Behind the NFT hype: Answers to five common questions

Behind the NFT hype: Answers to five common questions

When a piece of digital artwork created by a little-known artist sold at auction for $69 million this spring, the technology suddenly became a hot topic of conversation well beyond those who track the latest crypto-related fads. More NFT (non-fungible token) sales followed — some 85,000 in May alone — with reports that everyone from Tom Brady to Paris Hilton were jumping on the NFT bandwagon.

But as individual investors were hit with an onslaught of news about a previously unfamiliar technology, they may have walked away with more questions than answers about what NFTs are, what makes them valuable, and what their ultimate impact might be.

Although they are likely outside the realm of investments on which you advise clients, it’s worth knowing about a phenomenon of the financial world that is creating such buzz and potential for confusion.

Here are answers to questions your clients — and you — may have about NFTs and what may lie beyond the current hype.

1. What is an NFT?

At the most basic level, a non-fungible token is a one-of-a-kind, verifiable digital asset that can be exchanged between a creator and a buyer. The one-of-a-kind characteristic is important in distinguishing NFTs from other digital assets; one NFT is not interchangeable for another, like a dollar bill or a share of stock, but is unique and has its own value.

2. What makes an NFT valuable?

The value of an NFT comes from the property it represents, which is generally something that exists in the digital world like an original piece of art or digital memorabilia. The NFT itself doesn’t necessarily contain the digital property, but points to its location on the blockchain. Like a concert ticket or a deed to a physical property, an NFT reflects the value of the thing it represents.

3. What’s the connection between NFTs and cryptocurrency?

NFTs aren’t cryptocurrencies, but they are built using technology similar to Ethereum and Bitcoin. Also, like cryptocurrencies, NFTs exist on a blockchain, which verifies their unique identity and ownership. The blockchain also keeps a record of all the transactions connected to the NFT and the property it represents. Many NFTs are held on the Ethereum blockchain.

4. Are NFTs the future of art and collectibles?

It depends on whom you ask. Artists, musicians, athletes, celebrities, and others find NFTs attractive because they offer a new and unique way to sell their wares — including things like GIFs, memes, and tweets — directly to fans. NFTs also provide artists an opportunity to program in continued royalties if it is sold to a new owner. Galleries see potential for reaching a new generation of collectors.

5. What questions remain about NFTs?

Many. Although NFT technology has been around since 2014, it is just beginning to be put to the real-world test. Because NFTs run on a blockchain, they could offer potential for uses beyond art and collectibles. Suggested uses have ranged from video games and fashion, to vehicle and real estate ownership. In theory, NFTs could offer efficiency and security through embedded smart contracts. However, the NFT market remains very new, and questions about rights, ownership, intellectual property, and more have not been fully explored. The final answer about what’s next may be … stay tuned.

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