The rise of cryptocurrency has created a situation where there are almost too many alternative investment options to choose from. After all, there are more than 4,000 types of cryptocurrency in existence as of early 2021, and the vast majority are mostly worthless or certainly will be in the near future.
Thanks to the creation of DeFi and blockchain technology, another investment option known as the NFT is also making a splash. However, NFTs are not a type of cryptocurrency, and some believe this “investment” is mostly being driven by the greater fool theory — a theory that says you can make money on anything if you find a greater fool to pay more than you did.
If you haven’t heard of NFTs quite yet, then you must not listen to Gary Vee. He has been pumping NFTs on YouTube and podcasts like they’re going out of style, which could easily be true. But, what is an NFT exactly? That’s a good question, because an NFT could be practically anything provided it is virtual and cannot be touched or handled in a physical sense.
For starters, NFT stands for “non-fungible token.” Alison Mangiero, President and co-founder of TQ Tezos, describes NFTs as a “unit of data stored on a blockchain which can represent any unique digital item.”
In other words, an NFT could be a digital work of art or someone’s tweet or even a “crypto kitty” — a unique virtual cat some people trade back and forth. What makes NFTs special is the fact that it is a non-fungible, meaning it is one-of-a-kind and cannot be replaced by something else, says Mangiero.
This makes NFTs different from digital currencies like Bitcoin, says Bryan Routledge, associate professor of finance at Carnegie Mellon University’s Tepper School of Business.
Bitcoin is a digital token, and its ownership is recorded on a blockchain. However, Routledge says we think of Bitcoin as fungible since any Bitcoin is as good as any other, just like you can pay for dinner with any $20 bill. Who cares which one?
By contrast, NFTs are digital assets that are unique and priced accordingly.
“The token is meant to be for something specific,” he says.
For example, a ticket that lets you sit in seat 3B at a concert could be sold as an NFT.
What Are NFTs Actually Worth?
Like nearly any other item people collect or desire, NFTs are worth whatever someone is willing to pay for them. For example, Paris Hilton recently created a digital picture of a cat and sold it on an Ethereum-based auction platform Cryptograph for 40 Ethereum, which was worth around $17,000 at the time (now worth more than $68,000).
If you’re a huge Paris Hilton fan, then paying that much for a digital cat picture she made might seem like a steal. For the rest of the universe though, not so much. After all, what can you do with a unique cat photo other than store it on your computer and hope to find a greater fool to pay more for it later on?
Then again, some NFTs seem more useful than others (e.g. a digital concert ticket), and there are deeper reasons NFTs are becoming popular. For example, David Shack, VP of Product at LexShares, says collectors and crypto enthusiasts find joy and excitement in “participating in an early iteration of what may someday become a standard mechanism for buying, selling, and owning on the internet.”
Michael Terpin, CEO of Transform Group and Co-Founder of Aspire, says that scarcity and desirability is what makes any collectible valuable, from an antique car to a collectible stamp or coin. NFTs are uniquely designed with scarcity programmed in, allowing an artist to make limited editions or even originals with only one token available, he says.
Terpin says NFT’s can also represent a physical object, as is the case with Icecap, which tokenizes investment-grade diamonds.
Should You Invest In NFTs?
Maybe you’re wondering if you should invest in NFTs. If that’s the case, you should start by asking yourself a simple question: Why?
Crypto expert Scott Morgan, founder of Crypto Integrity Tao, says individuals have been hearing about NFTs the last two weeks because of the unimaginable sums of money being made on them.
“They appeared as if by magic, fueling debates on art, finance, and fads,” he says. However, he believes It’s good for newcomers to realize that forms of NFTs have been around for many years, and it is simply the fast money that put a spotlight on it, much like the GameStop GME +17.5% phenomena.
Further, people need to remember that NFTs are a lot like the Initial Coin Offering (ICO) craze in the fact that all ICOs sounded great but plenty turned out to be scams.
“This does not mean that almost all NFT’s are scams,” he says. “It’s just good to remember that, when so much hype delivers this amount of money, there are many incentives to convince innocent people to risk too much money.”
Investing In NFTs Anyway: What To Consider
Pierre Bourque of Blockchain Radio believes investors should do their homework before buying NFTs.
“There are a lot of available art NFTs, much of it forgettable, something that mirrors more established art forms,” he says. “But they are all available together online, which makes a lot of visual noise that takes some degree of knowledge & insight to sift through.”
Unless you have incredible knowledge of what makes digital art unique, or the market forces that might make something as fleeting as a digital painting grow in value over the years, you may be destined to fail at NFTs from an investment standpoint.
This is part of the reason Morgan says investors should be wary of NFTs, even if they’re fun to dabble in.
“Don’t risk your financial stability,” he says. “Basically, NFT’s now are worth what people are willing to pay, and not much else is a factor.”