It’s a new phenomenon in investment land that’s kind of a cross between investing in art and crypto: NFTs, digital images that you can buy and hopefully increase in value. It’s 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 not interchangeable.”
Think of an NFT as a unique item, for example a real painting, or a copy of an item 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, image or meme and NFT it, making it an ‘original’ in its own right. The new original can then be bought and sold, just like any other work of art, and it can’t be replicated.” or ripped off.”
How are NFTs used?
Common uses of NFTs include digital art, concert tickets and vaccination certificates. Ownership of NFTs resides with the holder of the token. They must therefore not have the actual digital file or the artwork, but they must have a link to the file or a login to it. Bob Seeman, tech entrepreneur and author of the bitcoin skeptic book The Coinmen adds: “Between the marketplace that hosts the actual file and the account on that marketplace and the blockchain that holds that ‘link’ back to the file is you an NFT.”
Should investors worry?
We can all become familiar with NFTs, especially when companies come up with new real-world applications, e.g. travel tickets, cinema tickets or a voucher for a weekly sushi meal for life. But for now, NFTs are mostly associated with people who collect and trade 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 token of choice for NFTs because it is customizable. It is also used as currency for purchases.
Unfortunately, it costs a significant amount of power. Environmental concerns are therefore a potential downside for NFTs, and ESG investors should consider it in their decision. Another characteristic 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 about their kids learning about NFTs in school from an investment perspective,” says Henry, “We find that interesting since the typical teenager doesn’t care about traditional stock and bond investments.”
Improving property rights for artists and performers isn’t a bad thing either. They can finally claim their work in the digital world. “Many early adopters were artists who wanted to use NFTs as a source of income in the face of a precarious pandemic economy,” said Henry.
Can you actually show it?
Anyone looking to invest in NFTs should ask themselves if they are comfortable with blockchain art assets, as there are important differences for the buyer to consider. “Limited-edition art prints at least give a 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 an artwork doesn’t give you the right to reproduce the print, but “NFTs don’t give that right either,” he says, “it’s just a connection, not an ownership 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 copyright and reproduction rights, as with physical works of art,” Seeman says, because the blockchain keeps track of who the original owner is despite all the following-up steps .
Ownership of NFTs is complicated
Once ownership of a piece of digital art is assigned to someone through the blockchain, it is forever. Or at least until the next block is added on the blockchain – which could theoretically contain a ‘license terminated’ note, Seeman said: “The owner could effectively terminate the NFT. The issue then becomes what value the NFT would have if the owner were to unilaterally terminate a NFT. The value of NFT would simply evaporate.”
The blockchain structure of NFTs also raises some privacy concerns regarding their potential “ultimate form,” said Dan Olson, a Youtuber who recently prepared a two-hour critique of NFTs. He explains that a blockchain-based future with NFTs specific to an individual would be a big deal. Fortunately, this ESG risk is some way off, but there are already some social implications of the structure, volatility and virality of NFTs today.
“A lot of the questions I get from younger people is that they’ve heard a friend say they’ve made a lot of money on NFTs and they want to get in on the fun,” says Olsen. Let a younger generation begin their journey of discovery in the investment world by putting their savings into something in the hope of a return that will triple or quadruple in a matter of months. Remember, investing is not gambling.”
NFTs can be a bubble
The anonymity aspect of crypto is a big problem for NFTs as investments when it comes to wash trading. Imagine a bunch of wallets, 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 laundry trade. It happens in the form of an exchange, and only that exchange sees what happens. You don’t know what’s behind it,” Seeman says.
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, “While some can 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 dealers of fine art, says Seeman, but they are experts with knowledge and skills. And it’s more of a trade to keep up with fashion than an investment. “A good example of the influence of fashion is the fall in the price of antique furniture. They share many of the same characteristics as art, but the segment has suffered a terrible depreciation,” Kemp added.
The art world also faces questions about the integrity of its market. Compare art appraisers to the “judge” during the subprime mortgage crisis. “The rating agencies were paid by the most powerful players in the game,” argues journalist Michael Lewis in a podcast episode about the intrigues and influences within the visual arts market.
Is it possible to be an expert NFT buyer? Yes. Do they actively filter out all laundry trades? Yes. Are art collectors constantly on the lookout for fakes? Probably. Do you want your investments to be confronted with that kind of risk? Unlikely.
NFTs as NFTs
“I wanted to see art as something to love for what it is, rather than as an investment,” says Kemp. You love the way it looks, sounds, feels, means. Art for art’s sake.
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 finds that 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 doesn’t mean they have no value. All that matters is what they are worth to you.