The Emergence of Non-Fungible Tokens: What You Need to Know About This New Asset Class

In recent years, the world of investing has seen the arrival of a new and rapidly growing asset class: non-fungible tokens (NFTs). As a global investment firm, we at Global Investments understand the importance of staying informed on the latest market trends, and NFTs are no exception. This article will delve into the world of NFTs, explaining what they are, how they work, and how you can access them. We will also discuss the potential risks and uncertainties associated with this emerging asset class and explain why they may not be the most suitable option for long-term financial planning.

What are Non-Fungible Tokens (NFTs)?

Non-fungible tokens, or NFTs, are digital assets that represent ownership or unique characteristics of a specific item. They are built using blockchain technology, which ensures that each NFT is unique and cannot be replicated. This quality of being non-fungible is what sets NFTs apart from other digital assets like cryptocurrencies. While cryptocurrencies such as Bitcoin are fungible, meaning they can be exchanged on a one-to-one basis with another Bitcoin, NFTs are not interchangeable and each holds its individual value.

How Do NFTs Work?

NFTs are most commonly associated with digital art, music, videos, and other forms of creative content. They provide a way for artists to monetize their work by selling unique, limited edition digital collectibles. When an individual purchases an NFT, they gain ownership of that specific digital asset, and the blockchain ensures the authenticity and provenance of the item.

How to Access NFTs

To get started with NFTs, you'll need a digital wallet that supports the storage and transfer of NFTs. Most NFTs are built on the Ethereum blockchain, so you'll need a wallet that supports Ethereum-based tokens. Some popular wallets include MetaMask, Trust Wallet, and MyEtherWallet.

Once you have a wallet set up, you can access NFT marketplaces to browse and purchase NFTs. Some well-known marketplaces include OpenSea, Rarible, and SuperRare. Keep in mind that purchasing NFTs often requires Ethereum (ETH) or another cryptocurrency, so you'll need to have some available in your wallet.

Potential Risks and Question Marks

As with any emerging asset class, NFTs come with their share of risks and uncertainties. Some of these include:

1. Volatility: The NFT market has experienced significant price fluctuations, and there is no guarantee that the value of a specific NFT will remain stable or increase over time.
2. Regulatory uncertainty: The regulatory landscape for NFTs is still developing, and future changes in regulations could have an impact on the market.
3. Copyright issues: Ownership of an NFT does not necessarily grant the owner copyright to the underlying digital asset, which could lead to legal disputes or challenges.
4. Illiquidity: The NFT market is still relatively small and illiquid compared to more traditional asset classes, making it difficult to sell or trade NFTs at a fair price.
5. Storage and security: As digital assets, NFTs are vulnerable to theft or loss if not stored securely. Ensuring the security of your digital wallet is crucial to protect your NFT investments.

NFTs and Long-Term Financial Planning

While NFTs have generated significant interest and excitement, it's important to remember that they are speculative assets. Their inherent volatility and the uncertainties surrounding their future make them a high-risk investment option. For individuals focused on achieving long-term financial planning objectives, such as retirement or wealth preservation, a diversified investment portfolio that includes more traditional assets like stocks, bonds, and real estate is likely a more prudent approach. NFTs can certainly be an interesting and novel addition to one's investment portfolio, but they should be considered as a smaller, speculative component rather than a core element of a long-term financial strategy. Always consult with a financial advisor before making any investment decisions, and remember to balance the potential rewards of NFTs with the associated risks and uncertainties.

Unpacking the Risks

The five risks listed above are the right ones. What a list cannot show is how they interact, and it is the interaction that makes this asset class behave differently from everything else in a portfolio.

Volatility is not the main problem. Equities are volatile too, and investors accept that in exchange for an expectation of long-run return grounded in company earnings. An NFT has no earnings, no coupon, no rent and no residual claim on anything. Its price is entirely a function of what the next buyer will pay. That is not a criticism — the same is broadly true of collectibles and fine art — but it means the usual tools for judging whether something is cheap or expensive simply do not apply, and neither does the reasoning that makes holding through a drawdown rational.

Illiquidity and volatility compound each other. A market that is thin in good conditions can become effectively closed in bad ones. The relevant question is not what a comparable token last sold for, but whether there was a genuine bid at that level and whether one would exist on the day you needed to sell. A quoted price in an illiquid market is an invitation, not a valuation.

What you own is a separate question from what you can see. Ownership of a token is not the same as ownership of the underlying work, and it is not the same as holding the file itself. Before buying, establish precisely what rights transfer with the token, in writing; where the underlying asset is actually stored and who is responsible for keeping it there; and what happens to your holding if that party ceases to operate. These are not exotic edge cases. They are the first questions a lawyer would ask.

