What is an NFT and why would you invest in one?

·4-min read
 (Unsplash)
(Unsplash)

NFTs are back in the news this week, as British rock band Muse announced their new album, Will Of The People, will be released as an NFT - and for the first time the format is eligible for the official charts. The band are releasing 1,000 NFT copies, all digitally signed by Matt Bellamy and co, and retailing for £20. That’s a relative snip, compared to the many thousands that investors are ploughing into this buzz new digital format. But the average person on the street has only just got their heads around what exactly NFTs are - and remains bamboozled as to why on earth you would bother forking out for one.

So let’s go back to basics. Let’s start by breaking down the core components of an NFT.

NFT stands for non-fungible tokens. They are built on the blockchain and represent unique ownership of specific assets. They provide what is known as digitally linked ownership and can be used to create digital ownership for a variety of asset classes. These include digital art and even physical assets such as real estate.

These innovative new vehicles of investment tap into the FOMO mindset of Gen Z and millennials who are looking for substantial quick returns, albeit sometimes at the expense of potentially devastating loss.

Different types of NFTs

Art NFTs have demonstrated to be the most popular NFT sector. People buy NFTs because they acknowledge digitally linked methods of ownership as being the future of art ownership. Despite prevalent and continuous hacking, investors also still recognise the security of this digital style of ownership. True crypto investors are fond of NFTs due to their decentralised style of ownership; a characteristic deemed imperative by loyal fans.

NFTs also offer fractional ownership of digital and real assets. For example, NFTs enable investors to own part of a property for those who cannot afford to buy the whole asset, and perhaps more importantly for those who don’t want 100 per cent exposure to real estate and rising interest rates.

But why would you buy a real-estate NFT you might ask?

Owning real-estate digitally removes several timely and expensive intermediaries and brokers. Also, real estate NFTs transfer the legal deeds of the property from the land registry to the blockchain, so if there was a government dispute, say in a warzone, then the ownership of your house cannot be forcefully acquired by a dictatorial leader or government.

NFTs are truly differentiating investment asset classes and demonstrate a chasm between younger people and more cynical - yet arguably more seasoned - older generations. They are a product of a new decentralised style of investing — these protocols offer innovative, yet sometimes risky, ways to invest and, in the case of art and Muse’s new offering, collect.

Crypto (of which NFTs are a part), was and is still widely considered to be the Web3.0 investment bull market, citing similar capital appreciation that the baby boomer generation witnessed in financial markets in the 1980s and 1990s.

Between 1982 and 2000 the SP500 US stock market index logged a 1,200 per cent return — a statistic dwarfed by Bitcoin’s five-year return of 4,686 per cent. However, even Bitcoin’s returns seem slight compared to the art NFT ‘The Merge’, which was sold for approximately $91,000,000 in 2021. The Merge was sold to tens of thousands of investors, valuing each NFT at the beginning of the sale at $575. In early trading the value of the NFT was reported to have increased by $25 every six hours or, in percentage terms, 17.4 per cent per day. This is a unique example of the opportunities that NFTs can provide. However, NFTs are naturally correlated to the crypto market and recently it has been claimed that the NFT market has decreased in value by more than 50 per cent (in line with tech stocks and of course the crypto market as a whole).

So what does the future hold for NFTs?

Opinion is divided when it comes to NFTs, their utility, and their role as an investment vehicle. However, regulation could pave the way for a dramatic upturn as the Law Commission of England and Wales has published proposals to reform the law on digital assets, in favour of acknowledging the unique features of NFTs. It will be an interesting space to watch in the coming months, for ardent investors and veteran cynics alike.

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