If you have heard of buzzwords like “WEB3” and “Metaverse” you may have heard of NFTs (Non-Fungible Tokens). NFTs have become a massive cultural phenomenon ever since its hype in 2021. These unique digital tokens piqued global interests as the NFT market nearly tripled in 2020 to more than $250 million year-on-year1. Celebrities and Artists alike have jumped on this bandwagon with their cartoon ape digital profiles and pixel art avatars.
However recently, there has been a massive downturn of NFT trading volumes by 97% ever since its peak in January 2022. As of last month, it has sunk to $466 million from$17 billion in the beginning of the year2. From the high speed and degree of the price change in the past year (in either direction), the NFT market continues to be highly volatile and speculative.
Figure 1: Volume Drop – NFT monthly volume has dropped 97% from 2022 highs
Source: Bloomberg, 28th Sep 2022
Please note that this article is purely for educational purposes and it will delve into the basics of NFTs including the risks of investing in NFTs.
SO CAN YOU PLEASE EXPLAIN WHAT’S AN NFT?
NFTs stand for Non-Fungible Tokens. The word “Non-fungible” means unique, irreplaceable and something when exchanged, will not hold the same value. The word “Token” is a digital certificate stored on a secure and distributed database called a blockchain. Once information is stored on the blockchain, it cannot be reversed and will be permanently recorded. Due to its decentralized nature, it can function without the assistance of a trusted third party3.
Figure 2: Non-Fungible vs Fungible Asset
Source: IntoNFT, 22 Jul 2022
In simpler terms, owning a NFT is like owning a one-of-a-kind art piece or a unique collectible which has no tangible forms of its own.
WHAT MAKES AN NFT AN NFT?
1.Select and create any digital art form – digital painting, photos, music, video, even a tweet or absolutely anything under the virtual sky. I can even make this article about NFTs into an NFT!
2.Find an NFT marketplace – These are blockchain platforms on which an NFT is created, bought, sold and traded. OpenSea, Superare and Nifty Gateway are the top 3 NFT marketplaces4
3.Let the Minting begin – This process ensures that your digital item is tamper-resistant, protected, and difficult to modify. When minting the NFT, there is a gas fee that needs to be paid which is used to compensate blockchain miners for the computing power they have to use to verify blockchain transactions5. Through the minting process the NFT now represents the digital item on the blockchain, verifying proof of ownership in an immutable record6.
Figure 3: Steps for Minting an NFT
4.Drop your Freshly Minted NFT – The NFT can now be bought, traded, and sold through NFT marketplaces and auctions.
WHY WOULD I PAY FOR AN NFT IF I CAN JUST RIGHT-CLICK, COPY AND PASTE?
Okay Karen, nothing is stopping us from having this “right-clicker mentality”7. Elon Musk took a dig at NFTs saying, “ I dunno…seems kinda fungible” along with changing his profile picture to a slew of screenshots of Bored Ape NFTs. Some on Twitter have even gone so far as to call this “property theft.”
Source: Twitter, 5 Nov 2021
However, by having the power of blockchain on the collector’s side, it is giving you something special that cannot be copied – Ownership. So, no matter how many screenshots you have of the Bored Ape NFT you have on your desktop, you still will not own it.
What does this “ownership” really entail? Only one individual can own the NFT at a time. While NFTs provide the buyer an immutable proof of ownership, it does not necessarily include copyright, intellectual property rights or any commercial rights6. In short, when you buy an NFT, you will own the representation of the digital item but not the item itself.
Figure 5: The “Holy Trinity” of NFT Ownership.
Source: Cointelegraph, 19 Aug 2022
This aspect or quality of the NFT is transformational and will propel us into the next internet age which is Web3. Web3 is an open-source and transparent internet free of hacks and leaks where data ownership and privacy will prevail8. It will act as a building block to decentralize the internet and give the power to the creators.
POPULAR TYPES OF NFTs
With the help of NFTs, creators can now eternalize any type of intellectual property on the blockchain. NFTs are ever expanding with the most recent data showing that 3,200 NFTs are sold per day9.
Figure 6: The types of NFTs and examples
ARE NFTs SAFE?
There are many rough edges that need to be straightened out in this highly volatile, speculative market. Amidst the secure blockchain technology that prevents fraud, the NFT space has been vulnerable to scams, especially to new and unsuspecting collectors. Some of the frequent scams that occur in the space are Rug Pulls, Wash Trading and Phishing Scams5. The recovery of these assets become difficult due to the decentralized and anonymous nature of the blockchain.
Moreover, the NFT space does not have any regulatory authority to protect collectors or control creators from fraudulent behaviour. In the end, as an investment opportunity, NFTs are a very speculative asset with high risks attached to them – they may not be suitable for all investors; especially for those with a lower risk appetite. The Monetary Authority of Singapore has reminded investors that investments in digital tokens, including NFTs, are not suitable for retail investors. For now, MAS will not interfere in this highly speculative industry but will continue monitoring this space11.
NFTs are still at a very early stage, in terms of the potential for innovation and opportunity. Although, the overall rate of adoption for NFTs has reached its peaked in January and it has significantly slowed down since, it shows the power of digital creation combined with blockchain technology. This technology’s future applications could include representing ownership of physical items in the real world, such as real estate12. Nevertheless, as an investor there is a high chance that you may fall victim to one of the various untraceable scams due to the high risk and speculative nature of NFTs.
This advertisement has not been reviewed by the Monetary Authority of Singapore. It is for information only and is not a recommendation, offer or solicitation. Information is subject to change without notice and is not to be relied on as advice. Investments are not guaranteed and are subject to investment risks. For more information, please visit www.lionglobalinvestors.com.