If You Don’t Know About NFTs, Now’s the Time to Learn

By Duncan Ferris

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Our 'Key Themes For 2022' is designed to help you identify and capitalise on the areas to watch out for. Here we have NFTs.

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Non-fungible tokens (NFT) have been one of the biggest investment trends of 2021. They have been nothing short of a phenomenon this year, with NFT sales reaching over $2.4bn in the first six months.

However, the digital artworks have proved divisive, with half of the internet seemingly frothing at the mouth to get a hold of them and the other half scratching their heads and wondering what all the fuss is about.

So, are they just a fad, or will NFTs be hanging around for years to come?

How to invest in NFTs

Just as there is more than one way to skin a cat, there is more than one way to invest in NFTs. The first thing you’ll need to do is get hold of a digital wallet. If you’re well versed in all things cryptocurrency then you’ll already have one of these. If not, you just need to know that this wallet will store the cryptocurrency you use to pay for your NFT.

Once you have your wallet and an appropriate amount of cryptocurrency, which is most likely going to be Ethereum, as this is the most commonly used coin for NFT trades, you will want to head to a marketplace.

These marketplaces are applications which allow you to bid for NFTs with the cryptocurrency in your digital wallet. If you successfully outbid all other comers, you are now the proud owner of your new NFT. Simple enough.

But this isn’t the only way to invest in NFTs, as December saw the launch of the first ever NFT ETF, NFTZ. This can give investors a taste of investing in this burgeoning marketplace. But if you really want to get stuck in then you could get in on the NFT hype by investing in an NFT company.

NFT companies

There are a wide variety of different companies making interesting moves in the NFT space. Here are just a sample:

Funko (NASDAQ: FNKO)

Funko are not best known for being involved with NFTs. The company makes and sells pop culture collectibles, most notably its Funko Pop! figurines, which portray people and characters from films, shows, videogames and more.

The company has released several licensed groups of collectibles as NFTs under its Digital Pop! brand through Droppp.io marketplace. While reaction from pop culture journalists has been pretty mixed, Funko said in its third quarter results that all of the collections it released in the period “sold out in minutes”.

This is even more impressive when you consider the size of these collections. The recently released Star Trek collection, for example, comprised 48,000 packs.

The company’s offering here differs from a lot of NFTs because of the very low price. A standard pack of five collectibles costs just $9.99, while a premium pack will set you back $29.99. This relative affordability compared to many other NFTs could be a powerful tool in drawing in consumers who might not otherwise bother with digital art.

Blending their experience in peddling collectibles with the emerging craze for NFTs makes Funko’s Digital Pop! range an exciting prospect. 

WISeKey (NASDAQ: WKEY)

Swiss cybersecurity, AI and IoT specialists WISeKey have also decided to sink their teeth into the NFT market. The company has created its own NFT development business segment in order to develop specialized branded NFT marketplaces.

The White-Label NFT Marketplace platform constantly monitors clients’ NFT marketplace and provides cybersecurity, identity management, marketing and support. Clients can use the service to quickly set up their own NFT platform for an initial fee of $250,000, which WISeKey says can save them millions of dollars and months of development.

Though the segment was only launched in October, the company appears confident that the demand is in place for its new segment to succeed.  Additionally, the company has developed purpose-built certificates of authenticity for NFT proof of ownership, through its WISeArt product.

Shortly after announcing the new segment, WISeKey released its full year guidance for 2021, indicating that revenue would increase by 32% to $20m.

Cloudflare (NYSE: NET)

Cloudflare is another business getting in on the NFT game.

The web infrastructure and website security outfit’s Stream service is a serverless video hosting platform for live streaming and on-demand videos, offering video ingestion, encoding and recording.

The company noted that content creators on its platform were becoming increasingly interested in using NFTs as a means of claiming ownership over their work and transferring ownership. As such, Cloudflare introduced the capability for every streamer to be able to have their content represented as an NFT back in Spring.

In essence, the company is binding content with NFT’s, ensuring that the NFT is actually tied to ownership of content. It’s an interesting idea and one which could help NFTs escape the label of just being a fad without any proper function.

