NFTs have gone from digital curiosity to a crowded, creaking bandwagon

OPINION: In London, the sun is shining, my friend’s top-end restaurant is open again, albeit outside only.

The tables are bustling with diners, many of them casually dressed business types willing to spend the cash they’ve hoarded over the lockdown. Profits are up, there are lower overall costs and higher prices due to the boom in demand.

The talk at the tables is about money … new money … crypto. One of the diners just paid their £90-odd (NZ$173) lunch bill with a fraction of ethereum via their digital wallet.

Against the madness of crowds, Frederich von Schiller once wrote, the very gods themselves contend in vain.

Consider this wisdom in relation to a recent view expressed by Paris Hilton: “NFTs have literally taken over my entire mind and soul,” she gushed to website Coindesk.

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“I’m obsessed. It’s all I think about. I’ve never been so excited about something in my life because I really see this as the future. I’m just so obsessed with it that I actually have dreams about it every single night.”

Many people will have seen the term NFT in the headlines lately and been wondering whether it is a fad, or offers genuine opportunities. After all, if Paris Hilton dreams about NFT projects, NFT artists, and NFT metaverses, why can’t they?

The once-niche world of digital currencies has invaded the mainstream. Along the way, cryptocurrencies have gone from curiosity, to viable investment, to crowded and creaking bandwagon.

NFT stands for non-fungible token – a digital token that is a type of cryptocurrency, much like bitcoin or the blockchain platform ethereum in which one can also invest. But unlike bitcoin and ethereum, which I do think have massive upside, NFTs are very hard to define or value.

A fungible asset is something with units that can be readily interchanged, like money. If something is non-fungible it is unique and cannot be interchanged with something else.

In essence, an NFT is a collectible digital asset, an investment which holds value as a form of cryptocurrency. A record of ownership is stored on a shared ledger known as the blockchain.

So, why are people paying millions of dollars for tokens? What makes an NFT more special than typical cryptocurrency?

An NFT is different because the file stores extra information. It is defined by metadata that builds in a role, function, and value that are unique to it. The types of NFTs are varied, but they could be a piece of digital art or a music file – anything unique that could be stored digitally and might hold value – in the form of MP3s, videos and GIFs.

Essentially, they are like any other physical collector’s item, but instead of receiving a sculpture or signed first-edition, you might get a jpeg file.

Just recently, NFT Investments, a UK incorporated company specialising in investing in NFTs, was the first investment company focused exclusively on investing in NFTs to list in a major stockmarket worldwide.

As a sign of how intense the appeal of NFTs has become, NFT Investments raised £35 million ahead of its initial public offering (IPO), more than three times the planned amount and a record-breaking sum for a company listing on the Aquis Stock Exchange.

I was recently offered an investment opportunity in the newly listed NFT Investments, which was very tempting, as the last company the promoters took public in London, Argo Blockchain, gave investors a $1 million return for $100,000 invested over the last 12 months.

If you did want exposure to the space, perhaps via a public company that has a well-thought-out and diversified approach to NFTs, this may be the best bet.

A lot of the current interest is around using the tech to sell digital art. Traditional works of art such as paintings are valuable because they are one of a kind. But digital files can be easily and endlessly duplicated. The distinction with NFTs, is that one-off assets in the digital realm can be traded like any other piece of property, even though they have no tangible form of their own. An artwork can be tokenised to create a digital certificate of ownership that can be bought and sold.

For the buyer or collector, NFTs can work like any other speculative asset, where you buy it and hope that the value of it goes up one day, so you can sell it for a profit. An album by Kings of Leon, and a tattoo on Croatian tennis player Oleksandra Oliynykova’s arm can be bought and sold as NFTs.

Some high-profile examples show the range of NFTs, and the extent to which people are making boat-loads of cash out of cultural absurdities. In February, an animated gif of Nyan Cat – a ten-year-old meme of a flying pop-tart cat – sold for more than US$500,000 (about NZ$693,000). Musician Grimes sold some of her digital art for more than US$6m. Staggeringly, Christie’s sold an NFT by digital artist Beeple for US$69m.

Overall, the crypto market is now more than a US$2 trillion asset class and much more widely accepted and traded by major institutions globally. Without doubt fortunes are being made and will continue to be so. On the other hand, a lot of the smaller ‘alt coins and tokens’ will undoubtedly fail.

Bitcoin and ethereum are now well-established and here to stay, and I could easily see the values treble if not more over the next couple of years. However, probably the best way to own them is via the miners: the public companies that control tens of thousands of dedicated computers that produce bitcoin, ethereum and many other cryptocurrencies.

These companies, in one example, produced bitcoin for less than US$10,000, mostly to cover the electricity cost, which averages around 70 per cent of the cost of each coin, the balance being machine amortisation and hosting. And with BTC at US$50,000 and the cost of production US$10,000 … well, you do the math.

But who knows; Paris may just be right, I see even the real Slim Shady, Eminem will be imminently launching his first NFT.

To quote the rapper, let’s hope that he, and the wider masses, don’t lose themselves in the moment.

Eric Watson is a New Zealand businessman who previously owned the New Zealand Warriors and was a shareholder in Hanover Group.