Be Aware There’s Little Regulatory Oversight in This Investment Class 

I think it is safe to say that the American economy has seen many changes since the Great Recession in 2008. One significant change is the amount of quantitative easing used to recover from both the housing crisis and a once-in-a-century pandemic. 

Another significant change and one that feels more like a surprise is the rise in interest in and adoption of cryptocurrencies that use blockchain technology. As this new sector continues to evolve and develop on what feels like a daily basis, we should expect new innovations to spring from it. 

​Case in point: another new category known as non-fungible tokens or NTFs. NFTs are digital only collector items backed by the same blockchain technology that cryptocurrencies use. As NFTs increasingly consume attention and attract extremely high net worth buyers, it’s worth understanding the basics of these alternative collectibles. 

What Are NFTs? 

Non-fungible tokens can be anything digital or anything tangible turned into a digital item. This includes artwork, memes, sports cards, video clips, music and photos. One example that took social media by storm was when Twitter’s CEO, Jack Dorsey, sold the first tweet as an NFT for $2.9 million. NFTs are similar to cryptocurrency in how they reside on the blockchain, but what makes NFTs unique is that they are one-of-a-kind. 

How Do They Work? 

Just like you could make a copy of a baseball card or reproduce the Mona Lisa into a print poster, you could make a copy of a digital asset like Dorsey’s tweet but by minting a non-fungible token, you can prove that a specific item is the original. Whoever holds the NFT can claim ownership of that original.

​NFTs reside specifically on the Ethereum blockchain.This blockchain both publicly stores non-fungible tokens and creates records of any transactions related to them. This may actually be a downside to collectors who prefer to showcase their prized possessions; NFTs are digital records, not physical.

Use and Monetization of Non-Fungible Tokens 

Non-fungible tokens brought dramatic change to the landscape for monetizing the work produced by artists and other creators in a more digital economy. Usually, artists can only sell their artwork at galleries and auction houses; now, those same artists can sell digital work directly to consumers with NFTs. This allows the artist to retain more profit and receive royalties on their artwork even if resold to a new owner. 

​Extremely high-priced NFTs, like tweets or clips of sports highlights that sold for millions, tend to garner a lot of media attention. It may feel like NFTs are just for high-end collectors, but that is not the case. 

​Individuals who were already major crypto­currency advocates and some tech-savvy buyers may purchase NFTs as a way to support their favorite athletes or celebrities. Others buy NFTs through video games to enhance their playing experience. 

​There are also the meme stock investors who are in it for the enormous return potential. Per The New York Times, the NFT market grew by 299% in 2020, and per CNBC, sales in the first quarter of 2021 soared to more than $2 billion. 

NFTs as an Investment 

Technically, NFTs aren’t brand-new. They’ve been around since 2014, but only in 2020 and 2021 has their market exploded. That’s brought in extreme volatility and high risk for average investors. 

​The future of this asset class is still unknown and there’s still a major lack of regulatory oversight. As a result, some unlucky buyers can purchase an expensive NFT only to find out years later that it is worthless or even fraudulent. As of now, NFTs also aren’t readily exchangeable for cash, so liquidity can be a significant issue too.

​NFTs are a testament to how much investment options have grown and flourished over the years. But just like any other investment within your portfolio, do your due diligence and make sure that your capacity for risk can withstand any potential volatility NFTs can thrust your way. 

This article was originally published in the October 2021 issue of BetterInvesting Magazine.

Malik S. Lee, CFP, CAP, APMA, is managing principal of Felton & Peel Wealth Management based in Atlanta and New York.

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