Are NFTs a fad?

A key topic to broach here is whether NFT’s are a fad, or whether they are actually a smart and viable investment.

This is a difficult question, as NFTs are essentially collectibles. They don’t necessarily hold any inherent value, but nobody thought that a Shiny Charizard Pokémon Card would be worth anything when it was first released.

NFTs seem to be able to gain value through a cult following just as Pokémon cards did in the 1990s.

Different series’ of NFTs have created social groups. Take the Bored Ape Yacht Club, comprised of the owners of 10,000 generated portraits of cartoon apes. Reported owners of these NFTs include celebrities such as Post Malone, Stephen Curry, Dez Bryant, and Jimmy Kimmel.

The group hold lavish private parties, so membership is a chance to rub shoulders with fellow famous and influential primate fans. Such is the demand for membership, that at the beginning of December a new Bored Ape NFT sold for 90 ETH, or just over $363,606.

You can call them a collectable or a status symbol, but it appears folks are willing to shell out a shedload of money for the right NFT. However, with so many NFTs flooding the market, very few are going to bring the same sort of clout as a Bored Ape.

As such, while NFTs might not turn out to be a fad, they are certainly an extremely speculative investment.

What is NFT wash trading?

We can’t really put together an overview of NFTs without looking into the dodgier side of them.

One major problem that indicates NFTs might not retain their popularity is the alleged prevalence of wash trading. This is a practice where investors simultaneously buy and sell the same financial instrument in order to manipulate pricing.

For example, an individual might sell an NFT they own to themselves at an exorbitant price in order to inflate the possible price of a future sale to a third party.

One alleged case of this was a $532m sale of a CryptoPunk NFT in October. Bloomberg reported that the sale was funded using a so-called flash loan, with the money and the NFT quickly switching back to their original owners. The NFT in question, the catchily named CryptoPunk 9998 was then placed back on sale for $1bn.

The concern with activities like this is that they distort the market value of NFTs, which can in turn dupe investors into paying through the nose for something with artificially heightened pricing.

Are NFTS used for money laundering 

Another concern which really stands out when it comes to NFTs is that they may be being used as a tool for quick and easy money laundering 

Famed crypto-commentator Mr Whale is one of those who has commented on the issue, stating on his blog that:

“Behind the facade of a bunch of bored rich dudes buying digital artwork at insanely high prices lays a sinister and twisted money laundering scheme for crypto’s ultra-rich elites to make their illegal profits look legal.”

So let’s dig into this.

Money laundering can be quite a difficult process. In attempting to turn dirty ill-gotten gains into clean money, criminals traditionally have to run the cash through different businesses and accounts until the paper trail is either non-existent, or simply too long and complex for suspicious eyes to track.

With NFTs, things are now far simpler. A criminal or criminal organisation can simply create their own NFT and buy it from themselves. With the transactions being conducted anonymously, the money is now clean, as it is simply the proceeds from the apparently legitimate sale of a piece of digital artwork.

Other more complex techniques are also used, but the results are invariably the same. Money washed clean from digital art sales.

But what does this actually mean for investors? That much is unclear at the moment, but for one thing, regulators and tax authorities could soon turn their attention to the market.

Something else worth noting is the pervasive money-laundering could give a false impression of the value of NFTs. As with the wash trading mentioned earlier, this might sucker keen investors into believing the digital artworks are worth for more than they are.

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In this article:

Topics:
Cryptocurrency
NFT
Industries:
Information Technology
Financials
Companies:
Funko
Cloudflare

Author: Duncan Ferris

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

Duncan Ferris does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the above article.

Duncan Ferris has not been paid to produce this piece by the company or companies mentioned above.

Digitonic Ltd, the owner of ValueTheMarkets.com, does not hold a position or positions in the stock(s) and/or financial instrument(s) mentioned in the above article.

Digitonic Ltd, the owner of ValueTheMarkets.com, has not been paid for the production of this piece by the company or companies mentioned above.