Much like Bitcoin back in the late twenty teens, NFTs are seen as something of a techy mystery by a lot people.
They are getting more and more mainstream press attention though, and while they may not be widely understood, your average guy or gal could probably explain what one was in very basic terms.
However, their existence wouldn’t warrant any more attention than the existence of online avatars if it wasn’t for the fact that they have been monetised.
Ever since the very first tweet was turned into and NFT and sold for $2.9 million, people have been creating these things in huge numbers, to then buy and sell as investments, or use to trade with just like a stock trader might buy and sell a stock.
Like anything without much of a past, however, whether or not these investments hold any long term value – indeed whether they really are investments at all – is not an easy question to answer.
The NFT market has been flooded with retail investors hoping to make a quick and easy buck, with many of those who are putting money in probably not fully understanding what they are buying.
What is an NFT?
The intro to this article assumes a certain level of understanding, but for anyone who has absolutely no idea what we are talking about, let us bring you up to speed.
NFT stands for ‘non fungible token’, and while the term is arguably most commonly associated with digital images, it can also apply to music, games, and all sorts of other digital assets.
The dictionary definition of the key word here, fungible, is:
- Fungible – Easy to exchange or trade for something else of the same type and value.
So since an NFT is a non fungible token, they are not easy to exchange or trade for something else of the same type and value.
Money is an obvious example of something that is fungible, since one £20 note will always hold the same value as another, and it can also be broken down in to four £5 notes or two £10 notes, which, when added together, will still always hold the same value as the original £20 note. You could easily swap two tens for a twenty, for example.
Other examples of real and digital things that are fungible are:
- Precious metals
- Crypto currencies
- Casino chips
- Tesco clubcard points
On the other hand, NFTs make something totally unique and show that each one is owned by a specific person, by giving it a sort of digital certificate of ownership which exists on the Ethereum blockchain.
There are a few different blockchains but what they all basically do, is represent a public ledger that records every transaction made on it using a specific type of programming language.
An example of something that is not fungible might be a piece of art. An original painting is unique, there is only one of them. Prints of that painting will not hold the same value as the original, and even other works by the same artwork are not comparable – you couldn’t do a straight swap of The Last Supper for the Mona Lisa, for example, even though they are both by Leonardo Da Vinci.
Other examples of real and digital things that are non fungible are:
- Concert tickets
- Skins for video games
Essentially then, an NFT turns a digital asset into something that is one of a kind, using a sort of digital signature. This defines the ownership of the asset, so although someone else could easily screenshot that NFT, they would never be the owner.
This means that an NFT is something that is added to an existing digital product, it is not the product itself, despite the way we talk about them. A digital picture of a monkey can exist but it doesn’t become an NFT until the technology is applied to it. This is known as becoming tokenised.
NFTs allow digital content creators to protect their material in a way that also controls their value… to a point. Since there will only ever be one original version of the asset, whether that be a gif, a picture, a video clip or a gaming skin, the true owner of that asset can always be proved because it has been tokenised.
Is Buying NFTs Investing?
Any investment decision carries an element of risk, as well as the possibility of increasing in value, but there is usually something tangible on the other side of it.
If you invest in a company then that company exists somewhere, offering goods or services, and has employees and a premises. It has a balance sheet and annual statements, and it might even pay out dividends to its’ shareholders bringing them a small income from their investment each year, on top of the asset potentially going up in value if the company does well.
If you invest in a piece of art then you own that piece of work, you own the physical copy that the artist actually created. It probably won’t earn you any money but it can certainly go up in value if the artist’s profile increases, or it can at the very least act as a store of wealth.
With a digital NFT though, the issue has always been that there is no difference between looking at or listening to an original of something than looking at or listening to a copy.
Look at these images side by side:
Do you know which is the original and which is the copy? Of course you don’t.
In actual fact this is just two screenshots of the same image laid out side by side, so neither is the original, but the point we are making is hopefully clear.
On top of this, while the owner of an NFT might be able to prove ownership of the original, they can’t stop other people copying and even altering copies of the asset online. If you are the owner of an artwork you have the physical piece in your possession and no one else can see it unless you let them – this is not true for NFTs.
There was a gif that went around the internet in 2011 called Nyan Cat. It’s rubbish, but this thing was turned into an NFT and sold for around $600,000 (paid for using Ethereum) in 2021. Despite the sale, you will still find the gif all over the web if you search for it, as well as hundreds of alternative versions that people have made changes to.
Here’s the original.
So while the scarcity of the original gif may have been maintained – there is still only one original and the owner of that original can prove ownership – the whole world can find it, watch it, download it, copy it, change it etc. to their heart’s content, with no financial benefit to the owner.
This begs the question, what sort of investment is it? It doesn’t have a use or a purpose, so essentially, someone has just paid $600,000 on the off chance that someone else will be willing to pay even more for it somewhere down the line. But this isn’t a calculated risk based on economic factors or financial forecasts, this is not a well researched decision after studying an annual report, it is a shot in the dark.
And that, sounds a lot more like gambling than investment.
You are laying down your $600,000 stake in the hope that it will turn into some higher amount, but you don’t know the odds, or how long the game will last, or if market sentiment towards NFTs will fall off a cliff… there is no precedent so you don’t know anything. It’s a total punt.
