5 things people are getting wrong about NFTs

NFTs (nonfungible tokens) are having a moment right now. Tons of digital collectibles have been traded, including Dapper Labs’ NBA Top Shot, which raked in $1.05 million for just one recent pack of basketball videos, and Everydays: The First 5000 Days, a digital image by artist Mike Winkelmann (aka Beeple), which sold for $69.3 million at high-end auction house Christie’s.

NFT transactions tripled in 2020, reaching more than $250 million, according to the Non-Fungible Tokens 2020 Yearly Report from NonFungible and L’Atelier. And they show no sign of slowing in 2021. But the big money currently being thrown around for single pieces leads to overall misconceptions about the cost and value of NFTs and their place in the market.

As CEO of digital-assets marketplace Blockparty I help artists and brands create and market NFTs. These are the biggest myths I encounter about the technology.

“NFTs are complicated”

NFTs are a type of cryptographic token that signifies true ownership of a digital asset, such as a piece of digital artwork.

NFTs also signify provenance. That is, each NFT contains within it a record of ownership of a digital asset. For collectors, this means that their investment is protected because only one original can be traced back to the original creator.

Since Chris Torres created the Nyan Cat GIF a decade ago, the animated flying-cat meme has been viewed and shared hundreds of millions of times. When he put up a unique version of the meme as an NFT for sale on Foundation, a bidding war ensued, and a collector paid around $580,000 for it. That collector can rest assured that he owns the only unique version of this NFT.

It’s that scarcity—the idea that there’s only one of something—that makes NFT art so appealing to collectors (and speculators). Each NFT is fully unique and therefore its value is derived only from the characteristics that make it unique. That might sound complicated, but it’s not. Logically, it’s no different than a sheet of canvas. If I paint on it, thus making that canvas completely unique to characteristics I applied, it’s only worth something to my mom. If Andy Warhol does it, it’s a commercially viable asset.

Especially amid the ongoing pandemic, we’ve seen a growth in new-age artists and musicians adopting NFTs as a way to engage their fans, but the traditional principles that govern the value of collectibles still apply—quality, authorship, uniqueness, scarcity, provenance, and cultural relevance.

“NFTs are a bad investment”

Dating back to my career in the art business, I’ve heard often that art is a bad investment—that it’s not easily convertible to cash and largely speculative. In the art world, dramatic increases in the cost of a few high-profile pieces can overshadow the fact that many other pieces only decrease in value. The same is true of NFTs. Actually, this is true of all speculative assets.

The NFT market especially has leaned into the speculation, however, by adding a new wrinkle: open editions of digital collectibles that are priced to resell. This is when as many editions of a digital collectible are created as there are willing buyers, but only in a very small window of time. So the scarcity factor isn’t defined by a predetermined edition number, but rather by the amount of time that was given to purchase. These editions are typically priced lower, and they hit the secondary market quickly to accommodate those that weren’t able to shop in the predetermined window.

The early adoption of open editions has led to some eye-popping resale numbers on the secondary market. However, once buyers become savvy to the fact that the value of an item is mainly speculative, resale numbers tend to stabilize over time.

The best approach to making sound NFT purchases is investing in works that are original and have a clear provenance. Not every asset will appreciate wildly, and that shouldn’t be the goal. The goal is risk management: Good quality assets with good provenance are less likely to depreciate. In a good collection, a few pieces might appreciate rapidly while the others will at least maintain their value.

“NFTs are pointless”

NFTs took some time to grab mainstream attention. And the traditional art world’s misunderstanding of NFTs as solely a digital art novelty may have contributed to their slow rise.

In fact, there is not much novelty here at all. Digital art has a rich history in the traditional art scene. Legendary artists that were around since the dawn of the digital age were experimenting in this medium. Globally significant institutions such as the Centre Pompidou in Paris are known for digital art exhibitions.

However, this genre of art has been difficult to monetize until now with NFT’s. The future of NFTs and art is bright because the attention and revenue generated has encouraged traditional artists (who may still prefer canvas and paintbrush) to give their works new digital features.

Guzman and others have been able to expand their creative mediums and branded assets into digital and mixed reality and create more robust experiences for their fans. Depending on how many of these digital features of the same artwork they will offer for sale, and the type of mixed media art they are using for the NFT, the prices can vary greatly for the initial sale.

As large-scale in-person events still seem like a far-off reality, issuing NFT art and collectibles also allows artists, musicians, and even brands to incentivize long-term relationships with their fans. These NFTs can offer fans unique benefits, rewards, or access to loyalty programs and perks. This allows these digital creators to access new initial and recurring revenue streams and open themselves to new markets of collectors.

“NFTs promote forgery and misattribution”

When it comes to digital collectibles, a common issue is validating their rarity and authenticity, especially as the value of trade in counterfeit and pirated goods continues to increase.

That’s where the blockchain comes in. A blockchain is a series of transaction ledgers maintained across different computers. They “witness” cryptocurrency transactions to ensure that each is 100% authentic and unfakeable. When the cryptocurrency is an NFT, the blockchain creates a clear chain of title. So collectors can be confident that their one digital file is the one-and-only “original.”

Just as forgeries work in the analog world, it’s possible to make a copy of the media and mint your own NFT token with it, then pass it off as the original and hope that no one bothers to check the blockchain records. NFTs guarantee ownership of an asset, not that the creator of the asset isn’t knocking it off. As with any other type of collectible, it’s on the consumer to make sure what they’re buying is legitimate. Thus collectors should buy from well-established NFT platforms and/or learn how to read blockchain data, so as to be able to independently verify that they are buying a legitimate asset.

“NFTs are bad for the environment”

Recently there has been considerable discussion about crypto art being environmentally taxing. Some have theorized that because NFTs necessitate many additional transactions on the Ethereum blockchain, the computers that conduct them must be burning considerably more power. But that assumption is not entirely accurate.

The global network of computers supporting the Ethereum blockchain operates all day every day doing “proof of work mining.” But that network of computers will consume exactly as much energy regardless of how many NFTs are minted. The problem that must be solved is the energy consumption associated with proof-of-work mining. This is actively being worked on by the Ethereum community with various possible solutions, including new approaches to mining and scaling solutions. And not all NFTs are made on Ethereum; some are supported by other blockchains, such as FLOW, WAX, and EOS, which are less environmentally taxing.

As we look to the future of the art market, NFTs will almost certainly play an important role. These digital collectibles open up a whole new world for artists, musicians, and brands to expand their mediums and tap into new audiences and collectors. It’ll be exciting to watch this industry unfold, but even more tempting to join in on the NFT action.