We believe it is our responsibility to give our thoughts on current investment trends, even if it involves an asset that we do not currently invest in for our clients. Of all the “assets” we have detailed in previous commentaries, none are as esoteric as NFTs, or Non-fungible Tokens. I use quotation marks around the word because the debate is still out on whether they are actually a viable asset to own over time.
To understand NFTs, it is important you understand their history. Back in 2014[i], the original concept of NFTs was to place ownership and authenticity on digital artwork. Unlike physical artwork which can be proven original via experts and various provenance, digital works of art could be easily copied and replicated. NFTs would allow artists to create works of art, and by placing them on a blockchain, it would assign each work uniqueness and to who that uniqueness belonged to. Simplified, a blockchain allows for a centralized and commonly shared data of the ownership records thereby eliminating one party’s ability to singularly alter the record. The NFT concept has evolved considerably since its origin but the asset now finds itself at the crosshairs of a fundamental debate about what makes something valuable.
Over the past several months, NFTs have risen from relative obscurity and an almost non-existent market to a now vibrant market environment with millions of new creators and buyers actively transacting. There are multiple sources attempting to measure the overall value of these transactions, but 2020 volume reached $250 Million[ii](largely at year end) and it is estimated to far surpass that figure in 2021. The spike in transactions is believed to be inspired by two primary factors: first, owners of cryptocurrencies are largely the buyers, using their previously much-harder-to-transact currency to diversify and second, the number of digital asset creators is skyrocketing. Numerous celebrities like Tony Hawk, Lindsay Lohan, and William Shatner have all launched some form of venture looking to financially benefit from this most recent craze. Is this new wave of creators the beginning of a lasting trend or just people looking to make a profit on a fad? Obviously, time will tell us much more, but it brings up a fundamental discussion about what makes any type of asset valuable.
A simple internet search will give you countless and varied opinions on the long-term viability to NFTs as an asset class. Like cryptocurrencies, another blockchain innovation, NFTs are largely being embraced by a younger and more tech savvy investor. One issue facing both assets is the steady entry of new competition to their respective asset classes. Just as cryptocurrencies like Bitcoin and Ethereum have seen competition from Litecoin, Dogecoin, and countless others, NFTs have witnessed a wave of new creators flooding the market. The proliferation of both asset types is most importantly creating a fundamental debate around something holding value because it is rare. Optimists of these asset classes will point to scarcity, decentralization, and few regulators. Pessimists will point to the countless unique physical assets that hold no value. My kids create artwork at school and my wife I enjoy seeing their creations; saying that I would be hard-pressed to find an audience for it, let alone a buyer. An impressionist painting by Claude Monet holds value because it is rare AND the skill required and groundbreaking technique makes it difficult, if not impossible, to replicate. We are very likely at the early chapters of the NFT story, and it is very likely that the growth (too slow or too quick) of the space will have much to do with long-term viability or collapse.
It is quite easy to get caught up in the hysteria around new investment opportunities. We are also at the very beginning of people trying to figure out how blockchain technology could provide societal benefits. Fundamental investors, like ourselves, would always prefer that we can point some specific economic underpinning in an asset before we deem it worthy of investment. We would encourage any investor to be hyper critical if not hyper analytical when any new opportunity is presented to them. This debate is just getting started and we look forward to watching it play out. For the time being we’ll be watching from the sidelines.