NFTs have been in the news lately as the “shiny new toy” bringing something altogether new to the collectible and digital asset markets. But what are NFTs?
NFT stands for non-fungible token. Non-fungible, in economic terms, means it has properties so unique that it cannot be interchanged with something else. You can take a $20 bill and exchange it for two $10s, or four $5s, and you still have $20. But NFTs are one-of-a-kind digital assets that can be bought or sold like any other property, but they don’t physically exist in the way a painting, a home, or any other tangible asset does.
When it comes to actual ownership of an NFT, it’s easiest to think of the token as a Certificate of Ownership. In its most basic definition, people have compared an NFT to buying an autographed print : you have a one-of-a-kind piece of art, but the artist retains copyrights or trademarks of what they created , and can also receive compensation any time the NFT is sold or resold. Record of your ownership of an NFT is stored on the blockchain (a system of recording information in a way that makes it nearly impossible to change or hack).
So, is an NFT something the average person should consider? According to BMT Chief Investment Officer Jeff Mills, NFTs shouldn’t be looked at as an investment. “NFTs are more like owning a painting or an ultra-rare baseball card or a one-of-a-kind antique: it’s value is derived from the joy you get from owning it, and ultimately what others are willing to pay for it, not through the generation of cash flows via business operations like a stock. This would be more akin to owning commodities than owning equities. That said, I do believe this technology is here to stay, and it will forever change the way people interact with digital property, creating an entirely new market.”
Mills went on to say, “One of the biggest concerns right now is whether or not we are seeing a bubble when it comes to NFTs. There is clearly a lot of speculation going on right now. Look no further than Twitter founder Jack Dorsey selling an NFT of the first-ever Tweet on Twitter for $2.5 million, or a piece of digital art recently selling for $69 million. If someone is looking to make investments in NFTs, the infrastructure supporting the technology would be a better bet than actually trying to make money from speculating on various digital assets.”
A consideration for some investors may also be NFTs impact on the environment, even though they only exist in the digital realm. Most NFTs are stored on the blockchain of the Ethereum cryptocurrency, which has a significant carbon footprint. This is because cryptocurrencies such as Ether and Bitcoin rely on purpose-built computers which compete to solve complex math puzzles in order to make a transaction go through. Value increases in these cryptocurrencies inevitably leads to increased energy consumption to “mine” them.
The NFT cryptocurrency has a similar carbon footprint to New Zealand (approximately 37 megatons of CO2 annually) and consumes as much power as the nation of Chile. With more and more investors and consumers taking a harder look at the environmental impact of investments and purchases, NFTs are likely not something for the environmentally-conscious collector or investor.