“A picture is worth a thousand words.” Now, it can also be worth much more in money.
Non-fungible tokens (NFTs) are digital artwork or media whose “ownership” is certified on blockchain technology, something similar to an electronic register. This ownership can be transferred and is often sold through auctions and trading marketplaces.
Although NFTs were introduced as early as 2012, the practice burst into the mainstream last year when artist Mike Winklemann — famous for creating a virtual piece each day — sold a collection of his “First 5,000 Days” for over $69 million. Since then, the largest trading platform, OpenSea, was valued at $13 billion in January.
However, the idea of NFT ownership can be misleading and a fuel for skepticism. The purchase of a digital asset doesn’t stop others from downloading and enjoying it, nor does it give the new owner rights over it, especially not copyright authority.
Often presented as a pointless waste of money, many NFT owners may disagree.
Rags to riches to lawsuit
One investor, Cooper Turley, put it simply in an interview with TIME: “It’s insider trading.” People purchase NFTs believing that their value will go up, hopefully leading to high future profits.
According to The New York Times, Izzy Pollak was one such person. Living with three other roommates, he decided to buy two Bored Ape Yacht Club NFTs — a famous collection of monkey portraits — for a considerable amount of money. Selling it a few months later, he made around $190,000 and has since bought a house.
Money isn’t the only incentive. Unlike other, more impersonal forms of investment, NFTs are perceived as supportive of the artistic community: “The reason that a lot of people are spending so much money on NFTs is because they really want to get connected to that artist on a personal level,” Turley said.
For the most part, this may be a reasonable justification. Although the majority of sales don’t reach into the millions — in fact, NFT sales average less than $200 — they’ve become the lifeline for some day-to-day artists. As the technology grew more popular, traditional artists were finding that NFT sales were beginning to match, and then outpace, the price of their physical art. Artists can also profit from royalties, even if their art changes ownership later on.
Still, as was happening a year ago, creators have also suffered. According to The Guardian, while trading platforms have erupted in value, some of the art they host is stolen. Since many artists put their art up on social media accounts to grow an audience, forgery is incredibly easy — all it requires is to “copy and paste” the presented work. These digital copies are then sold as NFTs.
Aja Trier, an artist cited by the article, found 87,000 copies of her art on OpenSea, some priced at nearly $10. While she managed to convince the marketplace to take down fraudulent copies — mainly by criticizing the issue on Twitter — none of the money made its way to her. Meanwhile, OpenSea profits from the commission sales.
Moreover, given the anonymous and decentralized structure of blockchains, it can be difficult to sue art thieves. Meant as a way to uplift digital creators, NFTs seem to have created a hopeless environment of fraud.
This isn’t to say that NFTs haven’t made their way into court.
In early 2022, Hermès, a luxury brand, and Nike both filed lawsuits after NFTs were created that misrepresented their products and freely used their trademarked logos. While the disputes are ongoing, they have the potential to expand trademark law into the digital realm.
The other problem cropping up in court has to do with the nature of NFT transactions. Though the transfer of ownership is recorded in something known as a “smart contract,” this process has no legal backing. Instead, NFT projects are set up informally, such as through handshake agreements or — as in the case of two other lawsuits — over the messaging app Discord. According to Bloomberg Law, this can lead to later disputes and misunderstanding when a project becomes successful or fails. NFTs may soon require more binding contracts.
Tips for NFT investment
Despite the success stories that have emerged from NFT trading, the marketplace is rife with financial failure.
“Collectors spoke blithely about getting ‘rugged’ on certain NFT investments, about how easy it is for hackers to entice potential investors into fake projects,” according to the same TIME article.
Cited by Bloomberg, it’s been found that one in three NFTs are rarely traded, while another third are valued under the price it took to mint them — the process of getting the art onto the blockchain. Given that 2.4 billion NFTs were sold over OpenSea just in January, the potential for a poor investment is immense.
Meanwhile, regardless of its billion-dollar growth, the NFT economy continues to be unregulated and uncharted. Considering how much of these transactions happen digitally, hacking and phishing are not uncommon.
According to Security Intelligence, newer scam strategies have also appeared. For instance, at one point, scammers pretended to be a support team on OpenSea’s Discord server, offering to resolve investor’s issues by asking them to share their screen.
Therefore, if one’s thinking of joining the NFT space, there are some precautions to keep in mind: Treat NFTs as long-term investments and research a piece before purchasing it. It’s easy to get excited by a hyped-up NFT, but one should pay attention to its background, reception and aesthetic.
With 2022 passing by, the surge around NFTs seems to finally be dropping. In March, OpenSea trading fell by some 67%, a statistic cited by Bloomberg. But, with many joining the NFT trend, from video games to Starbucks, this slowdown most likely just indicates the end of a frenzy — not an era.
Contact Filip at breezembr@gmail.com. He is a media arts and design and international affairs senior.