Non-fungible tokens
IF you are like most people (this writer included), cryptocurrency won’t make a lot of sense to you. They defy what we generally understand about currency. There’s no central bank that issues them. They don’t even exist in tangible form (yes, we’ve all seen those popular images of bitcoins as golden-coloured coins but they don’t actually exist as coins). Yet they have immense value. At the time of writing, one bitcoin is worth RM238,770.
Non-fungible tokens (or NFTs) are similarly difficult to comprehend but they are the hottest thing in the digital asset space this year. Here are some examples to blow your mind. An NFT representing the Nyan Cat digital animation was sold for 300 Ethereum (equivalent to about US$540,000 at the time of writing). Shocking? That’s nothing compared to the US$69 million paid for the NFT for a digital collage called “The First 5000 Days” by Beeple (real name: Mike Winkelmann).
How much would you pay to own the NFT for the first tweet by Twitter cofounder Jack Dorsey? Well, at the time of writing, the bidding for his first ever tweet (“just setting up my twttr”) is going for US$2.5 million. Yes, you could own the world’s first-ever tweet for a cool RM10 million.
Sounds crazy, right? Welcome to the world of NFTs. The phrase “non-fungible” indicates that each token is unique. So in that sense it is not like cash or even cryptocurrency. Dollar bills and even bitcoin are fungible in that they are replaceable. An NFT is not. There is only one of its kind.
Of course, you could copy or download digital works easily. Just Google “Nyan Cat” and you will find the artwork whose NFT sold for slightly more than half a million US dollars. Google Beeple’s “The First 5000 Days” to see what someone paid US$69 million for.
So, it isn’t the digital work’s accessibility that makes it valuable. Anyone can see it.
Anyone can copy or download it. What makes it valuable is the ownership that the NFT confers. Think of an NFT as a tradable digital asset certificate for a particular piece of digital work.
Ownership of the NFT is authenticated through blockchain (a kind of digital public ledger) that holds a record of the underlying data. Essentially, an NFT is a unique token on the blockchain. So, while the digital work can be easily reproduced, the NFT has a unique digital signature.
MONEY’S WORTH
NFTs are usually bought with the Ethereum cryptocurrency and the blockchain keeps a record of transactions. These records cannot be forged because the public ledger is maintained by thousands of computers around the world. It’s worth highlighting that while the buyer of a NFT owns the work, the copyright of the work is usually still retained by the artist. Theoretically the artist can continue to make copies of the work and sell those copies. So, what exactly are the owners getting for their money when they buy an NFT?
Besides bragging rights, they also have the ability to sell that NFT.
But what value is a tweet, even if it is the world’s first-ever tweet? Or a simplistic animation like a Nyan Cat? The value is whatever someone is willing to pay for it. So, you could say it’s all about perceived value. If someone thinks the Nyan Cat NFT is worth half a million dollars and is willing to pay that price for it, that’s what it is worth.
Of course, that person is buying that NFT with the expectation that someone else (a greater fool, perhaps) will pay even more for it. You can be sure, for example, the guy who bought the Beeple collage for US$69 million didn’t buy it just to admire the artwork. You and I could do that by simply Googling it. He bought the NFT at that incredible price in order to sell it for even more, convinced as he is that someone else down the line will be willing to pay a higher price for it.
JUST A FAD?
If you still don’t get NFTs, don’t worry, it just means you have normal sensibilities. I don’t quite get it either. It’s hard for me to get around the fact that anyone would pay half a million dollars for a digital cat that any third-rate graphic designer could create in five minutes.
Then again, some modern artwork look like splashes of paint to me. Yet some people will pay millions of dollars for it. So, think of it this way — NFTs are a way for investors to make money selling ownership of digital assets to someone else for a higher price. Then it starts to make sense.
But is this a bubble that will eventually burst? Is it tulip-mania for our times? It’s very early days so it’s hard to say, but billionaire investor Chris Sacca recently tweeted that NFTs are something worth taking seriously.
“No matter how you feel about NFTs, don’t look away from this,” he said. “It’s okay to not get why someone would pay that. But don’t be wilfully ignorant about what is happening.”
Sacca, who had invested in Uber, Twitter, and Instagram, doesn’t think NFT is a fad. “Very cool and I am a collector at heart,” he said in a tweet recently. “I don’t think it’s a bubble, and I do think it will work.”