What is an NFT and should I do something about it?

It’s a new phenomenon in investment country, which is a kind of cross between investing in art and crypto: NFTs, digital images that you can buy and hopefully increase in value. It is a somewhat shady world that you should know more about whether you plan to buy it or not.

What exactly is an NFT?

Non-fungible tokens (NFTs) are things that cannot be replaced. More specifically, they are “intangible pieces of content that come with a digital signature that can be used to verify authenticity online,” said Madeline Hume, Senior Research Analyst for Emerging Asset Classes at Morningstar. “NFTs are a digital asset, but unlike other digital assets such as cryptocurrency tokens, they are unique and non-exchangeable.”

Think of an NFT as a unique object, for example a real painting, or a copy of an object from a (large) edition, for example football pictures, of which there are many copies, but each of which has its own unique value.

“Anything can be turned into an NFT,” said Adam Henry, crypto expert at Harbourfront Wealth Management in Winnipeg. “People take something like a tweet, picture or meme and turn it into an NFT, making it an ‘original’ in itself. The new original can then be bought and sold, just like any other work of art, and it can not be replicated. ” or peeled off. “

How are NFTs used?

Common uses of NFTs include digital art, concert tickets, and vaccination certificates. The ownership of NFTs lies with the one who has the token. They must therefore not have the digital file or the work of art itself, but they must have a link to the file or a login to it. Bob Seeman, tech entrepreneur and author of the skeptical bitcoin book The Coinmen adds: “Between the marketplace that hosts the actual file and the account in that marketplace and the blockchain that holds the ‘link’ back to the file, you an NFT. “

Should investors worry?

We can all become familiar with NFTs, especially as companies come up with new applications from the real world, e.g. travel tickets, cinema tickets or coupon for a weekly sushi meal for life. But so far, NFTs are mostly associated with people who collect and trade in digital art. People invest in visual arts. So can NFTs too, one might say.

At their core, NFTs contain elements of cryptocurrencies; so there are crypto-attributes involved. Ethereum is typically the preferred token for NFTs because it can be customized. It is also used as currency for purchases.

Unfortunately, it costs a significant amount of power. Environmental considerations are therefore a potential disadvantage for NFTs, and ESG investors should consider this in their decision. Another property of crypto is its ability to evolve. “The good news is that the Ethereum standard is already working to mitigate this problem as a cost-saving and efficiency initiative,” said Adam Henry. And there are arguments for socially positive characteristics of NFTs, such as bringing in new groups of investors.

Or even as an educational tool. “We’ve heard stories from clients that their kids are learning about NFTs in school from an investment perspective,” says Henry, “We find it interesting as the typical teenager doesn’t care about traditional equity and bond investments.”

Nor is it a bad thing to improve property rights for artists and performers. They can finally claim their work in the digital world. “Many early adopters were artists who wanted to use NFTs as a source of revenue in light of a precarious pandemic economy,” Henry said.

Can you actually show it?

Anyone wishing to invest in NFTs should consider whether they are familiar with blockchain art assets as there are important differences for the buyer to consider. “Limited-edition art prints give at least one person the legal right to display and hang the print anywhere. Almost no NFTs do that,” said Seeman, who is also a lawyer.

Owning a print of a work of art does not give you the right to reproduce the print, but “NFTs do not give that right either,” he says, “it’s just a context, not a property right.”

What if someone else copies and distributes my NFT? No matter how many times NFTs are copied, “the artist or creator can still retain the copyrights and reproduction rights, as with physical artwork,” says Seeman, because blockchain keeps track of who the original owner is despite all the following steps. .

Ownership of NFTs is complicated

When the ownership of a piece of digital art is assigned to someone through blockchain, it is forever. Or at least until the next block is added to the blockchain – which could theoretically contain a ‘license-terminated’ note, Seeman said: “The owner could effectively terminate the NFT. The problem then becomes what value the NFT would have if the owner unilaterally terminated an NFT “The value of the NFT would simply evaporate.”

The blockchain structure of NFTs also raises some concerns about privacy in terms of their potential “ultimate form,” said Dan Olson, a Youtuber who recently drafted a two-hour critique of NFTs. He explains that a blockchain-based future with NFTs specific to a person would be a big deal. Fortunately, this ESG risk is a long way off, but there are already some social implications of the structure, volatility, and virality of NFTs today.

“Many of the questions I get from younger people are that they have heard a friend say that they have made a lot of money on NFTs and that they would like to be part of the excitement,” Olsen says. Let a younger generation begin their journey of discovery in the world of investing by putting their savings into something in the hope of a return that will turn around three or four times in a few months. Remember, investing is not about gambling. “

NFTs can be a bubble

The anonymity aspect of crypto is a major issue for NFTs as investments when it comes to laundry. Imagine a bunch of purses, each representing a long series of random numbers, each buying a series of digital prints from one artist. With a limited supply, the price rises. But were all those purses perhaps the artist’s own? Who knows? Is it possible. And that’s the problem with the laundry trade. It happens in the form of an exchange, and only that exchange sees what is happening. You do not know what is behind it, “says Seeman.

Should you stick to investing in art?

“The price of art is determined by fashion,” warns Dan Kemp, Global Chief Investment Officer for Morningstar Investment Management, “although some may recognize such fashion, most do not have that capacity.”

Okay, but what about full-time art collectors? Can’t it be the same with NFTs? There are collectors and retailers of visual arts, Seeman says, but they are experts with knowledge and skills. And it’s more of a trade to keep up with fashion than it’s an investment. “A good example of the influence of fashion has been the fall in the price of antique furniture. They share many of the same qualities as art, but the segment has suffered a terrible depreciation, ”Kemp added.

The art world is also confronted with questions about the integrity of its market. Compare art evaluators with the “judge” during the subprime loan crisis. “The rating agencies were paid by the most powerful players in the game,” argues journalist Michael Lewis in a podcast episode about intrigue and influences in the visual arts market.

Is it possible to be an expert NFT buyer? Yes. Do they actively filter out all laundry trade? Yes. Are art collectors constantly on the lookout for counterfeits? Probably. Do you want your investments to be confronted with such risks? Unlikely.

NFTs as NFTs

“I would see art as something to love for what it is, rather than as an investment,” Kemp says. You love the way it looks, sounds, feels, means. Art for the sake of art.

Seeman would like to own an NFT 1-of-10 print of a painting from the Louvre, perhaps as part of a charity fundraiser. It would be nice. He thinks that is useful. And he sees opportunities to make things that make sense. “For example, a print of a favorite World Cup goal for football fans. They can own a piece of their favorite sport in a different way.”

NFTs are an interesting, versatile and useful tool. No investment. That does not mean they have no value. The only thing that matters is what they are worth to you.

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