In economics, a fungible asset is something with units that can be readily interchanged – like dollars, for example. However, if something is non-fungible, it is not interchangeable, meaning it has unique properties so it cannot be switched with something else.
You’ve probably heard by now about NFTs. It’s all the rage with arts, highlights, and videos selling for an astonishing value. The artist Mike Winkelmann, commonly known as Beeple, sold an NFT at a record-breaking $69.3 million earlier this year. (The third-highest price sold by a living artist.) NBA Top Shot has generated over $230 million in sales. And dozens of other celebrities capitalized on the mania to sell their digital assets, as well.
Why in the world would people spend thousands, and even millions of dollars, on fully digital assets? After all, they are just JPEGs or GIFs, right? Let’s get into the world of NFTs to understand the mania.
What Is An NFT?
NFT stands for Non-Fungible Token, which is a unique and non-replaceable digital item. Bitcoin, for example, is fungible. It means that you can exchange your Bitcoin with someone else’s Bitcoin, and it would make no difference because all Bitcoins hold an equal value. However, physical art masterpieces like the Mona Lisa are non-fungible because there’s no other original Mona Lisa.
An NFT is verified by blockchain technology — where a network of computers records all transactions on a digital ledger and gives buyers proof of authenticity and ownership. In general, the blockchain eliminates the risk of damage, theft, and fraud.
Why Would Anybody Buy NFTs?
Now, many people can’t wrap their heads around the idea of buying digital art. Why would you buy a picture when it could be copied by everyone else? Naturally, they are skeptical of the NFT craze.
Look at this in a different way. Paper currency has been indispensable to human civilization since the first coin was created 5,000 years ago by ancient Mesopotamians. When the internet slowly went mainstream, people were skeptical of putting their money in the “digital space.” But now, we routinely use credit cards and digital wallets (such as Apple Pay) to store money and make payments.
Some experts believe that NFTs will bring the same transformation to the arts. Let’s take trading cards as an example. Pokemon trading cards were popular back in the old days. However, holding physical cards has become a nuisance — like carrying around cash. Why would you want to carry cards when you could simply open a verifiable app and show the whole collection of Pokemon cards on your phone?
In fact, people believe that NFTs can even make passports obsolete. Why do we still carry around passports when we could have blockchains (issued by the government) to securely verify our identification — just like we can make payments straight from Apple Pay?
Is It A Déjà Vu All Over Again With The Internet?
In fact, this looks like a repeat of the 1990s when people were skeptical of the internet. This is hard to believe, but publishers were calling the internet a “hype.” Here’s an article published by Newsweek in 1995:
The article said: “The truth is no online database will replace your daily newspaper, no CD-ROM can take the place of a competent teacher and no computer network will change the way the government works.”
And here are other skeptical quotes from technology magazines that echo the criticisms about the NFTs nowadays:
Robert Metcalfe, in InfoWorld, 1995: “I predict the Internet will soon go spectacularly supernova and in 1996 catastrophically collapse.”
Waring Partridge, in Wired, 1995: “Most things that succeed don’t require retraining 250 million people.”
Even Wired doubted the internet. That’s why Shark Tank investor Mark Cuban compared blockchain technology to the internet: “It’s like the early days of the internet” when “a lot of people thought we were crazy.”
Should You Buy NFTs?
There are various marketplaces where you can browse NFTs and buy them for your collection. Go ahead and stretch your imagination by browsing through NFT marketplaces for a glimpse into the future.
Buying collectible NFTs is like buying physical art. Its value can range from a small sum to millions of dollars — with Beeple’s art selling for $69 million, while thousands of NFTs selling for $10 or less. The truth is, no one knows which NFT art is valuable in the long term. The market is still finding its footing, so be careful in buying an NFT. The best way to do this is to buy artwork that you feel good about. You should love the work itself, and you would want to share it with your friends. However, buying NFTs just to resell them in the future is highly speculative. Be aware of your risks.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
