What are non-fungible tokens (NFTs)?

Harvey Jones 24 May 2021

NFT's like Bitcoin seem to be all the range right now—Harvey Jones helps you to get your head around them 

The investment world has gone crazy. Hot tech stocks such as electric car maker Tesla have raced beyond their intrinsic value, Bitcoin soars and crashes, and social media influencers are treating investing as if it’s gaming.

The craziest investment by far is a new digital asset called non-fungible tokens (NFTs), which have shot from nowhere to trade for millions of dollars. You may have read about NFTs and without understanding what they are. After reading this, you may still not understand, but here goes…

Rich twit

 big copper coin on a wooden table with a computer keyboard and two dollar bills

Fungible means something that is interchangeable, or indistinguishable. Non-fungible means the opposite, something unique.

NFTs are digital assets that cannot be copied, stolen or replicated. They are created using smart contract platforms such as Ethereum. You can buy and sell them, sometimes for ridiculous sums.

Twitter founder Jack Dorsey recently sold a digital version of his first tweet for more than $2.9 million (£2 million). Incredibly, someone paid a seven-figure sum to buy a message that said: “just setting up my twttr”. You can even buy a video clip of a great moment in basketball history. An NFT of a LeBron James dunk recently sold for $208,000 on the NBA Top Shot platform.

The art of making money

Tesla charging station

Canadian singer and musician Grimes has auctioned off around $6 million worth of NFT-based digital artworks. Her most expensive piece, which sold for a thumping $389,000, was a video called Death of the Old, showing a ruined castle, floating “WarNymphs”, a cross and ethereal light, set to an original song by Grimes. Anyone can view it online for free, but only one person "owns" the NFT.

Digital artist Beeple’s digital collage Everydays: The First 5000 Days, recently sold at auction house Christie’s. Bidding ended at $69.3 million.

All this is good news for artists, but downright weird for the rest of us.

Make the right call

There are some similarities with the familiar world of collectibles and memorabilia, as well as traditional art collection.

NFTs allow buyers to establish and enforce their property rights and create a secure secondary marketplace for trading digital goods.

Like Bitcoin, early adopters can potentially make big profits. Last October, Miami-based art collector Pablo Rodriguez-Fraile spent almost $67,000 on a 10-second video artwork. In February he sold it for $6.6 million. As with any new market, speculation is rife. Buyer beware.

Approach with caution

bitcoin

NFTs are not the digital artwork or media itself, but a tokenised record of ownership recorded on the blockchain.

This means you can trade them like any collectible or valuable but working out whether it will grow in value or wind up worthless won’t be easy.

There are also questions over whether buying an NFT confers genuine legal ownership of the underlying asset. The biggest danger is that this is just another passing craze. Strange things are happen at the end of a long bull stock market run, such as this one.

Like many disruptive technologies, nobody knows how it will end. As ever, the old rule applies. Only invest money you can afford to lose.

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