Updated: Dec 2, 2021
The Good, The Bad, and The Fungible
Disclaimer: Please note that the opinions expressed by the author in this article do not constitute financial advice and are solely for educational purposes only. When buying shares, the value of your investment may go down as well as up and you may get back less than you invest.
Taking the world by storm, NFTs are the hot new trend in the world of investment. Day by day, record-breaking sales and profits are being made in the NFT world, for example, the first tweet on twitter was sold as an NFT for over $2.9 Million. Further statistics indicate that the NFT market has grown almost tenfold in the past two years and that NFT sales have amounted to the equivalent of $2.4 billion in the first six months of 2021.
Investors and consumers will be looking to answer a simple question, what are NFTs?
Throughout this article, I’ll catch you up on what NFTs are, their benefits, costs, and my personal outlook on the future of NFTs as an investment tool.
So, NFTs are an abbreviation for the term ‘Non-Fungible Tokens’. The term ‘fungible’ is used to describe a good or commodity that is identical to other goods and can be mutually substituted. A common example of a fungible asset is money, money can be always mutually substituted; a ten-pound bill can always be repaid by another ten-pound bill. The 'non-fungible' part of NFTs refers to their completely unique nature on the market; each NFT is essentially irreplaceable and one of a kind. The 'token' part of NFTs represents the ability for sellers to convert their physical and virtual assets into digital tokens that can be sold or traded.
The NFT market has a very wide scope. In theory, the only characteristic of a NFT is that it is a unique asset that requires ownership. Examples of NFTs being sold include digital artworks, in-game items, a digital collectible or even a domain name. Once an NFT is purchased, there is a built-in authentication system which shows that the buyer has proof of ownership, which is one of the key draws of NFTs. The act of buying and selling NFTs can have different goals depending on who buys it. For individuals with significant disposable income, it can be likened to collecting artwork. for investors, it can be used as an opportunity for financial through flipping these NFTs when their value appreciates. NFT works like any other speculative asset for investors, where you buy it in hopes that its value will appreciate at some point so that it can be sold for a profit.
Many major companies from a wide array of industries are beginning to move into selling NFTs, examples include Marvel, Taco Bell and Nike who all come from very different areas, but all see the potential within the NFT market- which is a sign that NFTs will only continue to grow.
Going into the positive externalities of NFTs, it is argued that NFTs empower individuals who create content because they can bypass the regular systems of third-party art dealers (who take profit cuts for themselves). Thus, content creators can monetize their work in a more efficient manner. Furthermore, NFTs (similarly to cryptocurrency) give financial freedom to lower income individuals, giving them further opportunities to make money through investments within the NFT market in comparison to the stock market: which is seen as inaccessible to low-income earners, as they must provide a certain level of capital before entering the market.
Now we will discuss the negative externalities associated with NFTs. NFTs have fallen into the same problems that physical art auctions have: they have become an unregulated area of the market that can be used to launder money and also facilitate tax evasion by the wealthy. To elaborate, buying NFTs using illicit funds is an easy way to move money whilst claiming that funds were used for legitimate purchases. One can use their dirty money to purchase NFTs, then resell it for an equal price or more, then bank in the money that has been earned- turning the dirty money into clean money that cannot be traced. As for the matter of tax evasion, the wealthy can put large amounts of their income into NFTs to avoid having to be taxed for their regular income. However, this “loophole” will most definitely change in the future as the IRS are looking into levying a capital gains tax upon the purchase of NFTs like what has been done with cryptocurrency, which will limit the profitability of NFTs as a tool for financial gain.
Further issues with NFTs are the associated environmental problems with NFTs. NFTs consume a significant amount of energy on the block-chain as the process of keeping financial transactions secure and creating ‘proof’ of ownership is an energy hungry process. Thus, it has contributed to a sizeable increase in carbon emissions. Due to this negative externality associated with NFTs, NFTs in the future might be ‘capped’ by government regulation to reduce emissions, which is another sign that investors should not be “putting all their eggs in one basket” with NFTs.
So, to conclude, what’s my verdict on NFTs? Obviously, it’s difficult to tell the trajectory of NFTs as an investment tool as they are a speculative asset that has no inherent value, similar to other block-chain technology such as Bitcoin.
The value of NFTs can heavily range as what determines its value is demand, which can be very fickle and dependent on consumer preferences. Thus, it is a very volatile market. Additionally, it could also be subject to further regulation by governments as it is currently left unregulated. If governments shut down the trading of NFTs, those who have fully committed to investments within the NFT market will lose heavily. Simply put, it would be best to buy NFTs only with money that you are willing to potentially lose; the profits can be significant (as evidenced by the explosive growth of the market) but the risks associated are also numerous.
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