The Weird New World of NFTs

SMITH BRAIN TRUST – It feels a little like the Wild West, or the early days of cryptocurrencies. Welcome to the strange new world of NFTs, or non-fungible tokens.

Sparking a trading frenzy for cryptocurrency investors and collectors alike, NFTs represent unique digital assets, like jpegs and video clips that are bought and sold much like stocks or other physical assets.

Investors have been buying into the hype, and at a high cost to boot. Digital artist Mike Winkelmann, known as Beeple, recently made history when his NFT piece sold for over $69 million at an auction. NBA fans have flocked to TopShot to buy, sell and collect officially licensed video highlights of notable players. And the music band Kings of Leon made headlines after announcing their latest studio album would have a limited NFT release.

This odd moment in the economy might be why there’s so much money in the mix, says Maryland Smith’s David Kass. With so much money being pumped into the economy by governments and central banks in response to the COVID-19 pandemic, investors are turning to cryptocurrencies and speculative assets as a way to bet against potential inflation.

“There is certainly a desire to invest in other asset classes that might appreciate at a faster rate than the near-zero returns offered by short-term U.S. Treasury notes or bills. The concept of nonfungible tokens is appealing to those who believe in cryptocurrencies such as Bitcoin and blockchain technology,” says Kass, a clinical professor of finance at the University of Maryland’s Robert H. Smith School of Business. “Bitcoin is a type of digital gold, a new substitute for physical gold that people are using to hedge against inflation, at least temporarily.”

Whether NFTs and cryptocurrencies, in general, are a fad is another discussion, Kass says. However, crypto’s rise for the last decade speaks for itself and there are quite a few smart people that have jumped into the fray, he says.

Twitter CEO Jack Dorsey recently sold ownership of his first-ever tweet for $2.9 million, and mogul Mark Cuban announced his Dallas Mavericks could be among the first sports franchises to incorporate NFTs into its operations.

Investors who regret not investing early in Bitcoin or other cryptocurrencies might be particularly drawn to NFTs. But as with Bitcoin, when it comes to evaluating the prices of different NFTs, investors are at the mercy of others, Kass says. That makes it difficult to judge intrinsic value – especially when multiple bidders can drive up the price into the tens of millions of dollars, he says.

“Cryptocurrencies are at a stage where the average person on the street could have already invested in Bitcoin, whereas very few people have invested in NFTs because they haven’t been democratized yet,” says Kass.

“They say something is worth whatever someone else is willing to pay for it, and some assets –  like those in the stock market – can become overvalued.”

There is another benefit to this trend, Kass says. With NFTs serving as a unique two-way street between investors and artists, they may be the solution that creators have been looking for to help make the artists' careers more equitable. If artists and bands like Kings of Leon are successful in these early endeavors, don’t be surprised to see others join in.

“Most artists and musicians are not wealthy and can really use this kind of money to support their careers,” says Kass. “Seeing an art piece sell for $69 million is eye-opening, and even though a percentage of that goes to auction houses or intermediaries, to have that money flow back in the direction of artists is something that can be very good.”