Non-fungible tokens, or NFTs, are taking the world by storm. Digital tokens have been around for a few years but their popularity exploded when artist Beeple sold his artwork, Everydays: The First 5000 Days, in March for a breathtaking $69 million.
NFTs rely on blockchain technology to designate an official copy of a piece of digital media, allowing artists, musicians, influencers and sports franchises to make money selling digital goods that would otherwise be cheap or free. Tweets by Twitter co-founder and chief executive Jack Dorsey and Tesla founder Elon Musk show that virtually anything can be sold as a digital asset.
The growing footprint of NFTs
Today, NFTs have grown into a multibillion-dollar industry fuelled by art lovers and memorabilia hunters buying up millions of dollars worth of rarefied digital creations and souvenirs of celebrities from the fields of music, art, movies and sports, among others.
“NFTs have been around for some time but have jumped into the mainstream this year and faster than just about any aspect of the cryptocurrency and digital asset space,” says John Wu, president of Ava Labs, developers of Avalanche blockchain, a platform for decentralised finance.
NFTs have triggered a global rush of artists and investors scrambling to get some skin in the game. These digital assets are “creating massive opportunities for artists and creators to not only earn more revenue, but develop new connections with their fans”, says Mr Wu.
However, there is more to NFTs than enabling artists to sell their work. The digital tokens are disrupting a wide range of industries that for long relied on conventional means of doing business. NFTs are putting a digital spin on things in a way that was hard to conceive until recently.
"NFTs are taking the art, fashion, music and sports worlds by storm – and these industries are growing in their economic, social and cultural importance around the world,” says Nigel Green, chief executive of the deVere Group.
Ultimately, their reach is expected to extend even further, he says. This is because NFTs can represent ownership of anything unique, such as a contract conveying ownership and royalty rights to a song, or indeed anything else that can be contractually transferred.
Here, we look at five trending NFT sectors that are becoming more popular with investors.
NFTs’ brush with art
NFTs are taking the global art industry by storm. The timing couldn’t be better. The pandemic-led mobility restrictions, social distancing and working from home forced art lovers to find a new way to feed their passion. The introduction of NFTs to the art world provided just that.
Since the eye-popping bid for Beeple’s artwork, Christie’s and Sotheby’s have racked up outsize profits by selling artworks as NFTs, including a $3m sale of Andy Warhol: Machine Made, and another $17m sale of digital artist Pak’s work.
“The spectacular results are fuelling a digital art boon, [where] galleries and blue-chip artists are considering NFTs,” says Sascha Gianella, art adviser and the founder of We, The Muse, a visual artist professional support platform.
Artists are fast learning that NFTs give them the potential to make money from their artwork in ways previously unavailable. “NFTs allow us to trace provenance, exhibition history and the authenticity of ownership in digital art in a secure and permanent manner,” says Ms Gianella.
Thanks to smart contracts, artists are also able to profit from secondary sales via royalties, she says.
Investor tip: The beauty of any artwork lies in the eye of the collector. An artwork’s worth could be whatever the collector wants to pay. However, for an investor hoping to profit from their NFT investments, the byword is caution. With the market exploding and just about anyone peddling NFTs without regulation or checks and balances, it is hard to know whether you are buying a rare gem of value or a dud you will be left holding when the tide goes out. It is a highly speculative market, so it is best to limit your overall NFT exposure to a small percentage of your total portfolio – and be prepared to lose most, if not all, of your investment.
Music industry takes note of NFTs
The music industry has registered a flood of NFTs from celebrities jumping on to the gravy train. The industry has already had the likes of Snoop Dogg, Lionel Richie, Boy George, Grimes and Kings of Leon rake in millions by selling music and art as NFTs.
"NFTs deliver two key elements for the creative industries like art and music,” says Mr Green. “First, they introduce a dimension of authenticity with certified ownership; second, they create scarcity, as each digital artwork will only have one or, at most, a very limited number of owners.”
Musicians are also exploring NFTs as a new way of releasing albums. Kings of Leon became the first band to release an album as an NFT, tying special perks and features to its purchase.
“For an industry that has been forced to adapt rapidly in the digital age and fight content piracy, NFTs can play a significant role in protecting creators’ monetary opportunities,” Mr Wu of Ava Labs says.
The music industry is a particularly interesting frontier for NFTs with regards to ownership rights to songs.
“Normally, an investor would have to jump through many legal hurdles to re-register the musical work with different bodies whenever there is a change in copyright ownership,” says Viktor Prokopenya, a London-based FinTech investor and founder of trading platforms Capital.com and Currency.com.
