The Rapid Rise of Non-Fungible Tokens: a Bubble About to Burst?

Non-fungible tokens or NFTs for short, are the latest investment megatrend. Somewhat more creative than others, their value has gone beyond any conventional norm in a short space of time. NFTs are a digital answer for collecting items which we attach value to. With life increasingly being lived online, every investor has to be prepared for new asset classes driven by thematic investing. The only route for investors seeking capital preservation is to explore the possibility and then decide whether it works for them. 

Takeaways

• What are non-fungible tokens

• Find out about the extraordinary amounts of money spent on them

• How to cash in and avoid losing your money

What are non-fungible tokens?

An NFT is a unit of data stored on a digital ledger. An example of a ledger would be a blockchain. In effect an NFT is a digital certificate of authenticity. This NFT can be anything such as art, a sports play, a song or anything which can be stored digitally. The ownership of an NFT is  tracked because it is stored on a blockchain. NFTs are in effect blockchain asset tokens. Because it is non-fungible, it cannot be interchanged with anything else. As such it creates something which is unique. When applied to a digital item which is desired by many, (a video clip of Lebron James slam dunking for example), it can cause the value of a specific NFT to skyrocket.

How do non-fungible tokens work?

As NFTs are digital tokens, they only exist virtually. In particular, the ERC-20 token, which is found on the Etherium blockchain is seen as being the best at supporting NFTs.

This is because it has a system for the creation and storage of NFTs. ERC-20 is also underpinned by a common list of rules. Indeed it is Etherium which created the term Non-fungible token. This confidence makes transferring NFTs to a buyer easier.

Are NFTs a fad or here to stay?

This is difficult to say due to the two different types of investors which are prevalent today. The historical portfolio managers who look to buy and hold investments are likely to see NFTs are nothing more than a fad. The more recent investor, who is typically younger and has seemingly no fear when it comes to risk, do seem to believe in them.

In particular the buy the dip mentality means this type of investor sees volatility as an opportunity to buy more. This creates momentum trading and may mean the risk is not necessarily whether NFTs are here to stay, but are simply way over-priced and will collapse in value when a genuine sell off occurs.

NFTs are probably here to stay but their value will be volatile.

With the wold increasingly digitized and the constant lock downs forcing laggards into adoption of technology (how many of you have had to explain to your parents how to use Zoom?!), it makes sense for some form of digital art to exist and to be bought and sold.

What are famous non-fungible tokens?

The surge in interest in NFTs has been driven by some high profile sales. The large amounts of money spent are impressive. Arguably the most famous is Jack Dorsey's first tweet, which was sold for $2.9m in March 2021! He put his first tweet up for sale on the 5th March as an NFT, on the Ethereum Blockchain.  Interestingly this entire sale was handled digitally as an auction on a platform called Valuables. Anyone wishing to buy a NFTs should also check out the following online auctions: OpenSea, Rarible and Mintable.

Christie's are also now selling NFTs. They recently sold Beeple's Everydays: The First 5000 Days for a value of $69.3 million. The novelty and value of the sale attracted considerable attention, especially as it was held at a reputable auction house.

Risks to be aware of

In a world of contradictions, we publicly care more about our planet but then support innovations who use a tremendous amount of electricity. NFTs are no different. If you have an environmental concern, look away now!

Another risk to highlight, is that your NFTs are stored on a particular blockchain run and owned by a particular company. If something happens to that company or blockchain, you may lose your NFT.

Finally in 1999, Digicash, an early form of electronic money became so sought after as the next big idea, that companies rushed to develop their own. This played into the dotcom bubble, where there was an ambition to get rich quickly, sending asset prices across the board to unsustainable valuations...

Conclusion

There is considerable downside risk in non-fungible tokens, in particular the explosive seemingly overnight valuations attached to some of them. As such it is advisable to invest with a margin of safety. This is reinforced as for many of us this is a new asset class we are yet to fully understand.

One way of investing in this space whilst taking less risk would be through a Blockhain ETFs. Blockchain provides the important technology underpinning new digital offerings such as NFTs and cryptocurrency trading. Sensible investing in high risk areas requires creativity to capture the upside, whilst limiting the risk of losing everything!