What is an NFT, why are they in the news, and does it sound too good to be true?

Stories of non-fungible tokens, NFTs, being sold for millions of dollars have made the news over the past year. Our blog from September 2021, Are NFT’s an investment?, looked at some of the craziness of the NFT marketplace. Just one example is when a token of ownership for a free clipart image of a rock sold for over 1,300,000¹. It seems crazy to us at Prato Capital.

The sale of NFTs have only gained momentum since our last article. The largest NFT marketplace, OpenSea, has seen its trading volume increase to $1.9 billion in just the first 10 days of 2022.² But as is often the case with new and emerging technologies, there is a dark side to the craziness of the NFT marketplace.

Reuters reported on February 12, 2022, OpenSea said last month “more than 80% of the NFTs minted for free on its platform were plagiarized works, fake collections and spam”. Another NFT marketplace, Cent, recently stopped most NFT sales due to “plagiarism, fakes and scams.” Cameron Hejazi, the CEO of Cent, called these issues “rampant” and that most NFT sales were just “money chasing money.”³ The bad news coming out of the NFT marketplaces continues with news that Her Majesty’s Revenue and Customs in the United Kingdom have seized three NFTs worth than $1.9 million due to suspected tax fraud.⁴

As we said previously in the September blog, some may consider NFTs a collectible. But like any other collectible, the marketplace is not for everyone. Throughout history, any collectible with a large price tag has drawn the attention of those that create forgeries and fakes. The NFT marketplace is no different and it is certainly a place for the buyer to use extreme caution.

Just because some individuals or groups are making profits on something, it does not always make a good investment. For the long-term investor, a diversified portfolio based on their risk tolerance has shown to be an effective way to build wealth for one’s lifetime.