What Are NFTs, And Are They Here To Stay? – Nasdaq

what-are-nfts,-and-are-they-here-to-stay?-–-nasdaq

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It’s a good time to be a comic book fan. Dueling streaming video services are serving up Zack Snyder’s version of the Justice League movie, while The Falcon and the Winter Soldier mini series launched. But comic books are also breaking new ground in the nonfungible token (NFT) space. One former DC comic book artist made $1.85 million in just four days auctioning 914 NFTs depicting the popular fictional heroine Wonder Woman. In response, reports talk of a letter (not an email mind you, but a letter) from AT&T (T)-owned DC Comics to freelancers, warning them not to create DC Comics-owned characters via NFTs.

Following the reported $69 million auction at Christie’s for an NFT for a piece from the digital artist Mike Winklemann (Beeple), we can understand why DC Comics would look to deter freelancers from cashing in on the company’s crown jewels, particularly since DC Comics is said to be exploring NFT opportunities itself.

But what exactly are NFTs, and how is it that they’ve squared up against some of comic’s most popular superheroes? Is this just another digital vs. analog battle brewing or something more? And are NFTs just another fad similar to fidget spinners, Tamagotchi pets, and pet rocks, or is there something more there?

What is an NFT?

First, let’s define nonfungible tokens. Think of an NFT as not only some unique digital media, but also a statement of provenance, or certificate of authenticity. Except instead of being physically separate from the purchased item, it is digitally embedded into the item. Instead of a sheet of paper, it’s a unique string of characters.

For example, the NFT for this piece of digital artwork created by actress Lindsay Lohan is 0x60f80121c31a0d46b5279700f9df786054aa5ee5. Think of it like an unreproducible signature, because in order to forge it someone would have to change not just one signature, but every signature in the distributed ledger, or blockchain. That string is connected to a blockchain, the same technology that powers cryptocurrencies like Bitcoin and Ripple. NFTs are part of the Ethereum blockchain, so they are individual tokens with extra information stored in them, which allows them to take the form of art, music, video, etc. in the form of JPGS, MP3s, videos, GIFs and more.

Blockchains work by using a distributed ledger, meaning that instead of having only one record of a transaction, everyone who is part of that blockchain has a copy. Further, they must all agree on the details of that transaction by performing complex calculations — a system that yields a secure and unchangeable document. That not only makes the technology and the subsequent unique digital identifiers a great solution for supply chain and asset tracking, but also for NFTs. Think of it in terms of dollar bills in that one can easily replace one physical $1 bill with another. An NFT by its very nature is unique and therefore non-fungible — hence the name.

So, in its most basic terms, NFTs transform digital works of art and other collectibles into one-of-a-kind, verifiable assets that are easy to trade on the blockchain and that will carry with them a history of every single transaction.

Once an obscure part of the broader blockchain technology world, NFTs have boomed in recently months as they have been embraced by the art, entertainment and media worlds. The types of NFTs are varied, but they could be anything unique that could be stored digitally and thought to hold value. Those characteristics are what make them appealing to the collectibles market, be it comic books, art, sports memorabilia or whatever. At their core, NFTs are like any other physical collector’s item but instead of receiving an oil painting on canvas, a rare comic book in mint condition or an autographed basketball, one gets a digital file that can be sold and has a verifiable, complete transaction and ownership history.

Disruptor or fad?

According to data published by Statista, the total NFT market was roughly $55.3 million in size during 2020 with art, gaming, sports and other collectibles accounting for just over 70% of the market. Given what we’ve seen thus far in 2021, it’s fair to say the NFT market will be substantially larger compared to last year. But the elephant in the room is whether it will be an agent of change that disrupts the collectible world, with ramifications in other industries — or is it just a fad?

In many respects the answer will be found in corporate activity. Recently, auction house Sotheby’s announced an NFT collaboration with digital artist Pak as part of its first sale to be held in April. AT&T’s DC Comics has put a proverbial stake in the ground, but the addition of companies with branded content such as Hasbro (HAS), Mattel (MAT) and of course Disney (DIS) would go a long way to legitimizing NFTs. In many respects there are few companies as adept as monetizing their IP as Disney, and given its character library that spans not only Disney characters but also those from Pixar, Marvel, and Lucasfilm, it could reap a rather nice windfall.

One potential reason why we may not see corporations, especially publicly traded ones, move into the NFT space has to do with the amount of power. Given the growth in the bitcoin market, which was recently reported to have past 18.5 million bitcoin, mining now requires special computer equipment that can handle the intense processing power needed to get bitcoin and that, in turn, means a lot of electricity.

How much electricity? According to Cambridge Bitcoin Electricity Consumption Index, the energy used to create bitcoin has continued to grow and has reached the equivalent to the annual carbon footprint of Argentina. Other reports suggest each $1 billion in inflows into bitcoin uses the same amount of energy as 1.2 million cars

In a world where companies are being increasingly scrutinized for their ESG and sustainability profile, one has to question if the NFT market opportunity is enough to overcome that scrutiny.

Like many other things, time will tell but those looking to track the developing NFT marketplace may want to check out some of the common NFT marketplaces such as OpenSea, Mintable, Nifty Gateway and Rarible.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Chris Versace

Christopher (Chris) Versace is the Chief Investment Officer and thematic strategist at Tematica Research. The proprietary thematic investing framework that he’s developed over the last decade leverages changing economic, demographic, psychographic and technology landscapes to identify pronounced, multi-year structural changes. This framework sits at the heart of Tematica’s investment themes and indices and builds on his more than 25 years analyzing industries, companies and their business models as well as financial statements. Versace is the co-author of “Cocktail Investing: Distilling Everyday Noise into Clear Investing Signals” and hosts the Thematic Signals podcast. He is also an Assistant Professor at NJCU School of Business, where he developed the NJCU New Jersey 50 Index.

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Lenore Elle Hawkins

Lenore Elle Hawkins serves as the Chief Macro Strategist for Tematica Research. With over 20 years of experience in finance, her focus is on macroeconomic influences that create investing headwinds or tailwinds. Lenore co-authored the book Cocktail Investing and in addition to her Tematica work, provides M&A consulting services for companies in Europe looking to expand globally. She holds a degree in Mathematics and Economics from Claremont McKenna College, an MBA in Finance from the Anderson School at UCLA and is a member of the Mont Pelerin Society.

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Mark Abssy

Mark Abssy is Head of Indexing at Tematica Research focused on index and Exchange Traded Product development. He has product development and management experience with Indexes, ETFs, ETNs, Mutual Funds and listed derivatives. In his 25 year career he has held product development and management positions at NYSE|ICE, ISE ETF Ventures, Morgan Stanley, Fidelity Investments and Loomis Sayles. He received a BSBA from Northeastern University with a focus in Finance and International Business.

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