Summary
Sales of non-fungible tokens has exploded in the last year, from $74 million at the beginning of 2021 to over $41 billion today.
NFT speculation is concentrated in a few collections, meaning a set of NFTs produced by the same creators that are alike.
NFT markets are prone to scams such as counterfeits, pump-and-dumps, wash sales, and stealing.
The evidence indicates that for atypical investors, NFTs are a losing investment proposition.
Rather than investing in NFTs, I recommend investing in companies doing business within the NFT ecosystem, particularly Coinbase.
blackdovfx/iStock via Getty Images The so-called asset class that has boomed in the last year is non-fungible tokens (NFTs), which have grown from $74 million in total sales at the beginning of 2021 to over $41 billion today. Everyone is getting on the NFT bandwagon, which has even seeped into pop culture. Saturday Night Live has parodied them. Jimmy Fallon, Paris Hilton, and Justin Bieber each bought one or more. Snoop Dog is one. There is now an NFT museum in Seattle. Many companies have created them: Mattel ( MAT ) has Hot Wheels and Barbie NFTs , Taco Bell ( YUM ) has taco NFTs , and McDonald’s ( MCD ) has McRib NFTs .
NFTs are specialized cryptocurrency tokens. Each is unique and attached to it is a record of ownership of a digital asset. A digital asset can be almost anything, but usually a picture, video, or music file; occasionally it is not digital, but a physical asset, such as a tennis shoe . A cryptocurrency’s blockchain has the structure of NFTs built into it. A blockchain is the computer code behind a cryptocurrency and its ledger records the ownership of an NFT and its digital asset. Ethereum is the most common blockchain used for NFTs because it was the initial one to have the structure for NFTs built into it. The blockchain does not attach the digital asset to the token, it only records the ownership of the asset, and usually a weblink to the asset. The creator or seller of a digital asset can store the asset anywhere. (For more details on NFTs, see the article ” What is an NFT ?”)
NFT traders buy, sell, and create (called minting) on NFT marketplaces. There are more than 150 different NFT marketplaces today, structured as auction sites like eBay’s ( EBAY ). The largest is OpenSea , which historically has had a market share of over 90% and has total transaction value as of today of over $21 billion. A very recent entry into NFT marketplaces, LooksRare , has captured a sizable piece of OpenSea’s market share, but it is yet to be seen if they can maintain that position. Other smaller marketplaces include Rarible , SuperRare , and Foundation .
Clearly, certain aspects of NFTs have become trendy. But are they any good from an investment perspective? My concern is that many participants in this market position NFTs as interesting investment propositions, even though there is no evidence to indicate this. I know of only one study that has looked at the performance of trading in NFTs, which concluded that only a minority of speculative NFT traders earn positive returns. On top of this, the structure of NFTs and NFT marketplaces are inherently unsecure and open to fraud .
In this article I will first discuss the market for NFTs, how NFTs are priced in the market, and then examine their investment potential. Next, I will discuss issues and risks inherent in NFT investing, followed by a discussion of whether the returns outweigh the risks to make NFT investing viable. I conclude with a section on if and how you can get exposure to NFTs via public investments. Traders Have Concentrated NFT Speculation in a Few NFT Collections
Analysts typically split the NFT market into four main sectors: collections, metaverses, games, and art. Data sites bucket individual NFTs into these sectors based on their details, such as how it was created, whether there are other NFTs similar to it, how and where it can be used, and so on. Many think of NFTs as art, but this is only one side of the NFT marketplace, and one of the smaller ones. The NFT world is truly diverse with numerous distinct types. By breaking the market into sectors, we get a better understanding of this diversity and how the NFT universe is evolving and where it might go.
A collection is a set of NFTs all produced by the […]
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