NFTs — Understanding the hottest new digital asset

Non-fungible tokens or NFTs might be the latest investment craze, but they remain a highly speculative asset class that will take some time to settle down.

A token of esteem?

An NFT is a unique unit of data (token) stored on the blockchain — a distributed, decentralised, public ledger designed to be fraud-proof by recording transactions on the ledger of every participant in the system, which is most commonly used to record the movement of cryptocurrency.

Non-fungible essentially means something that cannot be easily exchanged, unlike a fungible asset such as a dollar bill that can be swapped for another dollar bill with exactly the same value. A bottle of wine of a specific vintage is an example of a non-fungible asset since it would have a different value to another bottle that had been stored differently, for instance.

Proof of ownership

Because each NFT token is unique, it can be used to prove that an asset is genuine and to establish who owns it. Transferring a token would therefore be the same as selling the asset.

To continue the wine analogy, an NFT could reduce the risk of fraudulent substitution by linking each individual bottle to a unique token recording its origins, history of ownership, and storage.

According to research by NonFungible Corporation, almost $6 billion of NFTs were traded in the third quarter of this year.

NFT Investments — an investment company that specialises in non-fungible tokens — says informed investments in the NFT space pose similar levels of risk to investments in any subjective asset, while Nigel Green, CEO and founder of financial advisor deVere Group says investors who dismiss NFTs as a passing fad are ‘fooling themselves’.

NFTs hit the headlines in March when a token of digital artist Beeple’s work sold for $69 million at Christie’s. Investors with slightly smaller budgets can purchase shares in the form of NFTs in digital and physical artworks.

Caveat emptor — again

NFT Investments acknowledges that this market can be hard to navigate for investors. While it is possible to purchase an asset directly, going through funds and other related companies can mitigate potential investment risks for investors by making the market more transparent.

However, potential investors should be aware that while the EU is pushing member states to agree on its proposed Markets in Crypto Assets regulations before the end of the year, as it stands the NFT market is unregulated.

Wealth manager Coutts warns that since NFTs are illiquid assets, they are even more prone to speculation and volatility than cryptocurrencies — which are at least fungible — and describes them as ‘uninvestable’.

Green also observes that while NFTs are the hottest new digital asset, investors need to exercise extreme caution and recommends waiting ‘until the dust settles’.

KEY QUESTIONS:

• Are you aware of the tax implications of selling an NFT?
• Where will the token be stored and how will you access it?
• Are you comfortable with the environmental impact of blockchain?

With ARQ understand how your crypto investments fit into your overall strategy.

Disclaimer: This is not financial advice, simply a financial opinion