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The 21st century can be considered as the starting point of a revolutionary change in how we approach finances and currency as a whole. In this digital era we have been introduced to various alternative assets through which we can make financial transactions with crypto currencies being at the forefront. Maybe in a couple of years with the development of the infrastructure and laws relating to the subject we might even be able to say, “Paper money…that’s so old school”
When we think of crypto currencies popular entities such as Bitcoin and Ether come to mind. They are have developed to such an extent that they are now part of everyday conversation and financial transactions with those who invested in the early days earning millions today. What you all may not have heard of our Non-Fungible Tokens or NFT’s for short. While they too are classified as crypto currencies they are a relatively new inclusion into the financial sector as a whole with the whole sector valuing at only $41 million in 2018. Come 2020 the industry value has risen to a whopping $338 million. But what exactly are NFT’s and why do they matter?
Before we go into the complex mechanics we must understand what ‘fungibility’ means. Simply put the term describes the ability of an asset or an item to be interchanged with another asset or product of the same value. To put it into perspective suppose you have one LKR 500 note and since you want change you ask a friend for 5 LKR 100 notes. This can be considered as the most common fungible everyday transaction. On a scale of 0-10 experts have attempted to classify items based on its fungibility with 0 being ‘perfectly fungible’ while 10 being considered as ‘non-fungible’.
In such a scale gold maybe considered as ‘perfectly fungible’ whatever shape of form it takes whether it be jewellery or gold bars it can always be melted down into its primary state and therefore will have the same value. Although paper currency is the most commonly transferred asset in the present day it is not completely fungible as it is possible to have money that is actually below the face value such in cases where the notes were involved in a bank robbery, since most paper currencies are serialized the bank can simply inform institutions not to accept notes with specific serial numbers therefore greatly diminishing its value. On this notion paper currency is rated as ‘1’ in the fungibility scale. While Electronic Funds are listed as 2, Crypto currency is listed as ‘3’. This is primarily because in crypto currencies you can see the full history of transactions that have taken place with that particular asset therefore tainted crypto coins would not have the same face value. Arguably there are specific coins designed not to include its transaction history but people would not be willing to trade with such coins and if something goes wrong there is very little a person can do as the law relating to the subject is in its infancy.
What some might consider a surprise is the fact that collectibles such as cards from the ever popular “Pokémon” franchise are listed at 9 in the scale. At the face of it if you are playing the trading card game 2 cards of a kind would have the same value on the deck, but as part of a collection it is an entirely different matter. You would have seen first edition Charizard cards being sold for $300 000, hard to believe a piece of cardboard has such a high value. Look closely and you will see that all the cards being sold at a high price have been well preserved, if someone were to find a similar card that has been significantly damaged the price would not be so high.
To have an proper understanding of the value of NFT’s such as the Original Neon Cat Gif which sold for 300 ether in February 2021 which the equivalent of $600 000 at the time the best comparison would be to priceless works of art such as the Mona Lisa. Unlike crypto currencies such as Bitcoin NFT’s are one of a kind and cannot be easily substituted for something similar, thus being included listed at 10 in the scale. The digital signature of these tokens are akin to a famous artist such as Leonardo da Vinci placing his signature on the Mona Lisa. This ability of NFT’s has helped digital creators profit from their creations as no matter how many people copy his/her work the original creation will still be considered scarce and therefore more valuable, case in point the Neon Cat Gif we mentioned earlier.
Despite the potential advantages in the fledgling sector of investors it too comes with its fair share of disadvantages. The possibility of fraud has been an underpinning concern of many investors as the realm of crypto currency as a whole is widely susceptible to scams and it is difficult to ascertain whether the person in question is indeed the original creator of the asset in question. This is partly the reason governments have been hesitant to accept crypto currencies as authorized modes of financial transactions.
At present investing in Non-Fungible Tokens is considered as ‘gambling’ rather than investing and there are a lot of things that can go wrong. Some experts consider the trend to be a digital bubble in the making and like all bubbles it is only a matter of time before it explodes. But we must not be quick to dismiss its potential for the future as after all it may only be a matter of time before crypto replaces paper currency as the most common mode of financial transactions.
