Written by: Bash Sarmiento
Hi accounting fans! Today we have an awesome guest writer, Bash who will be writing about NFTs (what the heck are they anyway??)
From A&As and ZBBs in accounting and finance to TGs and FFs in social media, don’t we just love acronyms? They make communication easier and faster, plus they can make us sound all smart and “expert-y.” So, naturally, we just had to add yet another word to the fray – NFT.
NFT is one of the latest buzzwords to hit the techie scene. It’s common to hear the byte-obsessed digital blokes discuss NFT alongside trending words such as cryptocurrency, bitcoin, and blockchain. And the interest is no longer just limited to technophiles and crypto geeks. Even the worlds of big business and finance are dipping more than just their fingers into the “digital pie.” Although the noisy fireworks about NFTs in the first half of 2021 have since settled down to more of a steady humming today, these digital assets look like they’re here to stay. First, NFTs…now it’s assets…Yep, the whole business can be puzzling. But remember that patience is a virtue…
So, what exactly is an NFT?
NFT is short for non-fungible token. While the word fungible can sound fudgy, it’s an actual term common in the circles of lawyers and economists. When something is fungible, it’s interchangeable with another that is exactly the same thing. For instance, if you sell a bitcoin, you can purchase another bitcoin to replace it with. However, NFTs are non-fungible. That means that each NFT is in a class all its own. They’re 100% unique and unrepeatable (unlike New Year’s resolutions, but that’s a different story).
NFTs are completely distinct and irreplaceable—and therefore rare. Being a token, it represents either digital or real-world assets. Of the two, digital assets are the ones more often “tokenized,” so let’s focus on that. Digital assets can be anything from photos, graphic designs, digital trading cards, photos, or any other digital file that’s owned and has value. When these digital assets are “tokenized,” each one is assigned a unique identifier code, which is entered into the blockchain space.
The blockchain is a sophisticated digital ledger that is maintained across several computers. Once a transaction is entered into the blockchain system, the information stored will be difficult or impossible to change or hack. The NFT market is mainly built and managed on the Ethereum blockchain, although other blockchain-based platforms can also support NFT transactions.
Now an NFT serves as a kind of certificate of authenticity and ownership of the “tokenized” digital asset. Each identifier code contains information about the asset, such as its I.D., history of ownership, a smart contract (an agreement in computer code), and other ownership specs that the owner may want to include to further add to the asset’s value (such as a signature or a special message). As with any other asset, its value is primarily hinged on its digital scarcity. The rarer an asset is, the higher the price it can fetch.
Can you earn “real money” with NFTs?
When the news broke out in March 2021 that the digital artist Mike Winkelmann, professionally known as Beeple, sold his NFT collage for $69 million in an auction, mainstream camps began to pay much more attention.
Other noteworthy NFTs (especially in dollar notes) include Brett Gardner’s blockchain game MLB Champions ($21.28 million), Jermall Charlo’s signed card – Lions Only GOLD ULTIMATE ($19.1 million), and Edward Snowden’s photo “Stay Free” ($5.4 million).
So, yes, NFTs can offer some pretty substantial money-making opportunities. There are several draws. If you are a content creator, like an artist or athlete, you can sell your NFT directly in the open NFT marketplace.
By selling directly, you can do away with powerful middlemen along with the expensive fees that come with them. NFT transactions are also automated, which makes transactions easy to manage, even for newbies. In addition, assets are highly customizable. Speaking of customization, you can input a clause in your smart contract to include royalties, so you can keep on earning every time your NFT changes ownership.
If you’re not exactly the creative type, you can go the buy-and-sell route, very much like how you would transact in a traditional stock market.
Can anything go wrong?
Who would’ve thought that Beeple, who, before his March 2021 fame considered a $100-print sale an above-average transaction, would make that much money overnight? The financial prospects of NFTs can indeed be enticing.
The thing is, like most success stories, this didn’t exactly happen overnight. It took years and years for him to develop the skill to create the NFT, which a collector later on saw was worth $69 million. In his book The Art of Thinking Clearly, Rolf Dobelli called this the “Survivorship Bias,” where people overestimate their chances of success because all they see is that one famous winning case.
It doesn’t help that the NFT market can be quite easy to manipulate. A recent eight-figure buyer of an NFT was revealed to be the seller of that same NFT. Although Sundaresan, the buyer, said that he just wanted to support the artist who made it, some people suspect that he did it to pump up the prices of his collection.
There’s also that chance that an NFT creator will make as many replicas as they want of an NFT after you’ve purchased it (although each will still be distinct with their individual unique codes). This can diminish the digital scarcity of your NFT, and therefore, its value.
Another risk is that the NFT market is built on cryptocurrency, which is still in its volatile nascent stages. Because the market thrives on speculation, NFT prices can go off the roof in one day, then come tumbling down the next, making it a high-risk investment.
Lastly, because NFTs aren’t securities, they are not subject to regulatory mechanisms, making investors vulnerable to theft, fraud, and system failure.
A word to the wise
In any investment, even supposedly safe havens such as government bonds, there will always be an element of risk. And the higher the risk, the higher the potential for both phenomenal success or dismal failure. The same is true for NFTs.
Cryptocurrencies are well known for their volatility and NFTs are currently the most volatile cryptocurrency derivatives. While some people have definitely made bank on NFT trading, many more have lost their money. Survivorship bias means that we only hear of the winners and very rarely do we hear of the losers. At the same time, It wouldn’t be wise to stake lock, stock, and barrel on NFT investments. Only ever invest money that you’re not afraid of losing when it comes to these kinds of investments. Make the prudent decision of being on the safe side of caution. Put your thinking cap on, cast a critical eye on the market, and keep DYOR-ing (and there’s yet another acronym worth checking out).