Non-Fungible Token (NFT) [CapiPedia]

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======Non-Fungible Token (NFT)======
A Non-Fungible Token (NFT) is a unique digital certificate, registered on a [[blockchain]], that represents ownership of an asset. This asset is often digital, such as a piece of art, a video clip, or even a tweet, but it can also be linked to a physical item. The 'non-fungible' part is key: unlike a dollar bill or a share of Apple stock, which are interchangeable (or '[[fungible]]'), each NFT is one-of-a-kind and cannot be replaced with another. Think of it as a digital deed or a certificate of authenticity. This uniqueness is secured using the same technology that underpins [[cryptocurrency]] like [[Ethereum]]. While hailed by some as the future of ownership and collecting, for the prudent investor, NFTs represent a highly speculative frontier, largely detached from the principles of [[value investing]]. Their value isn't based on underlying cash flows or utility, but on market sentiment and what the next person is willing to pay.
===== What Makes Something "Non-Fungible"? =====
Imagine you have a $10 bill. If you swap it for a friend's $10 bill, you both still have $10. Your bill is **fungible**—it's interchangeable and not unique. Now, imagine you own Leonardo da Vinci's Mona Lisa (congratulations!). You wouldn't trade it for just //any// other painting. The Mona Lisa is **non-fungible**; it's a unique, irreplaceable asset.
NFTs aim to bring this concept of unique ownership to the digital world. While anyone can right-click and save a copy of a digital image, the NFT acts as a public, verifiable record on the blockchain that says, "You own the original." The debate, of course, is what 'the original' even means in a world of infinite digital copies.
===== How Do NFTs Work? =====
NFTs are not the digital assets themselves. Rather, an NFT is a bit of code—a 'token'—that lives on a blockchain. This token is governed by a [[smart contract]], which is a self-executing program containing the terms of the sale, the history of ownership, and a link to where the actual digital file (like a JPEG or GIF) is stored.
When you 'buy' an NFT, you are paying to have the blockchain record updated to show that your digital wallet now owns that specific token. This transaction is public and, in theory, permanent. You're buying the 'bragging rights' and the proof of ownership, not necessarily exclusive access to the art itself.
===== The Value Investor's Perspective =====
From a value investing standpoint, NFTs are not an investment; they are a speculation. The distinction is critical.
==== Speculation vs. Productive Assets ====
A true investment is a productive asset. It's something that generates value on its own.
  * A share of stock represents ownership in a business that (hopefully) earns profits and may pay [[dividends]].
  * A rental property generates [[cash flow]] from tenants.
  * A bond pays interest to its holder.
These assets have an [[Intrinsic Value]] that can be estimated based on their ability to produce money in the future. An NFT, like a rare painting or a Beanie Baby, produces nothing. Its //price// is determined solely by what someone else is willing to pay for it. This is not investing; it's a bet on market psychology, often called the [[Greater Fool Theory]]—the hope you can sell it to a 'greater fool' for a higher price before the enthusiasm fades.
==== The Mountain of Risks ====
Potential NFT buyers should be aware of the extraordinary risks involved:
  * **Extreme Volatility:** Prices can swing wildly, driven by social media hype and celebrity endorsements rather than fundamental value. Fortunes made can be lost in a matter of hours.
  * **Zero Liquidity:** If the craze for your specific NFT collection dies down, you may find there are no buyers at //any// price. You could be left holding a worthless digital certificate.
  * **Fraud and Security:** The crypto world is rife with scams, 'rug pulls' (where developers abandon a project and run off with investors' funds), and phishing attacks that can drain your digital wallet.
  * **The 'But I Can See It for Free' Problem:** The underlying digital asset an NFT represents is often freely viewable and copyable online. The value is purely in the concept of ownership, a concept the market may one day decide is worthless.
===== A Final Word: Tulip Mania 2.0? =====
Many seasoned investors view the NFT boom as a modern-day equivalent of historical speculative bubbles. The most famous is the Dutch [[Tulip Mania]] of the 1630s, where prices for rare tulip bulbs reached astronomical heights before crashing spectacularly, leaving speculators ruined. The story serves as a timeless warning: when the price of an asset becomes detached from its underlying utility or ability to produce income, relying only on the hope of selling it to someone else, you are no longer investing. You are gambling in a casino that has no posted odds and can close its doors at any moment. For the value investor, the path to long-term wealth is paved with productive assets, not digital tulips.