Security failures are usually final. Custody of a digital asset rests on control of a private key. Lose it and there is no institution that can restore access; disclose it and there is no mechanism to reverse the resulting transfer. There is no chargeback, no ombudsman and, in most cases, no realistic prospect of recovery. Anyone holding assets this way needs a genuine plan for key storage, for backup, and — a point almost universally neglected — for what happens to those assets if they die or lose capacity, because an executor who cannot access a key inherits nothing.

Regulatory change can affect access as well as treatment. The rules governing digital assets have been developing rapidly and continue to do so, across every major jurisdiction. That affects not only how a holding is taxed but potentially how it can be bought, sold, held, reported and passed on. An asset class whose ground rules are still being written carries a category of risk that established asset classes do not.

Tax and Reporting

The tax treatment of digital assets varies materially between jurisdictions and is an area of active change in most of them. Nothing in this article should be taken as a statement of how any particular holding will be taxed anywhere.

What can be said generally is that the practical burden falls on record-keeping, and that it falls at the point of acquisition rather than at the point of disposal. Keep, from the outset, the date and cost of every acquisition in the currency you report in, a record of every disposal and exchange, and evidence of transaction fees. Where an internationally mobile individual is concerned, the position may be complicated further by residence, domicile and reporting obligations in more than one country simultaneously, and by the possibility that a holding is reportable somewhere even where no tax is due.

Take advice in every jurisdiction that has a claim on you, and take it before you transact rather than at the point a return has to be filed.

If It Has a Place, What Size Is It?

The article above concludes that NFTs belong, if anywhere, as a small speculative component rather than as a core holding. Two practical tests give that principle some teeth.

The first is the total-loss test. Would the complete and permanent loss of this position change anything you have planned — a house purchase, school fees, a retirement date? If yes, the position is too large, regardless of how confident you are. Speculative allocations should be sized so that the outcome you can most easily imagine going wrong is genuinely survivable.

The second is the time-horizon test. Money committed to a goal with a date attached needs to be held in something you can convert on that date at a price you can broadly predict. A speculative, illiquid holding fails that test by construction. It is not that it might fall; it is that you cannot know whether you will be able to sell it at all when the date arrives.

What the Blockchain Does and Does Not Prove

Earlier this article says the blockchain "ensures the authenticity and provenance of the item". That is true in a narrower sense than it sounds, and the gap between the narrow sense and the reading most buyers take from it is where a good deal of money has been lost.

What the chain records is a sequence of events: this wallet created this token at this moment, and it has since moved between these wallets in this order. Those records are extremely hard to forge, which is a genuine technical achievement. But every one of those facts is a fact about the token. None of them is a fact about the work the token points to, or about the person who minted it.

Nothing in the process verifies that the minting wallet belonged to the artist, or that the artist had any rights in the image at all. A third party can take a work they do not own, mint a token referring to it, and the resulting chain record will be exactly as tamper-proof as one created by the original artist. The chain is faithfully recording an event that should never have happened. Nor does the record verify that the same work has not been minted several times over on several different chains, each with an equally impeccable audit trail.

This is the connection between two items in the risk list that are usually read separately. The copyright problem is not a legal footnote sitting alongside the technology; it is a direct consequence of what the technology was designed to do. Immutability protects the ledger, not the claim the ledger describes. Verification of the claim itself still depends on the ordinary, unglamorous work of establishing who the seller is, how they came by the work, and what a written contract says transfers with the token — the same due diligence an auction house does on a painting, with none of the auction house's liability if it gets it wrong.

The same distinction runs through tokenised real-world assets more generally; our coverage of Dubai's real estate tokenisation initiative looks at how the question changes when the thing behind the token is a building with a land registry entry rather than an image with none.

This article was written in 2023. The digital asset market, and the regulation of it, have moved considerably since, and nothing here describes the current position. It is general information only, not investment, tax or legal advice, and not a recommendation to buy or sell any asset. Digital assets are highly speculative, may be illiquid, are largely unregulated in many jurisdictions, and can lose all of their value. You should not invest money you cannot afford to lose entirely. Take independent professional advice appropriate to your circumstances before acting.

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Stephen James Mitchell

As the Managing Director of Global Investments, I bring 25+ years of expertise in finance, wealth management, and real estate. I specialize in portfolio diversification, deal structuring, and wealth preservation, delivering data-driven strategies for sustainable success in global markets.