I’ve heard about NFTs. You’ve heard about NFTs. Maybe even your older family members are asking about them, too. So what’s the deal with NFTs?
An NFT (or “non-fungible token”) is defined as a unique (“non-fungible”) unit of data (“token”) stored on a blockchain (kinda like a database or digital list, generally decentralized, where you can only add info and everyone can see all transactions that have occurred). In practice, the data is usually associated to something, whether that’s a nyan cat, a bored ape, or a collage from Beeple that sold for a staggering $69 million (nice) in 2021.
Depending on your view of NFTs, they are either a clever way to capitalize on humans’ desire to collect (while avoiding physical clutter that often comes with collecting), a store of value in a low-yield environment, a new way to support artists and creatives in our increasingly digital era, or yet another new form of money laundering. Let’s take a closer look at these categories:
NFTs as “the next big thing” for collectibles
Whether it’s Marie Kondo minimalism or the lack of affordable housing, younger generations may not be buying big physical items in the same ways that the past couple generations have consumed, but the same can’t be said for their virtual presence. Tons of photos saved to smartphones and the cloud, decades of Microsoft Word docs cluttering hard drives, curated social media feeds capturing life’s highlights: experiences are collectible currency.
If NFTs have value and staying power as a new way for people to engage in collectibles, then startups like Autograph.io are in a good place (disclaimer: I know one of the cofounders of Autograph). By focusing on a sports star-studded lineup, these NFTs are essentially a new way to collect and show off memorabilia from celebrities. At the very least, I got to mint an NFT of my name when I signed up:
NFTs as an investment
NFTs have emerged in an interesting financial scene. Some investors see NFTs as a way to purchase something “rare”, buying in before a proverbial gold rush on virtual real estate. Other investors, wary of traditional investments thanks to the Great Recession, are opting to pour money into more-unusual options (including NFTs).
Whether or not NFTs are a good investment remains to be seen, but they certainly are being used as investments by some. Rarity doesn’t necessarily equal value, and value can change (a can of sardines is worth more than a pile of gold to a hungry man trapped in Fort Knox, as they say), but if something is recognized as rare by a lot of people who desire owning it, then we end up ascribing value to it. At the very least, disaster girl is $500,000 richer from her NFT.
NFTs as art
Why do people purchase a Monet, or a Banksy, or a Nara? Coveted art pieces can certainly be considered an investment, but people appreciate them (and the wide variety of far-less-expensive artwork) for aesthetics as well.
Companies like OpenSea are creating large NFT marketplaces where people can buy and sell what amounts to digital art with a bit more ownership attached to it. As display options become more available (and if people care about ownership — see also “right-click” meme), hanging your genuine original NFTs in a “virtual gallery” may carry the same cachet as a Monet in the living room.
NFTs as money laundering
It’s worth noting that everything listed above can be used at least for gray-area tax evasion. Some NFT transactions might also be straight-up money laundering and tax fraud.
Consider an owner of several Bored Ape NFT who reported selling one for $3,000 instead of $300,000. Current evidence points to this being an honest mistake (and big financial loss), so I’m not claiming there’s fraud here, but others have pointed out that this type of transaction could be abused for future money laundering schemes. If you set up an anonymous account, “accidentally” sell an NFT at a loss, and immediately repurchase the NFT using funds from ill-gotten gains, you’ve secured a tax advantage for your personal taxes (capital losses), laundered some money to your main account, and shielded an NFT in an anonymous entity you control.
It’s too early to say what will become of NFTs. Perhaps, like the Dutch tulips and beanie babies of yesteryear, we may find ourselves laden with digital reminders of the dangers of market bubbles. Maybe a select few from the “early era” will hold significant value for investors, and homes of the future will be decorated with AR projections of memes, virtually signed faces of athletes, and a friend’s NFT that matched the (real) curtains on the wall. In the interim, if you’re exploring the NFT space, all I can say is have fun, and don’t spend more than you can afford to lose.
Unless you’re offering to buy an NFT of this article. If so, please spend away.