That first tweet NFT that was bought for $2.9 million in March of 2021 was put up for sale in April of 2022, and achieved a top bid of just $6,800. A losing gamble, or a very bad investment?
Hard to say, but whichever way you look at it the financial loss is sickening.
Hype and Volatility
One of the biggest problems around NFTs is the way people talk about them.
During 2020/21 the hype reached fever pitch and people were throwing money at these things sometimes with no clue what they were buying.
People were diving head first into the market which inflated prices as well as liquidity as buyers were willing to outdo each other to get hold of popular (and even totally unknown) NFTs. Platforms like Opensea, on which NFTs could be sold sprang up, as well as software to create your own.
The concern is that this is just one crazy digital bubble that will burst, leaving everyone who still has skin in the game an awful lot poorer when no one wants their ‘assets’ anymore.
Hype can only last so long, eventually, true value will be established, and if you are the person holding the balloon when it pops, you end up with nothing.
NFTs are also commonly talked about as an asset class which they are most definitely not, because as we have discussed, the NFT itself is just a digital certificate of ownership and originality. It’s the official paperwork, not the asset itself.
The asset is the thing attached to the NFT, so simply buying something because it is an NFT is insane. We could create an NFT out of this sentence but it wouldn’t make it valuable.
This all makes the NFT market incredibly volatile, as we have seen with the tweet NFT that lost 99.97% of its value in just over a year.
Other investable assets simply don’t behave in this way. Yes all investments can go up and down in value, sometimes sharply after good/bad news, but the waters are nowhere near as choppy as with NFTs.
As you can see from the images in this section, the swings between what people make and what they can lose are absolutely huge.
Should You Invest in NFTs?
No one can tell you what to invest in, it has to be a personal decision. To be honest, if you are looking for someone to give you a cast iron answer to this question then you almost certainly don’t know enough about them to risk your money.
That said, your opinion on whether NFTs are even investments in the first place rather than simply gambling will probably have a big influence on whether you think them worth buying or not.
We would reiterate that it is not the NFT you invest in, despite the language used to talk about them (including on this page). It is the underlying asset that is important.
An official original digital image of the Mona Lisa and an accidentally taken phone camera shot of some shoes can both be turned into NFTs, but most sane people would realise that only one of them has a chance of holding any value.
If you think the underlying asset has value and have researched the market for that asset then you can at least make an informed decision.
We would encourage anyone thinking about it to do loads of research though. There are some concerns such as the ability for someone who didn’t create something to tokenise and then sell it
Gambling with NFTs
While the question of whether buying NFTs is more akin to gambling than investing isn’t exactly straight forward, the NFT/Crypto online casinos that are already out there are unquestionably gambling.
Players can deposit using fiat money, various different crypto currencies, or even NFTs in some places, and can then play games as normal with all transactions taking place on the blockchain, making them provably fair.
The advantage to gambling in this way is that it cuts out third party payment providers that traditional online casinos have to use, but the by-product of this is that these casinos are also more likely to be exploited or used by those with gambling problems.
A criminal organisation wanting to wash dirty money, for example, could anonymously buy large amounts of crypto or NFTs, then deposit these to an online casino, play a bit, then withdraw and sell their virtual funds to turn it back into fiat money.
Crypto casinos are already populating the internet, in which gambling takes place more or less the same way as it does with fiat money – you stake however much bitcoin or Ethereum or whichever coin you are using on the game you are playing, and either lose it or win more back.
There aren’t NFT casinos in quite the same way, but there are lots of ways NFTs could, and already are being used, for gambling.
For example, Gambling Apes allows people to buy their NFTs to become owners of the casino itself, and take a profit share each month. Other casinos allow NFTs to be traded in and then the funds used to gamble with.
Gamers already stake ‘skins’ – outfits for online characters basically – some of which are very rare and valuable, in order to win more skins, so this would just be the same thing by a different name really.
The difficulty would be establishing the value of the NFT in the first place, as you wouldn’t want to risk an NFT you paid £1,000 for if you only stood to win one that was bought for £50, for example.
A lot of the answer to the original question will depend on what you think the outlook is for NFTs, and which assets you are looking at that have been tokenised.
If the world suddenly finds a use for a bunch of digital monkey pictures and the price rockets then no doubt more people will accept NFTs as investments.
If they hang around for a bit being sold for silly money before the furore dies down and no one is really interested anymore, most people will probably look back on them as a gamble that didn’t pay off.
If we had to pick it would be on the gambling side of the fence for us.
There is simply too much uncertainty around them to make a well researched investment case, so people buying them to hopefully make some profit later on are just having a punt and hoping their timing works out in our opinion.
The idea of digital ownership is certainly useful for protecting your own material online, and almost anything can be tokenised and made into an NFT, so the technology has a place.
But very few of the assets that become NFTs are made any more valuable because of it as far as we can tell. Images can be copied and looked at for free, the same goes for music and games, and copywrite laws cover most angles already.
It might just be that our tired and tiny brains can’t imagine a future where the NFT has a unique use or a reason why it might become valuable, but we think it’s firmly in bubble territory.