Horse 2991 - Non-Fungible Tokens - Are They Worth Anything?

What do you think about NFTs? Are they a good investment? 

- name withheld

Sometimes Horse gets asked questions directly for comment. The problem with being a generalist and being across many subjects is that although I might be able to explain things in a broad sense, you're better off going to a specialist if you want proper advice. Advice is worth the usefulness of information and truth that the expert in question is able to impart upon the the person asking for it. As someone who is a jack of many trades but a master of none, then my advice is to go and speak to a professional. Even then, I still have a very dim view of most of the investment world and financial system, who derive their riches by moving the giant pile of money from one place to another; which is backed by the work of real people in the real world.

To address the actual questions though, I think about NFTs very little. From the outside of this particular world, the whole thing looks like previous bubbles such as the company craze, the tulip craze, both the market crazes of the 1890s and 1920s, the credit craze of the early 1950s, the era of when greed was good in the 1980s, and the dot-com bubble of the 1990s/2000s. From the outside NFTs look as solid as Box-Tops, Pogs, Pokémon cards, strips, and will only be useful as an investment vehicle when a long market emerges. Are they a good investment? I would be more inclined to buy shares in the Commonwealth Bank, BHP, Woolworths and Telstra because I know that those companies are reasonably likely to be here in 12 months but even then, asking me for investment advice is like asking me about the weather. 

In the broadest possible sense though, I think that investing in NFTs sounds like an insensible idea; not because I am a Luddite and don't like technology but because I have feet which walk in the real world and not the virtual one. There's something potentially very hokey to me about a thing which you can not even hope to hold or touch.

An NFT or Non-Fungible Token is as the name suggests, some token which is a string of digital information (which can be a picture, video, string of text, etc.) which as the name suggests is non-fungible. By being fungible, we mean that a thing is identical to other items like it. Petrol is a good example of a good which is fungible. Your motor car doesn't really care if you fill it with 30 litres of petrol from a Shell, Mobil, BP, Conoco, Texaco, Eneos, Union 76, Ampol or any other petrol station you can think of. A non-fungible item is a thing which isn't identical to another thing. Someone's house is non-fungible as there is neither another house which is like it, nor any other house which is in the exact same spot.

An NFT is similar to a house, in the respect that its non-fungibility is backed by a verifiable blockchain which is attached to the string of digital information in question. A blockchain for want of a better description, is like take Torrens Title for digital information, where every calculation can be independently verified in the same way as anyone can go to the Lands Titles Office and look at all of the mortgages, caveats, liens, stamping etc. that has been attached to a particular piece of property. An NFT is just a piece of digital property with a verifiable string of title that can be established.

That's all sound in principle but the question is is an NFT worth anything? That question hinges entirely on what you think that the concept of worth and value is. Someone who buys or mines an NFT in a blockchain, does so with the expectation that at some point in the future, they will be able to sell their NFT to someone else for some kind of value. Again we've run around to the concept of value; which isn't helpful.

Value as it relates to a thing being bought and sold, relies exactly on the agreement of the buyer and seller at that moment in time. The whole idea of money being a universal fungible token system, relies exactly on the agreements of all of the the buyers and sellers at any moment in time and the general fidus that they will continue to be fungible and acceptable to future buyers and sellers at a future moment in time. One dollar is only worth whatever goods and services that it is capable of being exchanged for. When carrots are worth $2/kg, then one dollar is worth half a kilo of carrots. The question of whether or not an NFT is worth anything, is entirely dependent on what its buyers and sellers happen to agree upon at this moment in time and what future buyers and sellers will agree upon at a future moment in time if the intent is to keep it.

The thing is that if nobody wants a thing, then it really doesn't matter what you paid for it in the past. Future buyers and sellers of a thing couldn't give a rip about what a thing sold for, except as far as it informs the story of what they will agree to now.

I get paid by my boss in Australian Dollars for the performance of doing work. I accept Australian Dollars with the reasonable expectation that I can them use them in a future exchange for goods and services. That doesn't mean though that those Australian Dollars are worth the same now as they were ten years ago, what they will be worth six months from now, or what they would be worth in another country. If I am paid Au$200 for a week's worth of work then I am exceptionally rich in 1975 where the Average Weekly Ordinary Time Earnings was only $75. If I am paid Au$200 for a week's worth of work then I am miserably poor in 2222 where the Average Weekly Ordinary Time Earnings might be $9000. If I take my Au$200 to Italy, then in the first instance my dollars are useless if I want to get a sandwich. An NFT will only be useful in as much as it is acceptable or even wanted by some future person who is prepared to take it in exchange for money or goods or services at some future date.

What do I think about NFTs? I don't care. As an investment vehicle they are only as useful as what the expected future market thinks about them. Any given NFT might be as valuable to someone in the future as a Type II Adelaide Pound or a Beanie Baby.

One of the slightly hidden things about the share market is that apart from the ASX200, the rest of the all ordinary shares are populated by many many companies which are only ever worth cents and tenths of a cent per share, which never pay dividends, and which go through an entire life cycle of going through an IPO, existing for a while and then being wound up at nil distribution to their share holders. I have no reason in principle to suspect that NFTs are any different to any other instrument which exists on any other börse. Probably some will do okay but mostly likely, most NFTs will be pointless. Besides which, I would rather spend many many dollars on a thing which I already know that people are likely to want to buy.