What are NFTs?
Hi everyone, and welcome back to Melissa Making Cents!
As a CERTIFIED FINANCIAL PLANNER and financial coach, I field tons of questions about "this stock" or "that stock." People are understandably curious about how different investments will perform and the latest and greatest ones to get in on. Some of the more recent questions I've been receiving have to do with a somewhat new type of investment, called cryptocurrency! Cryptocurrency started working its way into existence in 2009, with the release of Bitcoin. Since then, consumers and producers have had somewhat of a frenzy, with different forms and iterations being created and sold left and right. This leaves many to wonder what a cryptocurrency is.
Cryptocurrency is not something that I personally invest in, simply because it doesn't align with my personal financial goals and risk tolerances. I will also caution you to really do your homework before investing in this type of asset. There are always risks when making investments, and it's important that you are not proverbially biting off more than you can chew.
I'm currently working on a more all-encompassing post that will deal directly with bitcoin and cryptocurrency. Still, a cryptocurrency is a form of decentralized, digital currency like the dollar. These are created and distributed using a blockchain, which acts as a ledger of transactions. This brings us to our topic for today: NFT's, or Non-Fungible Tokens, which are a form of cryptographic tokens. These tokens operate similarly to cryptocurrencies by utilizing a blockchain. NFT's have been all over the news lately. Artists like Grimes and Beeple have generated millions of dollars by selling NFT's, which has spurred a lot of questions about what they are, how they're created, and why they're worth so much money!
Non-Fungible Tokens (NFTs)
NFT stands for Non-Fungible Token. To most people, that doesn't clear things up very much, so let's break down what that means.
Fungible essentially means something is "mutually interchangeable" or that it can be traded for something equivalent. For something to be fungible, the physical (or digital) asset itself isn't as important as the value of that item. For example, if I were to loan you twenty dollars for one week, you could pay me back by giving me twenty different dollars next week. It's unimportant to all parties which bill or combination of bills I'm paid back for our transaction. As long as the overall value of bills I'm receiving is equal to twenty, everyone is content.
For something to be non-fungible, it must be non-interchangeable. An example of this could be a painting! If I were to loan you a certified original artwork by Vincent van Gogh, it would be very important to me that I get that exact painting back. A similar painting or a painting by another artist would not meet all parties' requirements because those paintings aren't identical or interchangeable.
The "T" in NFT represents the word token. In the case of NFTs, token serves as a double-meaning. Token represents the technology behind authenticating each piece of digital artwork as unique and original and identifies what is being sold. According to Entrepreneur, A token is the sign of ownership of an asset. For example, if you purchase an NFT, you're purchasing a "token," which is the piece of identifiable and original digital artwork, which could be a picture, video, or GIF (Graphical Interchange Format, or a type of digital image). To get a clearer picture of how cryptocurrencies and cryptographic tokens should fit into your financial plan, you should contact and set up a meeting with a financial planner who can help guide you along the way. Doing so will help you create a financial plan that's in-touch with your principles and value-system.
What Gives an NFT Its Value?
It's confusing that a digital asset, like a video or picture, which can be saved by anyone could have so much value. So why are NFTs selling for so much if anyone can access and look at one online?
The concept behind creating an NFT is that you're creating and selling "the original" piece of artwork. An artist, like Beeple, who makes a piece of digital artwork, can certify something's authenticity by using the blockchain. While anyone can see the piece of artwork online (if it's publicly available), not everyone can stake claim and ownership of "the original," which was initially sold by Beeple.
The value of an NFT can be better understood by thinking of it as a painting or a trading card. Anyone can have a re-print or a photograph of Tom Brady's rookie season NFL trading card or Van Gogh’s Starry Night; they have very little value compared to the real thing. The blockchain, which acts as an un-editable digital ledger of transactions, authenticates who's currently in ownership of the real NFT. While they're exciting, NFTs aren't the only way (or even necessarily the best way) to create wealth. With concepts like compounding interest or dollar-cost averaging, you and your financial planner can create a more concrete plan to build a stable foundation.
What Can NFT's Be Used For?
As we've established, NFTs are non-fungible. This means that you can't necessarily purchase an NFT and "trade it back." Knowing this begs the question: What are NFTs good for?
The answer is probably less exciting than one would hope. The majority of NFTs created and purchased are really only good for proof of your digital assets' originality and authenticity. These aren't like stocks, bonds, or investments that pay dividends. The chances of an NFT gaining value over time are highly iffy. The ones that have the potential to gain value over time can be costly. Outside of personal satisfaction or purchasing in hopes of reselling, there isn't much else NFTs can be used for, making them essentially digital trading cards.
Ownership of Non-Fungible Tokens
Ownership can be a tricky word concerning Non-Fungible Tokens. With NFTs, you can certify ownership of the digital asset you've purchased. However, you may be let down to learn that doesn't entitle you to any royalties or legal ownership of the asset's likeness. A recent article by the New York Times states, "The buyer of an NFT will not necessarily acquire a copyright, or even sole access to a work." This can once again be represented with our trading card example. If you own Tom Brady's NFL rookie season trading card, that card may be quite valuable. However, you don't own any legal rights to the trading card's image, Tom Brady's likeness, or any logos, team names, or vocabulary used on that trading card. This is a significant pitfall that many don't understand when purchasing an NFT.
Should You Invest in an NFT?
While everyone is different, and each person's assets are unique to them, it's safe to say that the average investor could be better off utilizing their money in other ways than NFT’s. While non-fungible tokens are exciting and new developments in the world of crypto, they aren't stable investments and don't necessarily have a place in everyone's financial plan. They are also incredibly new, which means that while they're unregulated for the time being, it's unlikely they'll stay that way. The risk and potential negative consequences of investing heavily into things like NFTs are something that most financial planners and financial advisor representatives would likely warn against.
A CERTIFIED FINANCIAL PLANNER™ Can Create a Customized Comprehensive Financial Plan
Every person and their financial goals are unique. It's impossible to truly advise someone on their potential purchase of an NFT without getting a fuller picture of their financial plan and goals. If you'd like to set up a meeting and discuss your personal and financial goals in a larger context, Please feel free to call or email and schedule an appointment with me. Creating a financial plan that's suitable to you, which has been custom-tailored to fit your goals and your lifestyle, is a must.
Until next time...this is Melissa Making Cents!
Melissa Anne Cox, CERTIFIED FINANCIAL PLANNER™, is also a College Planning and Student Loan Advisor and Financial Coach in Dallas, Texas.