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The brave new world of NFTs

What exactly are NFTs, how can they be used and what role will they play for the creative industries? This new frontier between art collecting and digital assets offers artists opportunities never seen before, as well as attracting a new type of collector.

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Just in time for Valentine’s Day 2022, the Belvedere Museum in Vienna released a limited edition of Gustav Klimt’s iconic painting The Kiss in the form of non-fungible tokens (NFTs). A high-resolution digital copy was divided into a 100 x 100 grid, resulting in 10,000 inimitable pieces. One NFT was sold for €1,850 and, at the time of writing, 1,730 pieces have sold. That amounts to €3.2 million from a potential €18.5 million.

To get a deeper understanding of what ‘non-fungible’ means, let’s look at the differences between NFTs and other currencies. Physical money and digital currencies are ‘fungible,’ meaning they can be traded or exchanged for one another. One euro is the same as another euro. They’re also equal in value—one euro is always worth another euro; one bitcoin is always equal to another bitcoin.

As unique as a physical painting

But NFTs are different: each has a unique digital signature. That means it’s not fungible (or replaceable). And the NFT’s supporting blockchain technology allows digital content that can range from videos, to songs, or even images. This becomes logged and authenticated on blockchains, the most common one being Ethereum.

NFTs are bought and sold online, mainly using digital currencies. Not only is the content logged on the blockchain, but also every transaction (from transfers to sales) is recorded. Once logged, it cannot be changed.

Essentially, NFTs are like physical collector’s items, only digital. So instead of buying an oil painting to hang on the wall, the buyers get digital files. They also get exclusive ownership rights. That’s right: an NFT can have only one owner at a time.

The unique data backing every NFT makes it easy to verify ownership and transfer tokens between owners. The owner or creator can also store specific information inside an NFT. For instance, artists can sign their artwork by including their signature in an NFT’s metadata.

This fusion between art and technology is expanding the canvas of audiences worldwide. Technology is about to create a scenario for artists that we haven’t seen in history of mankind. This is like the opportunity social media has created for influencers: please go read the New York Times best seller Crush It!. People had no idea that they could cash in on their passions – for instance, making US$100,000 a year from online cooking classes.

Fresh opportunities for artists and investors

NFTs are going to do for artists what social media did for personalities. This is a moment for artists to tap into their creativity and market tenaciously. Perhaps as many as a billion people are currently setting out to be influencers, although many won’t make it. Being tenacious won’t make every artist a billion dollar Banksy of course, but there are new revenue streams opening up that previously were unthinkable. This is new ground for investors and collectors too. About three quarters of NFT buyers at auction are completely new clientele for the auction houses.

For their part, investors should keep in mind that an NFT’s value is based entirely on what someone else will pay for it. Therefore, demand will drive the price rather than fundamental, technical or economic indicators, which typically influence stock prices. That said, approach NFTs just like you would any investment.

Do your research and understand the risks, including that you might lose all of your investing dollars. And, if you decide to take the plunge, proceed with a healthy dose of caution. What’s more, don’t give up on physical art and visiting galleries and art fairs any time soon, but dipping your toe in this brave new world can be a great learning experience.