Navigating the investment dangers and opportunities in NFTs

The NFT space is moving at a speed of a million tech miles a minute, but before you leap into NFTs as an investor or collector, here are a few things to consider.

An NFT, which stands for non-fungible token, is a digital currency (a token). Government-issued currencies are fungible in that each unit (a dollar) represents equal value and is a medium of exchange from one person to another. In contrast, something that is non-fungible is unique and of non-equal value, so it is not ideal as a medium of exchange, but it is ideal to represent assets that are unique.

The use cases for NFTs are limitless in circumstances where digital uniqueness is mandated or desired. An obvious one is for collectibles and art; in securities, for bonds, shares, options, warrants or royalties; in real estate, to evidence land titles or mortgages; in the cybersecurity sphere, for key access to safeguard systems and critical infrastructure; and in financial crime, for identity. 

Two hot NFT projects

People in the NFT space are going ape over two NFT projects: CyberKongz and Bored Ape Yacht Club.

CyberKongz are digital gorillas. They sold for about $34 each. CyberKongz was one of the first NFTs used for social signalling. Social signalling, also called flex, means using an NFT as a profile picture to brag about your crypto wealth.

The first CyberKongz NFTs are called the “Genesis Kong.” Interestingly, the creators issued a digital currency on Ethereum (an initial coin offering) called the Banana coin.

It’s interesting because each owner of a Genesis Kong gets 10 Bananas daily for 10 years. Today, one Banana coin is worth $61, and it has traded as high as $122, meaning that the Bananas are paying each gorilla owner (e.g., you) between $610 and $1,220 per day in passive income. If the price holds, over one year, that is between $222,650 and $445,300. Keep in mind that those owners paid $34 to buy the original digital gorilla. If the price of Bananas holds, the annual return for year one is 1,309,606%. 

Not only that – Genesis Kongs are reselling on the secondary market for $550,000 each at the floor price and so the base return on investment for this NFT is over 1,600,000%. One CyberKongz is currently selling for $35 million, and it was minted only six months ago.

Bored Apes

The second hot NFT project is Bored Ape Yacht Club, which is a collection of digital apes. They originally sold for $279 each and now sell on the secondary market for floor prices that start at $125,000. Some have sold for millions of dollars. The most expensive listing is Ape #122, selling for $350 quadrillion perhaps as a joke, but perhaps not.

Bored Apes are such a hot commodity, a few of the apes signed a deal with a Hollywood talent agency to represent them in film, TV and in commercials, and these ape brands are worth more than Britney Spears. 

It’s a GenZ world

NFTs are very much the domain of GenZs – they are creating the hot NFTs, the marketplaces, and using their social influence to impact influencer-driven NFTs. You can’t buy the hot NFTs that provide returns of 1,600,000% on the primary market in a normal way on an exchange. In the GenZ world, you have to join a channel on a social media platform and often have to be a smart contracts coder to have access. 

There is nothing wrong with that on its surface, but it becomes problematic when you consider that it blocks visibility over financial transactions. As soon as a financial ecosystem operates in darkness, it attracts organized crime and poses heightened risks of money laundering and terrorist financing. Who’s to know if, using the guise of NFT sales, people move hundreds of millions of dollars in Banana coins or Bitcoin, from Iran to Vancouver for the Iranian regime? No one.

Not risk free

NFTs are not risk free. Some projects are illegal securities; some are games of pure chance or of mixed skill and chance and are illegal online gambling; some are offering crypto lending; and some are scams. 

An NFT project tied to the popular Netflix show “Squid Game,” which required buying squid coins to buy the NFTs, blew up when the creators vanished online with over $3.3 million. A few days ago, a millennial sold three Bored Apes and because he did not know about smart contracts or digital wallets, he transferred three apes to a fraudster and is out about $4 million. 

A significant risk British Columbia faces with respect to NFTs is to the capital markets with mining, cannabis or LSD issuers pivoting into NFTs without any real developer expertise, understanding of the NFT space or desire to manage a legitimate enterprise. 

Buying an NFT can be problematic. Not all NFTs are created equal and grant the owner the same intellectual property rights. In fact, some multimillion-dollar NFTs grant no intellectual property at all. It’s important to understand what rights are acquired as part of the metadata of an NFT when buying one and to seek the advice of an expert. 

NFTs have lots of future promise and will be required for metaverse realities, but exercise caution: it’s bananas out there in the NFT world. 

Christine Duhaime is a financial crime expert with Fusion Intelligence.