What are NFTs and what do they have to do with trees? Good questions! We’ll get to NFTs in a minute, but first let’s look at trees.
I recently spent a weekend with family at a beautiful cabin in the forest. We are fortunate to regularly escape the heat of the summer and relax in the mountains. We always hike, read, explore, eat, talk, play games and just relax. I also spend time watching the trees. I imagine their life stories. Some are old and gnarly and some straight and tall. Some have been there for centuries, and some are just starting their journey. Some have thick, strong branches and some barely hold a small bird. They are as unique as people.
As I contemplated the trees, I pictured children climbing. Some of the trees were perfect for climbing with sturdy places to put feet and hands. Some of the trees, however, were too weak to even hold a few pounds or had branches that were too far apart to be able to climb more than a couple of feet. If climbing a tree was your or your child’s goal, it would be important to assess which tree was the best keeping in mind height, weight, agility, etc., of the climber. A good tree for your child to climb might not be a good tree for their brother or sister or friend or you. When was the last time you climbed a tree? Or are you past tree climbing years?
Now let’s look at NFTs. Be patient. This will all come together.
What is an NFT?[i]
NFT is short for non-fungible token. Non-fungible means that it’s unique and irreplaceable. A digital token is a code which stands as a representation of the holder’s right and is used to facilitate a real-world transaction. The transaction can be anything from an online money transfer to subscribing to a service. NFTs can be any sort of digital item that someone might want to own, such as a piece of music or a painting. It can even be a tweet.
- Graphic designer Beeple sold an NFT artwork at a Christie’s auction for $69 million.
- Twitter founder Jack Dorsey’s first tweet sold for nearly 3 million dollars.
Think of NFTs as gift wrapping. The value of the wrapping is negligible; the gift inside the wrapper holds the value. NFTs are digital wrappers that can encompass assets—any asset that can be stored and transferred on a blockchain.[ii] (Blockchain is a peer-to-peer decentralized database technology that makes the records of any digital asset transparent and unchangeable and works without involving any third-party intermediary. [iii])
The key word in NFTs’ description is digital. NFTs are bought and sold online using cryptocurrency. The concept of NFTs can be traced back to 2012, when multiple cryptocurrency researchers started talking about the concept. In their more current form, NFTs have existed since at least 2017. The vast majority of NFTs right now are bought using the Ethereum cryptocurrency, but other cryptocurrencies have started to develop the capacity for them.
When you buy an NFT using cryptocurrency, you can verify on the blockchain that you are sole owner of that work. No one can undo your ownership of an NFT or re-create the exact same one that you own. NFTs are like unique collectible cards that anyone can look at, but that only one person can own at any time. While the image or audio that an NFT represents is reproducible, the proof of purchase seals the NFT itself as being under the sole ownership of the buyer.
NFTs are an investment. Like a stock or any other investment, NFT prices can and do fluctuate. Because of the scarce nature of NFTs and the high demand from investors, gamers and collectors, people are often willing to pay large sums of money for them.
Is an investment in an NFT right for you?
It depends. It’s a risky investment that can fluctuate widely, just like baseball cards, paintings, or cryptocurrencies themselves. Wide fluctuations in value are common and, although regulation is currently sparse, digital assets and cryptocurrency are under the radar of financial regulators. You can expect lots of scrutiny and regulations in the future.
If you plan to invest in NFTs, you should bone up on the NFT market you’re exploring. Like any alternative investment area, you’ll need to think strategically and follow trends that often change rapidly. Yes, it’s possible to earn money through an NFT investment, but you must do your homework. It is also possible to lose money through an NFT investment. As you have learned through my blogs, where there are more unknowns there is more risk.
As you analyze, think of your investment portfolio as a tree. Each of you is unique. If you are a beginning investor, your tree is small, and the branches are flimsy. The weight of an NFT purchase could completely topple your tree. NFTs are more suited for investors with thick tree trunks and many sturdy branches that can stand the test of time. If you have a well-diversified investment portfolio that will meet your and your family’s needs into the future, then your tree may hold the weight of an investment in an NFT. Your tree would look strange, however, if you cut off all the other branches to hold the NFT. Your tree could even topple.
Because of the risk, volatility, and typically high cost, NFTs may not be an appropriate investment for you. However, it is a technological development of which you should be aware.
~Bev Bowers, CFP®