Non-fungible tokens, or “NFTs”, have been the subject of breathless media coverage since early 2021. Are NFTs the new Dutch tulip craze? Anyone who has taken Econ101 in college, probably remembers the Dutch tulip story. It may have even sounded fabricated at the time. When the tulips were being exported and sold (usually to the French) from Holland, the frenzy for the bulbs caused prices to skyrocket. Some farmers were said to have traded their houses for a single bulb and at the height of it, the value of one bulb was comparable to a mansion in Amsterdam. It almost sounds like fiction, right? But remember the Preacher in the Old Testament said, “there is nothing new under the sun,” and that may be an apt way of viewing NFTs in the 21st century.
Christine Bourran, the chief executive of the London-based art market analysts Pi-eX, provided a good framework for this question. “Ether has gone from $100 a year ago to $1800. A group of people have become millionaires and billionaires in cryptocurrency…It’s very complicated to turn [cryptocurrency] back into dollars or another fiat currency, and they don’t have many options for spending [it].” NFTs give these new ultra-wealthy people an option for spending their crypto wealth. An NFT can also give them something that money can’t buy but can create – status. With famous people in the market to spend their wealth, what better way to do that than by being part of a new fad that is being marketed as an investment. The problem is that when you have more than you could ever need, your concern with the value of any individual thing you own is diminished.
NFTs are a low-overhead endeavor from start to finish because they are created, viewed, traded and owned online. They are unique digital tokens (remember, tokens are created, transacted and recorded on the blockchain) associated with digital files of various stripes, including images and artwork. NFTs are closely tied to cryptocurrency as a method of purchase and sale, primarily Ether, although that is changing. Because of this, NFTs are also dependent on cryptocurrency, which, while becoming more widely accepted as an investment, is still not part of any mainstream transaction and payment methods.
If NFTs are rendered valuable because of how they are held (i.e., on the blockchain) and because of who owns them (e.g., Snoop Dog, Jimmy Fallon, Eminem, etc.), it may be fair to guess that the value is somewhat fragile compared to more tangible investments. If any aspect of the blockchain or high-profile ownership were to be exposed to fraud and/or fall out of favor with the masses, the value would also evaporate, and you’d be left with a lot of pretty digital flowers.
Keep reading…
Charitable Gifts of NFTs: How is the IRS going to treat NFTs from a charitable perspective?
Charitable Gifts of NFTs: Can I get a Charitable Deduction for my NFT donation?
Charitable Gifts of NFTs: Liquidation Process
Charitable Gifts Of NFTs: Qualified Appraisal Requirement