NFTs - The pros, the cons, and the environmental impact

At this point, you've probably heard of NFTs, crypto, and the blockchain... but is it a good idea to invest?

The concept of investing in NFTs has attracted much attention in the past few years, especially within the art world. Last year, a single piece of artwork was sold in digital form for just under  R1 billion. Since then, the demand for digital real estate in the form of unique digitally signed pieces had increased exponentially.

In a previous piece (Digital Artistry - Setting the Scene for Bluechip Masterworks) we took a preliminary look at this burgeoning phenomenon. Now, after a full year of NFT drama, we ask the question - Are NFTs a good investment? What is the longevity of the investment? And what are the effects these digital tokens have on the real world?

Should you invest in NFTs?

To clarify, the idea of "investing" in an NFT can be a misleading term since these digital tokens are not exactly considered an asset class. NFTs utilise what is termed blockchain technology to certify and signify ownership. In essence, an NFT is the title of ownership of an "asset" and not the asset itself.

However, investing in tokenised assets is not strictly a bad thing. Should you discover a digital asset that appeals to your taste and you have the necessary funding then it might be a good idea to buy it. The value of each asset is placed, as always, on market interests. The only difference with NFTs is that there could be a niche market out there for practically anything you can think of. 

As such, ownership over an NFT means that you enjoy all the additional benefits associated with it. But regardless, it's important to go over the pros and cons before making an investment decision.

What are the pros?

There are a host of advantages to NFTs beyond simply owning a digitally signed title. For one, NFTs are open to anyone to invest in at any time. Digitally signed assets or tokenised assets are easily accessible and can be efficiently transferred from one party to the other anywhere in the world.

Ownership can also be secured by blockchain technology (a decentralised public ledger) which can then signify and record the ownership of any tokenised item. Beyond this, anything secured on the blockchain is publicly accessible and makes ownership more transparent.

Owning an NFT also presents an opportunity to learn more about this new form of technology which can help diversify one's portfolio by diverting a small number of funds to tokenised assets

What are the cons?

On the flip side, there are just as many reasons why investment in NFTs can dissuade savvy market experts who are less certain about the viability of this venture. As we've stated before, NFTs are not an asset class but rather a digital way of indicating ownership. Because of relatively limited knowledge of the market, tokenised assets have a reputation of having inflated value (see R1 billion sale of Digital Artwork) and have paved the way to a volatile market.

There are also environmental concerns revolving around the creation of NFTs which are considered energy-intensive. Most NFTs are supported through the Ethereum blockchain which utilises an operating protocol known as proof of work. A single NFT transaction, powered through the use of a decentralised network of computers, is estimated to use as much energy as needed to power an average home for about a day and a half. 

And if one considers just how many NFT transactions occur during a day (15,000 and 50,000 NFT sales a week according to NFT statistics) total emissions for NFT transactions alone are on par with that of New Zealand per annum.

Adding to the Ethereum saga, investors may also need to OWN some of the blockchain's native currency, Ether (ETH), to purchase an NFT. Regular investments using fiat money (such as US Dollars or the Rand) may be limited in options.

Analysing the environmental impact

Energy consumption per annum matches those of small to medium-sized developed nations. And while New Zealand is an extremely green country, transactions of a digitized token matching those outputs is extremely alarming.

While not directly responsible, the energy required to complete transactions on the blockchain produces millions of tons of carbon dioxide in energy produced to simply maintain them. Some artists utilising NFTs have argued that there is indeed a sustainable future for NFT investment while others argue it's a pipe dream.

The artist who sold the highest ever valued NFT at Christie's in New York, Mike Winkleman, is a proponent of this sustainable future. He argues that his artwork will be carbon "neutral" or "negative" by actively investing in renewable energy and conservation projects to offset the carbon footprint. "I think you will see a lot of artists doing the same thing," he explained to The Verge.

However, this "solution" relies solely on the altruism of artists who sell NFTs as opposed to proper regulations. But based on the decentralised framework of the blockchain, regulatory intervention is unthinkable and thus makes the argument that this is simply a pipe dream more plausible.

Final thoughts

At the end of the day, NFTs aren't going away any time soon. There are multiple reasons why you should and probably shouldn't invest in an NFT. However, it probably IS a bad idea to jump in and invest in something simply because it's tokenised and hyped up. The fundamentals of investment apply to anything, digitised or not, and your best move as an investor is to, as always, identify quality assets, and do what must be done to acquire them.

Read our previous article here: https://www.hamiltons.co.za/news/chic-accessories-fragrances-and-sensory-delights-for-a-winter-home/

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