What You Need to Know About NFTs

What You Need to Know About NFTs

If you’ve paid attention to current events over the past couple of years, you've probably heard of NFTs. If you're like most people, however, you probably have only a vague idea of what they are. For starters, NFT stands for Non-Fungible Token. In English, that means an NFT is simply a unique unit of data. An NFT can represent literally anything, from a digital image to a video clip to a patch of skin on someone's arm. You read that correctly, a tennis player has sold a region of their skin as an NFT. To understand what that means, it's important to know what an NFT is and what it isn't.

What is confusing to many people but is critical to note is that owning an NFT does not confer any rights to whatever is represented by the NFT. Owning an NFT of an image does not prevent anyone else from copying or using the image, and owning an NFT of someone's skin does not provide physical ownership of that skin or rights to do anything with that skin. The owner of the skin NFT cannot force the tennis player to get a tattoo or do anything else with their body.

If not ownership of the asset itself, what does an NFT provide? In essence, an NFT is simply an entry in a ledger. This entry is associated with something specific (again: an image, a sports highlight, an audio clip, etc.), but all the owner truly has rights to is the ledger entry itself. But what's the point? It is true that, like cryptocurrency, Blockchain technology is used to store and authenticate the ledgers of NFTs. In simple terms, this means that the data used to verify who owns which NFT is distributed among a series of computers and users in the Blockchain community. In theory, this makes the process more secure since no one person or piece of hardware controls the data. While an interesting new form of data storage and authentication, the Blockchain itself doesn't really add value to the actual NFT.

So then, where is the value in an NFT? That's the tricky question. What many don't want to admit is that there is no inherent value in an NFT; they represent speculation in its purest form. The main reason to own an NFT is the hope that someday, someone might pay you more for it than it originally cost you. Think Beanie Babies without the physical toys themselves, shares in company stock without the opportunity to earn dividends or vote in shareholder meetings, cryptocurrency that can't be used to buy anything, or those services that let you buy a star or part of the moon. Each NFT could simply be given a number (imagine owning NFT 378652 instead of owning an NFT of the last play in the 2016 World Series), but tying each NFT to something memorable provides a recognizable identifier and some perhaps misplaced optimism that someone might want to buy your NFT. Why would anyone buy your NFT? Simply because they share the same optimism that eventually they themselves can sell it for even more.

To be sure, there are other reasons someone might be interested in NFTs. One of the most disturbing is that buyers may not truly understand what they're getting into. So often, new technology that seems impenetrable (e.g., Bitcoin) can absolutely explode in value, leaving people who knew about it but never engaged wishing they'd gotten in on the ground floor. So often, tech-adjacent people see the hype surrounding a new concept, read a few encouraging comments by some ostensibly intelligent CEO or rocket manufacturer, and assume those people are both correct and have the public's best interest at heart. Unfortunately, what often happens is that people who spent more than they can afford to lose are left holding the bag. There is also the possibility that NFTs will be used for more nefarious reasons by the financial elite, such as tax dodging and fraud schemes common to the fine art world.

While it is true that many digital artists benefit from the ability to sell their work as NFTs, it seems naïve to believe that some of these artists aren’t taking advantage of their buyers. On the bright side, NFTs generally have a high barrier of entry, with prices in the tens of thousands or even millions of dollars. In general, this prevents many people from gambling away too much money. However, there are exchanges like the NBA's Top Shot system which allow users to buy NFTs for as little as a few dollars.

For someone with millions of dollars looking to invest, an NFT could represent a new method to diversify holdings, albeit a method with significant risk. It seems likely that public enthusiasm over NFTs will fade over time (prices and transactions already plummeted off a cliff in the summer of 2021), so holding NFTs as an investment for the long term is a dubious proposition at best. In short, unless you have plenty of money to burn, NFTs may not be the most solid investment choice for the average person. It may be best to stick with the more traditional investments. If you’re looking for direction, talk to our team at Eaton Community Bank - they can help steer you towards safer investments and away from the more risky and trendy ones!