Non-Fungible Tokens

Financial Fraud or A Business Opportunity?

Robin Zhu, Senior Correspondent, US

12.00am PST, January 21, 2022

In March, 2021, at Christie’s Auction, a digital art was sold for record-breaking 69 million dollars, and you might wonder who the creator of that art is, and whether he or she is a master like Van Gogh and Picasso. The artist is Beeple, whose real name is Mike Winkelmann, and the art sold is unlike any traditional painting but in a digital form, or so-called Non-Fungible Token (NFT).

So, what are NFTs? In economics, a fungible asset is something that is interchangeable like money and gold, while intangible assets are very unique, such as patents, copyrights, and a company’s brand. NFTs use blockchains to record information of each artwork, or digital item in general. To give a brief introduction about the blockchain, it’s associated with the idea of de-centralization, allowing thousands of computers to store and share information simultaneously, instead of storing plentiful information in one. Thus, blockchains allow numerous computers to complete tasks together, and build the foundation of digital coins, cryptocurrency that flows through the network, and also the NFTs, files that can tell the ownership of a work of digital art.

Why NFTs are so valuable? Are they really worth millions of dollars? In reality, a product or service’s price is determined by the demand and supply in the market. Due to the scarcity of resources, some products or services can be extremely expensive, because of the low supply and huge demand. Another reason why some goods’ prices are very high is that they are unique, so consumers are motivated to buy them so that they can differentiate themselves from the others. This causes a confusion in the pricing of NFTs, since people can easily copy and download digital files by themselves in most cases, which make the digital files seem valueless. However, the blockchains impart NFTs unique characteristics: the information of how many times the digital art work is traded and downloaded is stored and can be retrieved by people, so they will know who the first-hand buyer of that digital property is. Hence, the unique characteristics guaranteed by the blockchain mechanics enable the NFTs to be priced, and explain why the NFT of Beeple’s art work can be sold for $69 million at the beginning.

Nowadays, NFTs are more widely seen in the trading of digital arts, but the application of NFTs can be extended to more fields and products, even the real-world tangible assets. By tokenizing the assets and using blockchains to make the tokens irreplicable, NFTs might be very popular and valuable in the foreseeable future. However, given the fact that buying NFTs is buying something that does not exist and has no substantial value in the material world, it’s reasonable to doubt that there are financial bubbles and speculators in the NFT market. There’s a possibility for a financial fraud to occur, if consumers who buy such tokens cannot sell them off or liquidate their values in other forms. To sum up, investors should consider the risks of buying NFTs carefully and evaluate them rationally, before they include NFTs as part of their portfolio of asset management.