews. This concern is growing by the day in 2021 when the sheer volume and value of NFTs transacted across these NFT exchanges (below chart) in just the last 6 months. Concerns for anti-money laundering and black-market financing are certainly issues on regulator’s mind that investor must consider.
Source: Reuters, 2021
Final thoughts
- For the average investor, NFTs represent a highly speculative class of investment that probably should be avoided. NFTs don’t gain in value because of their utility but are based on the value of proof which the medium (i.e. proof of ownership of digital art, video, music) are stored. Without any real-world applications (even Bitcoin and Ether has some proof of stake) nor physical value (collectible arts), valuation on such asset is incredibly difficult to justify and are highly subjective.
- For investors who still fancy some exposure to NFTs may instead consider dipping into the cryptocurrency market whereby Ethereum is the leading blockchain that NFTs are most often traded on. Having said that, NFTs are certainly an indication of a new digital era and it’s important to appreciate that most people can only really grasp the tip of a potentially huge NFT iceberg (so to speak). For all we know, the world is changing at a record pace and certainly NFTs’ rapid development is at least worth keeping an eye on.
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