NFTs are all the rage but should investors bother with them?

Many traditional investors might have found themselves googling the term Non-Fungible Token on the day Rishi Sunak announced he was asking the Royal Mint to create one but where does that leave advisers? Whilst NFTs have a growing fanbase which resulted in a whopping $25 billion* being spent on them by collectors and traders last year they’ve not quite cut through to mainstream investing yet. Until they do it will be important for advisers to understand the basics, but ultimately this emerging asset class is likely to require specialisation perhaps in the same way traditional ‘collecting’ already does.

The value of NFTs is still largely untested and in the end it all comes down to how much someone else is willing to pay for what you have.

In a nutshell NFTs are digital assets, but the value comes from a unique proof of ownership stored on the same blockchain that’s used to buy and sell cryptocurrencies. Some of those assets also have a tangible twin – think a work of art that can also be physically hung on a wall – but most are virtual only. One of the most famous examples is the first “tweet” put out by Twitter creator Jack Dorsey, which sold for $2.9 million and is now back on the market for over $48 million.

There is potentially money to be made, but the value of NFTs is still largely untested, and in the end it all comes down to how much someone else is willing to pay for what you have. There is no history to look back on, no precedent to determine if an investment decision looks sound. Ultimately at the moment it all comes to down to taste and risk.

Plenty of individuals and businesses are scenting opportunity, from artists like Damien Hirst to pop stars like Justin Bieber, multi-national corporations to massive sporting conglomerates. This means NFTs have become prolific in a short space of time.

Don’t just think images either, like the aforementioned tweet. NFTs can capture a moment in time, a phrase of music, footage of an incredible basketball shot, a virtual frock or pair of shoes, a skin for your avatar or a GIF. Prices vary widely – unsurprisingly the rarer the item the more people are willing to pay. Justin Bieber backed “Bad Ted”, the colourful creation of InBetweeners artist Gianpiero D’Alessandro, has harnessed the pop star’s fan network to great effect and the average ‘bear’ is now selling on NFT marketplace ‘OpenSea’ for around $3,000 – though one has fetched over $120,000. Clearly there is a risk that the NFT you acquire might not appeal to anyone else, in which case your investment might end up being rendered worthless.

Businesses jump on the NTF bandwagon

But investors nervous of or simply uninterested in the ‘volatility’ of NFTs might find they have shares in one of myriad companies already on the bandwagon. Nike recently snapped up a company that designs virtual trainers, and Coca-Cola, Gucci and Adidas have also jumped in. Paramount’s come in for quite a bit of stick from Trekkies for its journey into the NFT frontier with algorithmically generated ‘star ships’ on sale for $250 dollars each. The idea is these ships will enable you to engage with the Star Trek universe, set out on “missions” and experience, well… experiences. But that’s still some way off and at the moment they’re kind of the equivalent of a fridge magnet but stuck on your virtual wallet rather than your kitchen’s cooler.

One of the most successful forays into NFTs to date seems to be from the world of sport. The NFL has taken a logical step from trading cards to trading tokens and it also used them to give value-added benefits to fans that attended this year’s Superbowl as each received a complimentary NFT which commemorated their attendance – a sort of digital keepsake. But a charity venture by Liverpool Football Club which looked to sell over 100,000 NFTs was something of a flop and drew criticism from fans that the club was trying to exploit them.

Tip of the iceberg

Institutions like the Royal Mint getting involved might offer some kind of stability, adding an almost inherent value.

Tech companies from Meta to Apple are making moves – and it’s easy to understand why. My teenagers spend their lives in the “metaverse” – they haven’t read the novel that particular name descends from, but they live it nonetheless. They think nothing of spending all their pocket money on skins, avatars, outfits and weaponry needed to succeed in quests or blend in with teammates, though most of those transactions are, at the moment, not in the NFT sphere. For them the blending of their ‘real’ and ‘online’ lives is seamless, something Mark Zuckerberg for one is hoping to push further.

Institutions like the Royal Mint getting involved might offer some kind of stability, adding an almost inherent value. And Damien Hirst’s last offering came with a deal that after three years you could swap your NFT for the tangible piece. Whichever choice is kept, the other will be destroyed. Stunt or smart move, it does give NFT dabblers a modicum of control, much in the same way an NFT from the Royal Mint might confer a modicum of certainty. There are also a growing number of NFT funds, another indication that the financial sector as a whole is sitting up and taking notice.

There are risks – not just those already discussed, but also from an increasing amount of fraud. The relative newness of the investment means many consumers have little real knowledge of exactly what makes an NFT and so don’t take the basic steps to make sure the item they are buying is real. Plus, the burgeoning popularity of NFTs has acted as a magnet for scammers who are incredibly clever at exploiting any perceived weakness in the system. Then there’s just the basics of making sure investors know to keep their “seed phrase” – the password to their virtual wallets – safe and secure.

As this world progresses, and it seems improbable that it won’t, regulators will catch up and NFTs will probably sit alongside other higher risk assets in a portfolio. Until then investors and advisers need to stay on their toes.

*DappRadar 2021 Industry Report

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