The value of any investment can go up and down although all investors hope for an overall net gain. In the NFT world there is an element of risk not only in the artwork itself but the cryptocurrency it is traded in. A January 2023 article in Vanity Fair alleges that the value of some NFTs notably the ‘Bored Ape’ collection are not what it might appear to be and that the typical prices of ‘high value’ NFTs are past their peak.
Art from a respected source will always find and hold its true value. Consider the NFT work of Damien Hurst. Purchasers of his NFT collection ‘The Currency’ had the choice of keeping the physical artwork or holding only the NFT with the original work being destroyed. Many people do not care for Damien Hurst’s artistic style but they could not argue against his output and the desirability of his work.
It would be hard to make a point that work such as within the ‘Bored Apes’ collection has any great artistic merit nor a strong provenance. The Vanity Fair report alleges that demand and hence the auction hammer prices of these NFTs had been artificially inflated. Celebrities endorsed the collection, showcasing their purchases but they may not have paid as high a price as has been disclosed or they may have been indirectly compensated for their endorsements.
Crypto organisations might also be inflating the prices of NFTs through their own investment practices. Any well run business will plan to have funds in fluid assets plus additional investments which could be used to shore up lean times as well as an opportunity to bring in more revenue. A crypto business could easily invest in another crypto business to, hopefully, safeguard and increase the value of its assets. In short if you are in the cryptocurrency business you might want to invest some of your funds in NFTs, ideally in the same cryptocurrency. As the value of your cryptocurrency goes up so does your company value as well as the value of your NFTs and because someone (you) is buying NFTs their inherent value goes up as well. It has been alleged that one of the bodies involved in bidding for ‘Bored Apes’ was the crypto exchange FTX which spectacularly collapsed in 2022. These investment practices are not illegal; they are best described as displaying poor or ‘overly optimistic’ business sense.
An interesting off-shoot of the drop in value of some NFTs is the launch of Unsellable to move on NFTs. They will buy NFTs for a token $0.01 and transfer ownership. When including gas fees the seller will be paying for the privilege of getting rid of their NFTs. The operation is geared towards USA tax law, allowing losses to be traded against possible gains. If a number of NFTs have been bought and sold then the losses can be offset against tax payable on gains. In the UK this is akin to Capital Gains Tax which only applies to share and trust dealings. The taxpayer is allowed a yearly limit on profits from trading, beyond that tax is paid. Any losses from trading can be offset against the gains to reduce or eliminate the tax due. It is not possible to only claim the losses as a pay-out; there is no gain to offset.
The NFT investor should not see these trends as a collapse in the market. The days of Tulipmania and potential quick profits are over. The nature of the artwork or physical produce linked to the NFT need to be considered. It cannot be assumed that simply creating an NFT will mint money. There should be some innate value in the product itself. New artists are beginning to make their names in NFTs and established artists are also diversifying into the NFT field. Where the artistic value of an NFT is less obvious; other benefits such as collectability or real-world benefits should be considered.