Magic beans or digital gold dust? The explosion of Non-Fungible Tokens

By Matt Redley

In 2018, Picasso’s 1937 painting of his “Golden Muse” sold for $69.2m at Sotheby’s in London. It was the highest price for any painting ever sold at auction in Europe. On 11^th March 2021, the first ever purely digital artwork to be auctioned at Christie’s in New York  was sold for $69.3m. This artwork has no physical presence, and was sold as a an NFT (Non-Fungible Token), a technology that has existed for less than a decade.

Interest in NFTs is currently ballooning in art, music and investment communities, who have all been gripped by their novelty and perceived enduring value. As a nascent technology, the mood from some camps is that NFTs in their current form are the beginning of something much more significant. Others are far more sceptical.

So what are NFTs, and what’s the fuss about?

NFTs, or ‘Non-Fungible Tokens’, are digital assets which hold value as a form of cryptocurrency with verified identity and ownership. They can represent ownership, but not of copyright, over digitally scarce goods such as art or collectibles.

NFTs are stored on blockchain technology which, simply put, is a type of database which uses a peer-to-peer network and acts as a ‘digital ledger’ for all users of the network. Blockchain has a special quality in that all information is recorded on the network permanently and is very difficult to hack, as all users collectively retain control.

Crucially, each NFT has a unique digital signature, much like a fingerprint, and cannot be cloned. This differs from most other digital content which can be reproduced infinitely, meaning that it does not retain its worth. In essence, this element gives NFTs their perceived value.

So what does fungible mean?

Unrelated to fungi, fungible describes an asset or item that can be mutually interchangeable with, and indistinguishable from, another item or asset. Fungible assets can be physical, like Pound Sterling, or digital, like Bitcoin.

Non-fungible describes assets that are not mutually substitutable, and which can have differing values despite being from the same asset class such as a painting, a rare playing card or a theatre ticket. NFTs are in this category and, therefore, cannot be substituted for another NFT.

The future of NFTs

The rise in interest around NFTs follows clamour around Bitcoin which made cryptocurrency mainstream. In the evolving world of cryptocurrency, however, this may well be a passing fad that investors and zealots will wince at in years to come.

Critics note that NFTs have a damaging effect on the earth’s climate due to excessive energy demands required to sell them, which could play a part in public scrutiny of the trend. Others warn that the Bitcoin bubble may burst, which would in turn tarnish the reputation of related blockchain technology such as NFTs. Nevertheless, the current rising use of this technology represents a further step towards wider adoption of crypto technology.

Michael Burry, the first investor to predict and profit from the subprime mortgage crisis of 2008, who’s story was the basis for "The Big Short", has weighed in on the trend. Michael recently uploaded a quote to his Twitter banner, which read: "NFTs exist so that the crypto grifters can have a new kind of magic bean to sell for actual money, and pretend they're not selling magic beans."

Jack Dorsey, the founder of Twitter, is currently auctioning his first ever Tweet as an NFT. The current bid at time of writing (19.3) sits at $2.5m.  Only time will tell how history will judge this phenomenon and its proponents.