The intrigue - and costs - of the rise of non-fungible tokens or NFTs

THE latest investment fad to spark a flurry of interest - not to mention a flood of headlines and explainer articles - is the rise of non-fungible tokens (NFTs).

Yet while the focus has largely been on the nature of NFTs and how meaningful they actually are (or potentially could be) as investments, there are arguably larger issues worth considering too: the costs associated with their popularity.

An NFT is a blockchain-based record of information that is associated with a particular digital item - an image, say, or a video. While the underlying digital artefact can be easily reproduced, the idea is that an NFT identifies a single unique instance of the artefact, acting somewhat like a digital certificate of authenticity.

While NFTs have been around for some years, they recently gained prominence in another of those self-perpetuating fountains of speculative enthusiasm. Examples include a record auction-winning US$69.3 million bid for an NFT-associated digital mosaic, and Twitter co-founder Jack Dorsey getting on the bandwagon by auctioning off an NFT of his first tweet.

Importantly, owning an NFT does not confer "full ownership" or a monopoly over the digital artefact itself - which may still be reproduced and appreciated by others - nor any associated rights.

Granted, even in the traditional art world, owning a physical artwork does not give the buyer any reproduction rights, and copyright usually remains with the artist. Yet in the physical world, one at least owns the artwork in question. With an NFT, one gains nothing but the token itself.

One could imagine advocates of NFTs dismissing their detractors as close-minded luddites who are incapable of appreciating the potential of this new "asset class". Yet there are solid reasons for scepticism that do not boil down to a simple aversion to new-fangled technology.

One of these is the environmental impact. With the increasing use of blockchain ledgers, attention has turned to the vast networks of computers that maintain this technology, and the associated energy costs. A common illustrative example is that the maintenance of bitcoin now consumes more electricity annually than the whole of Argentina.

Even if some uses of blockchain might conceivably - though not necessarily - be valuable enough to justify their damaging environmental impact, it is hard to imagine NFTs providing anything of significant worth to offset the harm that they do.

That lack of societal value is related to a more general objection, which applies beyond NFTs: the opportunity cost of having funds flow into this sort of non-productive speculative investment.

In a world full of potentially meaningful investment opportunities - from infrastructure projects in emerging markets to startups based around life-improving technology - it is a shame that resources are being channelled towards energy-guzzling abstractions that bring no obvious wider benefits.

And while other recent frenzies such as the GameStop short squeeze may seem similarly ludicrous, investing in firms at least opens up the theoretical possibility that the funds might be used for productive purposes. Trading in NFTs, in contrast, seems only to enrich those who buy into this new game - and even this future windfall remains for now a gamble.