While NFTs do not necessarily address the issue, they effectively offer a new asset separate from the copyright to a song.
“The ramification of which is that the NFTs themselves do not inherently entitle the owner [normally] to royalties, which are held by the copyright,” says Mr Prokopenya.
Investor tip: The NFT market is inundated with supply and speculators looking to make a quick buck. This causes price volatility. Investors must be prepared to pay increasingly larger sums for items they truly want to own. Also bear in mind, as with the physical world, the biggest winners in the NFT space are the established artists who already have enormous followings. Smaller and upcoming artists without a large fan base will struggle to replicate the financial success of their more popular peers and the same goes for their NFT offerings.
NFTs galvanise sports memorabilia game
NFTs have been embraced by the sports memorabilia sector. Sports franchises such as the NBA were quick to capitalise on it. Blockchain company Dapper Labs, which is in Vancouver, made a splash when it unveiled NBA Top Shot, a blockchain-based platform that allows fans to buy, sell and trade NBA highlights as digital tokens. One highlight of a LeBron James dunk recently sold for $210,000 on the platform.
Sports celebrities such as Michael Jordan are investing in the firm that received more than $305m in funding, including from past and current NBA stars.
Dapper Labs uses blockchain to create permanent certificates of ownership that cannot be replicated or deleted.
“Professional sports teams and leagues have been at the forefront of NFTs, realising the potential to create new fan connections and experiences,” says Mr Wu. “Like every part of NFTs, there is still so much untapped potential”.
Investor tip: While its hard to forge an NFT, the market is not free from foul play. Manipulation is prevalent in the market. People with several accounts can artificially inflate the price of an asset by trading between those accounts. If the issuing company behind a memorabilia NFT goes out of business and stops hosting those digital pieces of celebrity souvenirs, investors would be left with "this file no longer exists" tokens.
NFTs to sock away collectibles
If the NBA is profiting from NFTs, can sportswear brands be far behind? Trainer brands already recognise the lucrative opportunity in NFTs. They are focusing on investors who collect rare, limited-edition pairs. For many, digital collectibles are a natural extension of physical entities.
If NFTs of nifty runners is what you seek, a brand called RTFKT Studios has you covered. They are already selling collectible trainer NFTs, including an Atari trainer, which are fetching $10,000 apiece. By one estimate, RTFKT Studios has so far sold $3.1m worth of trainer NFTs.
NFT ownership is transferable, creating a secondary market. Each time the NFT is resold, RTFKT receives a cut. For creators, NFTs are the gift that keeps on giving.
“There has been a boom in the global collectibles market since the beginning of 2020, and we are just beginning to see NFTs' potential with relatively simple use cases,” Mr Wu says.
Investor tip: It may be too early to say if NFTs of collectibles are a worthy long-term investment or a passing craze. Values can be highly volatile as tastes and trends change, and a lack of track record adds further uncertainty. Investment advisers stress that it is important for prospective buyers to understand exactly what it is they are owning. It is probably best to view it as fun investment with money you can afford to lose.
NFTs land in property market
Property is one of the most recent targets of NFTs. “Real estate has long been considered a significant use case for NFTs, as properties are unique items that require transparent, reliable record-keeping,” says Mr Wu.
He points to the early days of Bitcoin, when efforts were made to create non-fungible assets with "coloured coins" representing a deed to a house or piece of property.
Fast forward to 2021 and a piece of online land in the blockchain-based online world of Decentraland was scooped up for more than $900,000, according to Reuters. It was the most expensive sale of NFT land yet, says DappRadar, a website that tracks NFT sales.
Decentraland is a blockchain-based world where ownership of online land can be bought and sold in the form of NFTs. Users can take a virtual walk around buildings, attend events and showcase their NFT artwork collections.
Investor tip: Property NFTs are largely the playthings of the ultra-wealthy. These digital collectibles are regarded more as status symbols than prudent investments. They may appreciate in value but they are so volatile as to wipe out the entire value of your investment in a day. Keep an eye on the online property market but for now, banish the thought of investing in a pocketful of collectible pixels as a down payment on your retirement income.
As with any trend, where there is money, businesses will follow. Before long, other sectors of the global economy could be adopting NFTs as they seek new revenue opportunities in a burgeoning digital marketplace teeming with a whole generation of digital natives.
“NFT cynics say they are a fad but people increasingly have digital lives and it is natural to want to take digital representations of luxury brands, sport, music and art into these worlds – and now they can,” Mr Green says. “The trend will only grow moving forward.”