NFTs provide a way to protect the copyrights of digital goods, and investors could profit from accessing new types of assets. What’s good about NFTs, and what are the drawbacks?  

NFTs, “Non Fungible Tokens,” are the latest talk of the town. They represent a right to a digital asset such as digital arts or a piece of software code, whereas the usage or ownership rights are documented on a blockchain. The blockchain acts as a sort of tracking device that records when the asset is sold on.

Why is that useful?

Contrary to physical assets, it’s relatively easy to copy digital assets or use them online infinitely. That weighs on the value of those assets – because what’s the point of buying a digital painting if anyone can just view it online? You probably wouldn’t get much of a kick out of presenting something as accessible as that to your guests at a dinner party.

Besides making digital assets unique, NFTs allow for all sorts of automation. For example, artists can build in payment obligations, meaning every time the token is sold on, part of the payment goes to the creating artist.

NFTs could also protect software code. Thinking bigger picture, the fact that code can easily be copied is a real challenge in the digital age. What incentive does a software developer or a software company have to write innovative code if anyone can afterward copy and reuse it? Protecting software code is a key to digital progress. 

Opportunities and risks for investors

The market of NFTs has seen massive growth recently. While NFT token sales were at a few tens of millions annually some years ago, almost $300 million were sold in February 2021 alone, and some investors have made serious financial gains with their tokens.

But as fascinating as NFT developments are, there are downsides: For one, NFTs are not as secure as they seem to be. One issue is that the token can be separated from the asset in some cases, meaning creators can change the creation, even if the copyright is protected. You may buy a digital painting of a cat, and several months later it turns into a dog. Also, some NFT platforms have recently been hacked, which adds further to security concerns. 

Some also compare the rapid rise of NFTs to the ICO craze in 2017. A dancing GIF from Taco Bell has been bid up for $3,500, and there were many other such outlandish examples. 

That doesn’t discredit the entire space though. NFTs certainly have their use cases, and there are good investment opportunities. That said, the developments around NFTs are still in the early stage, so investors should proceed with caution.

For more information on digital asset investments and INVAO’s Managed Digital Asset Accounts, visit www.invao.org