The most recent example was this year’s US Superbowl, an event watched by an estimated 112mn people worldwide, which, alongside the usual mix of offbeat advertisements saw multi-millions spent to promote some of the higher-profile cryptocurrency exchanges.
However, crypto no longer means just bitcoin, ethereum or the plethora of so-called ‘alt-coins’ that trade every day on exchanges. The relative new guy in town is the non-fungible token.
What an NFT is can vary wildly: simple jpegs of colourful cartoonish characters; sophisticated human or artificial intelligence-created ‘art’ in a more traditional sense; or video clips of top sporting moments or viral YouTube videos. Even the first ever tweet, sent by the founder of Twitter, is now an NFT.
The focus now is on places people can show off their art, and the ‘metaverse’ is already starting to offer people help to display their sometimes extensive and high-value collections.
The origins of NFTs
Some of the very first NFTs date back to 2014, and arguably the most famous early NFTs – the CryptoPunks – were created in 2017. But it was the sudden wave of adoption experienced in mid-2021 that has fuelled the public’s current interest and the staggering growth in the area, with tens of billions of pounds already having been spent by people wanting a slice of the action.
NFTs are touted as ‘one-off’ artworks stored on the blockchain, with their novelty and prestige being in the public traceability of proof of ownership.
Most of the NFTs currently in circulation are based on the Ethereum blockchain, which is more than just a cryptocurrency as it allows for the creation of smart contracts by, among others, NFT creators.
These enable people around the globe to buy, transfer and ultimately trade in NFTs across decentralised networks. That said, other crypto blockchains such as Solana and Cardano are now also seeing NFTs being ‘minted’ (the verb used to describe the act of creation of an NFT) and stored on their own blockchain ledgers.
Even Twitter has taken note and has worked to integrate crypto wallets to enable people to show off their NFTs.
While NFTs are not, strictly speaking, a monetary token like the more run-of-the-mill cryptocurrency we may now be used to, they are still a type of crypto token and in some cases can be worth a great deal.
For example, many will likely recall the media storm around the $69mn (£52.3mn) sale by Beeple of his 'First 5,000 Days' NFT artwork; then in the autumn of 2021, tens of millions of pounds was made from Sotheby’s auctions of Bored Ape Yacht Club NFTs; and earlier this month there was the sale of a rare CryptoPunk for a very respectable $23.7m. While some may still value Rolexes and supercars, there is a steadily growing portion of the populace who would now rather flash a digital asset, the value of which only those in the know will truly appreciate.
Some NFTs can also be linked to ownership of a physical item, others purport to generate a passive income in cryptocurrency, and still others are being used as a membership pass to closed circles of like-minded investors keen to share the latest ‘alpha’ on upcoming opportunities.
Investment risks
That said, NFTs bring their own complexities and not insignificant risks for those who may wish to invest in them.
Just like any investment, and particularly one in cryptocurrency, there is no guarantee your NFT will hold or increase in value, or will be worth anything at all at the end of the day.
The harsh reality is that most investments in NFTs are likely to lose money. While some outliers like the CryptoPunks and Fidenza Art Blocks have ended up being worth millions, it is very much hit and miss.
With tens, if not hundreds, of new NFT series’ being minted each day during peaks of activity, there are a lot of frogs to kiss and most will never find their prince.
Indeed, the value of NFTs, as with tangible art, still remains in the eye of the beholder and are subject to the same economies of supply and demand. Just like other unbacked cryptoassets, NFTs will only ever be worth what someone else might be willing to pay in the moment.
It is also not just financial risk – sometimes there will be ethical considerations. An example of where we saw this was a series of NFT artworks produced at the end of 2021 by George Trosley, a former cartoonist for Hustler Magazine.
While initially the mint went extremely well, with Elijah Wood of Lord of the Rings fame counted among their high-profile holders, when past racist cartoons created by the artist during his tenure for Hustler resurfaced, this led to a public outcry. This in turn led to Elijah Wood and many others publicly abandoning the project and donating their proceeds of sale to charities supporting anti-racism causes.
Last but by no means least, there are of course the risks of fraud and scams that dog both cryptocurrency and NFTs. These can take the form of so-called ‘rug-pulls’, where a scammer produces a series of NFTs with the promise of future utility and upside, only to then take the money and run – in most cases this can amount to a few million dollars for a 10,000-mint run of NFTs.
Then there are scammers who impersonate a popular project in the hope of fooling enough people to part with their crypto for an NFT that has no association with the project they were hoping to acquire.
Finally, there is straightforward theft. A bad actor hacks your crypto wallet or a smart contract you have interacted with, stealing away your favourite NFTs. Unfortunately, all these variations are regular occurrences. The nascent nature of the NFT space, combined with significant knowledge gaps around smart contracts and a lack of online vigilance, can leave new adopters extremely vulnerable.
While present market conditions may have dampened the crypto markets somewhat, for as long as we continue to experience bull and bear cycles alongside increasing mainstream hype around such things as the metaverse, it seems unlikely that NFTs are going to go away anytime soon.
Christian Toms is a partner in Brown Rudnick’s litigation and arbitration practice
