NFTs offer little more than the joy of ownership – at least for now

NFTs
Image by Vector Point Studio | Bigstockphoto

The Associated Press has worked out an easy way of making some extra revenue as it is moving to sell NFTs of its photos, in a great example of how NFTs are going to become a big part of the digital economy. However, beyond investment purposes and the Metaverse, I think that NFTs offer very little utility over the infinite number of perfect digital copies that can be made of the unique asset, meaning that the Metaverse is by far the best use case (assuming it takes off).

There is a lot of hype and confusion surrounding NFTs, but the reality is very simple. NFTs are unique digital watermarks that can be freely traded using the blockchain. This enables digital assets such as pictures, outfits, weapons or digital locations to be identified as unique with all copies (albeit perfect) easily identified as fakes.

This is already being used to great effect by artists who create artwork digitally and are then able to sell the original.

It also enables fractional ownership meaning that highly-priced investments (such as artworks) to be part-owned by small and individual investors. I have also long believed that it will make the ownership, trading of and investment in copyrights or patents much simpler to get access to and manage.

Like cryptocurrencies, NFTs are run on the blockchain – the most popular of which is Ethereum (not to be confused with the cryptocurrency token) – which, in mining terms, are the picks and shovels of the cryptocurrency gold rush. It is here where I think the investment opportunity lies because cryptocurrencies do not fulfil any of the requirements of a medium of exchange and remain purely speculative assets.

They are also not a hedge against inflation as their financial return remains completely uncorrelated with inflation. Over the long-term, an inflation hedge should be as perfectly negatively correlated with inflation as possible where the last 50 years of history clearly points to precious metals.

After the NFT gold rush …

The Associated Press will launch its NFT marketplace in collaboration with Xooa at the end of January using the Polygon blockchain, and I expect that there will be quite a lot of interest from collectors and speculators.

Despite the hype, I think that NFTs are only just beginning to get going, but that does not mean that there will not be a typical boom and bust cycle before this technology becomes widely adopted. We are currently in the upward climb of this cycle meaning that 2022 is likely to see more irrational investment actions as well as plenty of hype.

At some point, however, people are likely to realize that outside of investment purposes, NFTs confer no utility at all other than the joy of ownership as digital copies confer exactly the same utility.

The one exception is the Metaverse where unique digital assets will remain unique and will be very difficult to copy. The problem is that everyone has their own version of the Metaverse, meaning that a unique asset in one version can be recreated and re-sold in someone else’s version which greatly undermines the point of owning the asset.

It is not until there is only one version of the Metaverse which everybody accesses will NFTs really find their stride in the Metaverse. I am not expecting this much before ten years have passed.

Hence, it is likely that once users realize that there is very little practical point in owning the original version of a digital asset in the real world, then there will be a period of disappointment and disillusionment.

Following that, I think NFTs will find a strong position in the world of investments and then sometime in the next five to ten years, they will become an integral part of the Metaverse, should it take off.

I think that the best way to invest in this trend is to buy exposure to the blockchain rather than the assets that sit upon it. Consequently, I would avoid all of the cryptocurrencies (which I consider to be little more than gambling) as well as digital assets which in the current environment are likely to be overpriced. There will be a better time to get involved in the assets once the current speculative fever has passed.

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