Are NFTs the Future for Collectibles?
By Elizabeth Cody, CFP®
January 27, 2022
Although many consider the first NFT (non-fungible token) to have been created by digital artist Kevin McCoy in May 2014, the concept did not gain much public awareness until the launch of Cryptokitties, a blockchain-based virtual game in which players adopt, trade, and raise virtual cats in 2017. And it really piqued public curiosity during 2021 after Twitter co-founder Jack Dorsey sold his first tweet for more than $2.9 million and a digital work by Mike Winkelmann, also known as Beeple, sold for $69.3 million.
So, what exactly is an NFT and what does non-fungible even mean? It is a unit of data that transforms works of art, tweets, photos, videos, and other collectibles into unique and verifiable assets that can be sold on digital markets, providing the purchaser with exclusive ownership rights. So rather than purchasing a physical asset such as a painting that can be showcased in your home, you purchase a digital file. As for the term non-fungible, think of currencies as fungible. One dollar is always equally interchangeable for another dollar, and one Bitcoin is always equally exchangeable for another Bitcoin. Because an NFT is logged and authenticated on a cryptocurrency blockchain, each is unique. It is similar to owning a Picasso painting which could not be traded for another of his works.
Given the vast amount of money flowing into this relatively new asset class, it begs the question: Why all the hype? One reason is that it broadens participation in art ownership and reaches new audiences. Most of us cannot afford to have a de Kooning grace our living room given the need for not only wall space but the associated installation, insurance, storage, and shipping costs. The NFT artist can connect with potential purchasers free of partnership with middlemen such as galleries, allowing them to retain more wallet share. These artists can also participate in programs that allow them to collect royalties associated with each subsequent sale. Additionally, the provenance, which is key to valuation in the art world, is documented on the blockchain making each transaction verifiable and traceable.
It is notable that, not only are auction houses such as Christie’s, which handled the Winkelmann sale, already participating in this space, we are now witnessing well-known brands such as Nike, Warner Brothers, and Louis Vuitton using NFTs as a means to gain a foothold in the virtual space and find creative ways to connect with customers. As an example, Warner Brothers created NFTs based on the new Matrix movie, and Nike has filed trademark applications to sell NFTs of its sneakers.
If you decide you would like to purchase an NFT, you will first need to know which marketplace to buy from. You also need to know which cryptocurrency is associated with the NFT you are interested in, so be sure to do your research into the appropriate platform well before you intend to make a purchase.
While we do not yet know if NFTs will suffer an eventual fate similar to that of the Beanie Baby, if you are an enterprising collector, you may wish to participate in a creative concept with potential staying power. As with any emerging asset class, it is always prudent to take a small position that will not negatively impact your financial balance sheet should your NFT lose value. Unlike the stock market where prices are driven by fundamental, technical, and economic indicators, NFTs are essentially based on demand and what someone is willing to pay for them. Therefore, it is critical to do the research to really understand the space, including tax implications and associated transaction fees.
Sources: CNN, Forbes, NY Times, Bloomberg, NPR, Harvard Business Review
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