Investors, let’s take a step back from NFT mania

You may have heard of the ground-breaking sale of Beeple’s digital artwork Everydays: The First 5000 Days, by auction house Christie’s.

What made it so historic wasn’t just the price at which the artwork sold — a whopping US$69 million — but that it was sold as a non-fungible token or ‘NFT’.

WHAT ARE NFTs?

NFTs are blockchain-based digital assets. Unlike cryptocurrencies, each NFT is one of a kind and therefore not interchangeable; hence the term “non-fungible”. What makes them interesting is how they can be used to prove the authenticity of an asset digitally. 

By using blockchain technology, NFTs are recorded on a database where information cannot be changed. This makes them ingenious instruments to guarantee the legitimacy of documents such as certificates of ownership, and digital assets such as contemporary artwork. 

This enables ownership of the intangible. Jack Dorsey, the founder of Twitter, famously auctioned his very first tweet, published in 2006, as an NFT for US$2.9 million. Although the tweet can be seen and replicated online, making its value disputable, the NFT now gives undisputable ownership of the tweet to the auction winner – Bridge Oracle CEO Sina Estavi.

ISSUES TO THINK ABOUT FOR INVESTORS

These digital tokens undeniably represent a new facet of the crypto world. But, as with other headline-grabbing digital phenomena such as bitcoin, there are several elements to consider before jumping on the bandwagon. 

First, like cryptocurrencies, NFTs remain unregulated. Legislative proposals such as the EU’s Markets in Cryptoassets Regulation may provide some regulatory framework, but these have not been passed yet. Existing anti-money-laundering laws in the EU and UK could potentially apply to NFTs, particularly for art sales. Still, they don’t explicitly mention such digital tokens, leaving a high degree of regulatory uncertainty and risk.

Second, since NFTs do not have access to the valuations of large markets, they are even more prone to speculation and volatility than cryptocurrencies. 

Recent data from digital asset tracker, NonFungible.com and analysis by crypto news site Protos, show that, after May 3, 2021, when US$102 million worth of NFTs were sold in a single day, the NFT-market virtually dried up – dropping to US$19.4 million of sales in the week to June 2. They then picked up again to a massive US$1.9 billion in the first 25 days of August. 

While cryptocurrencies are infamous for double-digit rises and falls in their daily value, they have the advantage of unit parity: a bitcoin always has the same value as someone else’s bitcoin. That is not the case for NFTs, which are, in theory, limitless – and bottomless – in value.

Additionally, like many cryptocurrencies that struggle to be sold into state currencies, these assets are not liquid: an NFT owner’s ability to sell it for cash is highly dependent on finding another collector willing to pay a certain price – not unlike a physical collectable. And at the other end of the scale, a large investment into such a nascent space could lead to untenable volatility.

THE COUTTS VIEW

For all these reasons, Coutts considers NFTs risky purchases that show no clear path to returns, which is why we currently don’t see them as investable. 

However, NFTs have proved the concept of blockchain as an efficient and reliable digital infrastructure. We believe this underlying technology will be transformative. So, while Coutts does not currently recommend investing in cryptocurrencies or NFTs, we will look to capture the blockchain opportunity through our exposure to growth tech funds and equities.