Non-fungible tokens, or NFT’s, have been all the recent rage. What is a non-fungible token and how does it relate to investing or art? Fungibility is the ability of an asset to be easily exchanged for another asset; the items are mutually interchangeable. Commodities, such as grain or other assets, common shares of stocks, and currency such as dollar bills, are mutually interchangeable with themselves and readily exchangeable for other assets. Less fungible assets include homes, used cars, furniture, collectibles and certain coins. Implied in a non-fungible asset is the diminished liquidity for that asset. Your priceless, inherited antique desk could be placed on a curb for pick-up by the trash service or sold at an auction for hundreds or maybe thousands. It is likely less fungible than say a box of silver bars or a gallon of oil. A good example of a non-fungible asset would be the Beanie Babies which received notoriety in the late 1990’s. The mania for these furry bean-filled plushes even had couples who were embroiled in a divorce separate their Beanies on the court floor with supervision. Many times non-fungible assets have a history as a collectible, as evidenced above.
Where do NFT’s fit in? Add computer coding and blockchain technology to a non-fungible asset and you are awarded a non-fungible token. The most expensive NFT sold up until today was a JPEG image “minted” by the artist Beeple in February of 2021, which sold for $69,346,250 in mid-March of 2021. The digital asset ownership and transfer was authenticated by a string of computer code or blockchain technology. Though there is verifiably one owner of the piece, it is digital which means it can be simply copied and pasted for enjoyment on any screen medium. Since the asset is digital it can be downloaded in arguably similar quality to the original and enjoyed by anyone who has a screenshot function on their computer.
Much of the hype regarding NFT’s has spilled over into sports. The idea has been tossed around that moments of sporting events such as a goal or a basket being made can be owned exclusively by those who choose to purchase them. Mark Cuban explained in an interview with Coin Base that he wants to use NFT’s to sell virtual shoes; “We can sell virtual Mavs gear, sneakers, art, pictures, videos, experiences, anything our imagination can come up with we can sell. We are looking at adding virtual jewelry, accessories and clothing that we create to real pictures in social media. So you can add cool Mavs virtual sneakers that look as real as the ones on your feet to your posts.” The question becomes will copy right law be aggressively pursued regarding the duplication of the NFT and if so, why wouldn’t registering music or a created image video with a rights organization do the trick? That party would be responsible for enforcing copyright, ultimately, in either case. Much of NFT sales today amount to digital real estate in games, virtual furniture (go figure) virtual baubles and obscure art.
NFT HODL’ers (hold on for dear life’ ers) beware. If any past performance of niche collectibles is indicative of future results, the future may not be profitable. In 1998 select Beany Baby plushes would have sold for 1800 dollars on Ebay; 20 years later, those collectibles were worth a mere 3 dollars (1). However, the founder of Beany Baby is worth approximately 2.7 Billion dollars, according to estimates (1). Will NFT’s meet the same fate and perhaps take up less physical space as other collectibles? Give it a few decades and we will see. Prudent investors should know the price you pay for an asset may not always reflect the value.
(1) The Hustle – The Beanie Baby Bubble of ‘99