How NFT mania is a lesson on speculation

Singapore

NON-FUNGIBLE tokens (NFTs) are changing the way artists sell and trade their work, and investors, including those in Singapore, are buying into the latest crypto mania.

A US$69.3 million digital photo montage by graphic artist Beeple - the most expensive NFT to date - was recently sold to a Singapore-based investor who paid in Ether, a type of cryptocurrency.

Artists are not the only ones cashing in on the NFT gold rush. From music and sports clips to memes and tweets, a variety of digital objects have been auctioned off as NFTs, with some fetching bids in the millions.

While there are some use cases for NFTs, the eye-watering prices - think US$2.5 million for Twitter CEO Jack Dorsey's first tweet - behind them have raised warning signs of yet another asset bubble waiting to pop, and offer some lessons on fad investments.

OCBC head of wealth advisory Kelvin Goh said the sale of Beeple's digital artwork is a "somewhat spectacular case of an overhyped asset class, especially when you look at the bidding action towards the close".

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It is also telling that the purchase was funded in Ether, a cryptocurrency that is "having its own moment in the sun" rather than the use of fiat currencies, he said.

A NFT is a unique crypto asset that runs on a blockchain network. But unlike other tokens like Bitcoin, a NFT cannot be traded at equal or be replicated.

Each NFT represents a unique digital artefact, and represents ownership of the rights of a digital product. The aim, proponents say, is creating market value through a sense - inflated or otherwise - of authentication and scarcity.

Much of the craze is centered around digital art, music, and sports collectibles, though some NFTs also extend to virtual real estate and gaming assets.

With more daily activities conducted online, people can now use these tokens to represent a claim against digital assets, said Mr Goh. The claim may also extend to real assets.

Blockchain technology powers NFTs, which may make it near-impossible to create counterfeits.

Take the music industry, for example, which has been rife with cases of piracy. A NFT can easily prove authenticity and ownership of the original asset. The individual artists can enforce copyrights which would help negate the risk of their work getting pirated and stolen, in turn allowing for these assets to be valued correctly, according to Mr Goh.

Rock band Kings of Leon generated over US$2 million in sales from their latest album released as a NFT. Canadian singer Grimes auctioned off 10 pieces of NFTs worth US$6 million.

Mr Goh also pointed out that the blockchain technology underpinning these digital assets are transferable peer-to-peer in near real-time without an intermediary.

Concert tickets sold as NFTs, for example, removes the need for a third-party ticketing platform, which makes ticket sales arguably more transparent and secure.

While there are some clear benefits for NFT sellers, what is really in it for buyers? Some see NFTs as alternative means to support their favourite artist or athlete. For others, owning a rare NFT come with bragging rights and expectations of short-term speculative gain.

But while the NFT confers ownership rights to a digital artwork, meme, or tweet, these things can be copied readily.

The current low-interest rate environment further heightens the allure of NFTs as an alternative asset class for investors.

While it may be tempting to ride the NFT wave, it is crucial that investors consider a few steps before coming to a decision.

As it is, OCBC's Financial Wellness Index 2020 showed that 70 per cent of Singaporeans do not seek professional advice or do their own research before investing. About 35 per cent also "speculate excessively to make quick gains".

There are several marketplaces to purchase and trade NFTs. As with other investment platforms, it is important to consider the reliability and longevity of NFT platforms, said Mr Goh. "Specifically, who are the backers and what is the track record of the platforms you are trading with?"

The age-old debate on price versus value will also surface when mulling a NFT purchase. Despite the already high prices paid, there is no guarantee that the next buyer will pay an even higher price to acquire the digital asset's rights, pointed out Mr Goh.

As with most alternative assets, the traditional methods of valuation would not be applicable, which makes it difficult to assign a suitable price to pay for these assets. Investors need to read up and research more on this topic before arriving at their investment decision.

"Given the largely speculative nature of digital assets currently, it may be better to limit the overall exposure to these assets and ensure diversification in investment portfolios," Mr Goh cautioned.

Another key risk for NFTs is that there is a distinction between the token itself - a record of ownership that lives on a blockchain - and the asset it refers to.

If a company that issued NFTs goes out of business and stops hosting those digital artworks, basketball trading cards, or other digital assets, buyers could be left with tokens pointing to links that no longer exist, added Mr Goh.

READ MORE:

• Metakovan, owner of world's dearest NFT, sells tokens of a token out of Singapore
• Ecomi gains users on NFT wave
• NFT: the crypto craze over memes, tweets and pixel art

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