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What are non-fungible tokens?

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24/03/2021
NFTs have garnered plenty of headlines of late, being at the centre of millions being spent on items as disparate as music albums, artwork and even tweets.

But what on earth are they? And what could they mean for your money?

What is an NFT?

NFT stands for non-fungible token, a fairly incomprehensible term for most of us. 

In basic economic terms, a fungible asset is something that can be readily traded, much like money. So to give an example, trading cards could be a fungible asset, or stickers. I could trade my doubles for ones that you have that I need to complete my collection.

Things are slightly different with non-fungible assets though. These are items which can’t be traded for something comparative, as they are essentially unique. 

NFTs are the digital version of this, items are ‘tokenised’ to make them unique and therefore ‒ in theory ‒ retain value.

What do I get for my money?

It’s worth emphasising that there is no tangible ‘thing’ that you get for your money when buying an NFT.

You’ll get a digital token for that asset, whether it’s a painting, an album or whatever. You own that token, and you can then sell if on should you find a buyer, just as you might with some other collectible.

The idea is that NFTs are essentially a way of establishing ownership of a digital asset, whatever that might be.

And the record of ownership is stored on blockchain, so there’s a sort of ledger for who owns what.

Selling for millions

NFTs have taken off of late, with all sorts of stories about them being sold for huge sums. 

For example the musician Grimes has sold a host of digital art ‒ ranging from still images to videos, sometimes with her music in the background ‒ which fetched a frankly ludicrous $6m. That’s the equivalent of about £4.37m. Some of the pieces were sold hundreds of times through an auction, such as the ‘Earth’ video which sold around 300 copies at $7,500 a pop.

Others though went as one-offs. One video, called ‘Death of the Old’, went for nearly $400,000.

Twitter founder Jack Dorsey has dipped his toes into NFTs too, selling his first tweet through an auction for $2.9m (£2.11m).

There seems to be little sign of the NFT craze dropping off either. A new platform is launching this week from Cypto.com, allowing users to bid for NFTs from the likes of Boy George, Aston Martin and even Lionel Richie.

Meanwhile a poker player called Tony G has announced that he will be selling his ‘iconic’ poker phrases as NFTs.

And perhaps silliest of all, Gucci has started flogging shoe versions of NFTs. So while you can’t actually wear the shoes in real life, you can ‘wear’ them using an ‘augmented reality’ (AR) app on your phone.

Are NFTs really worth anything?

An excellent question, and one that there isn’t really an answer to. There’s nothing to stop me making a copy of one of Grimes’ videos, or some artwork that has been sold as NFTs, and keeping that copy for myself. It hasn’t cost me a penny.

I don’t own the original though. It’s a bit like the distinction between buying an original painting and buying a print, except that when you are talking about digital assets there’s no real difference between the original and a copy.

If the NFT market continues to grow, then it may be that that artwork you bought by Snoop Dogg ends up growing in value, and you can sell it on at a profit.

But equally, the bottom could quickly fall out of the market and leave people holding onto worthless digital ‘tokens’ for pictures that they could have simply right-click and copied.

Ultimately only time will tell if this is a real innovation or a bizarre fad that disappears.

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