Prefer listening? Check out our episode on NFTs.
NFTs are an interesting idea, a sort of cool new way to buy and sell stuff. In a way, they remind me of trading cards, like Pokemon cards or the baseball cards of old. Buying, selling, and trading such cards can bring a certain level of enjoyment, and that’s all good. The problem comes when you start to think of them as an investment. Their actual value is extremely volatile, and there’s no way to predict which way they’ll go. If you buy NFTs an investment, you’re basically playing Roulette at a casino.
What is an NFT?
So what is an NFT? Let’s start with the name. NFT stands for non-fungible token. Fungible means it can be replaced with something identical. A dollar bill is an example of something fungible; you can replace a $1 bill with another $1 bill, and you won’t notice the difference.
With regard to digital files, you can replace a JPG image that you took with your camera with a copy of the JPG image, and you won’t see the difference there, either. But suppose you want to distinguish between the original JPG that came out of your camera, and any copies made of it. So you assign a token to the original JPG, a sort of digital serial number. Now the original JPG is non-fungible, and it has a token. There you go, a non-fungible token, a serial number assigned to a non-fungible item.
Then you encrypt the token, and you are the only one who has the decryption key. Your possession of the token, and your ability to decrypt it, says to the world that you own the original JPG file. And this token is put on the blockchain, where you can sell it to other people.
This, in a nutshell, is an NFT. While you could make copies of the original very easily, and no one would be able to tell the difference between the original and the copy, you have a certified original, as evidenced by the unique token and its protection by the secret encryption key.
Why do people buy NFTs?
Who would buy this certified version of a copyable thing? It turns out that lots of people will.
But why? Part of it is a belief that it’s an investment, that you’ll be able to sell it in the future for more than you paid for it. Another reason might be pride of ownership.
A classic example is the very popular Disaster Girl image, where a little girl smirks at the camera in front of a raging house fire. In 2021, the star of the photo, Zoe Roth, sold an NFT of the original JPG image for nearly $500K. Maybe the buyer wanted to help Zoe pay for her college education, or maybe they thought it would be worth more than that in the future. Since the buyer hasn’t talked, we might never know.
This seemingly outrageous price for a copyable digital item points up the fact that NFTs are worth exactly what people are willing to pay for them, and that the price can fluctuate wildly. In this way, they’re also a bit like the stock market. But at least with the stock market, you can read annual reports and press releases to get some idea of how a particular company is performing. With NFTs, there’s literally no way to predict how much they’ll be worth in the future.
The rise and fall of NFTs
This problem of volatile value makes NFTs highly unpredictable. Ever heard of the Bored Ape NFTs? They caught on fire in 2021, with exponential prices that eventually reached over $1 million. Now, in 2024, a Bored Ape NFT sells for around $60K.
I can’t say I’m sad. It’s one thing to buy a piece of art because you enjoy it, or want to support the artist, but most of these buyers most likely bought Bored Apes NFTs because they thought they would increase in value. If you’re going to buy something as an investment, you should at least have some idea of how it will get there.
NFTs are right up there with cryptocurrency, where no one has any clue where it will go, or why. Anyone who tells you they can predict these things is full of malarky. Or more likely, they’ve been paid by the originators of the NFT to tout it and pump up the price.
The positive side of NFTs
On the positive side, NFTs can be a great way for an artist to raise money and get support. In fact, this was one of the benefits touted by the NFT market at the start.
There are fine artists out there who sell NFTs of their digital art, where you can drop $10 or $100 and get a little something (an NFT) in return. It’s a great alternative to asking for donations, or to producing postcards of their larger works to sell in a lower price range, which can get costly for them.
Maybe the artist will get famous and the NFT will be worth a zillion dollars, or maybe you’re just helping an artist pay the rent that month. If you’re okay with it being the latter and the NFT never reaching the value of an original Picasso, then it’s all good.
I personally love this lower-priced end of NFTs, and applaud artists who pursue it. However, many people buy NFTs with no appreciation for who’s getting paid, or the inherent value of what they’re buying.
NFT fraud
The fact that NFTs are on the blockchain has given rise to a new kind of fraud. Whoever has the key to that digital item owns it, but the ownership is anonymous. So if someone gets a hold of your NFT through fraudulent means, there’s no use going to the police or the copyright office or any number of other controls we have in place for the usual way things are done.
This level of anonymity has opened up a whole new world for con artists, where fraudsters use phishing scams to get people to give them their keys. The victim gets a fake email that makes it look like they’re logging into their own account, but the fraudsters are really just stealing their encryption key. Then the fraudster uses the key to transfer ownership of the NFTs or cryptocurrency to themselves.
This is exactly what happened to Seth Green in 2002, when he fell for a phishing scam, and four of his NFTs, including a Bored Ape, were stolen and transferred to another account, and sold on an NFT marketplace. He got the Bored Ape NFT back only by buying it back from the person who now had it, and he had to pay $300K to get it back. Yes, you read that right. $300,000 for a cartoon drawing of an ape.
Seth needed to get his Bored Ape back because he was developing a TV show using his own ape’s image. That type of NFT came with full copyrights to the image, and he needed those copyrights back.
There are so many stories of people’s NFTs being stolen this way, too many to count. The con artists seem to especially hit people who are new to the game and don’t understand what a huge black market there is. It’s easy for a scam artist to send out thousands of emails, and if they get even a few NFTs out of it, that’s free money for them. And because of the anonymous nature of the blockchain, it’s nearly impossible to catch them.
Conclusion: NFTs are okay, sometimes
I personally think NFTs have their place in the digital world, just like paintings and other types of art do in the physical world. I just hope that anyone who invests in NFTs does so with full knowledge of what they’re getting into, and how it could all go badly, whether through theft or an enormous decrease in value.