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Is it crazy to buy art that doesn't physically exist?

Investing in collectables is nothing new. It ranges from traditional investments such as paintings and fine wines to more outlandish Beanie Baby toys and even tulip bulbs. 

Until now, collectables have been physical objects, but the latest craze is virtual-based. 

Investors are collecting non-fungible tokens (NFTs), which are essentially digital receipts that prove they own something digital, such as a piece of art, a song, or even a tweet. 

Modern art: The artist Beeple became one of the richest living artists after an NFT for his art, above, was sold by Christie's

The NFT is not the digital art or song itself, it is the receipt that proves ownership, comprising a long, unique combination of letters and numbers. 

Recent events make it hard to dismiss NFTs out of hand. There's big money in them and even established institutions are becoming interested. An NFT was sold by auction house Christie's in March for £50million – breaking all records. The sale of the associated digital art made its creator Beeple – real name Mike Winkelmann – one of the world's richest living artists. 

The owner of this digital artwork has not bought something they can put on their wall. They don't even get an artwork that they alone can look at on a screen. Instead, they own a digital receipt which says they are the owner of the artwork. Anyone else can look at it online, or even print off a copy and stick it on their wall. 

The sale by Beeple is not a one-off. In February, an animated online image of Nyan Cat, a grey cat with a pop tart for a body, sold for around £425,000. The following month, the artist Grimes sold a collection of digital artworks for around ten times that sum. 

NFTs are not just art works. In March, Twitter boss Jack Dorsey sold his first tweet – which said: 'Just setting up my twttr' – as an NFT for more than £2million. A French winemaker, Chateau Darius, is selling online images of wine bottles as NFTs for hundreds of pounds. 

Holly Mackay, of straight-talking investment website BoringMoney, agrees the NFT craze is strange, but adds: 'Maybe, it's not that weird.' She explains: 'Buying and selling art as a mere commodity to store value has been going on for centuries. And actually, the notion that a brown scrap of polymer with the Queen's face on it is somehow a fair exchange for anything worth £10 is quite odd, too.' 

An NFT is like a proof of ownership receipt. It is stored on a virtual ledger known as blockchain. This is the same technology that cryptocurrencies such as Bitcoin use. 

The advantage of blockchain is that the ledger is not overseen by any one party. Instead, it is stored by multiple parties. 

Susannah Streeter is senior investment and markets analyst at wealth manager Hargreaves Lansdown. She explains: 'Each unique token is recorded on a digital ledger shared on the network, and once it has been logged it can't be deleted. This can reduce fraud as it increases transparency of the transactions and helps with verifying the authenticity of assets.'

NFTs can use any blockchain. However, most tend to use the ethereum blockchain, which is the second-largest cryptocurrency by market value after Bitcoin. The rising popularity of NFTs has helped drive the value of ethereum to new record highs – and its value has risen from $205 to $3,266 in the last year alone. 

Tom Selby, senior analyst at wealth platform AJ Bell, believes that if you are thinking about buying an NFT, you should consider what it is worth to you – rather than its value to future investors. He says: 'As with any purchase, consumers should think about whether they are getting value for money in terms of what the NFT is worth to them. But it would be foolish to buy an NFT on the assumption it will go up in value as this simply cannot be guaranteed. That doesn't definitely mean you won't be able to make a profit, but that shouldn't be your primary motivation.' 

Streeter advises investors to proceed with caution, as rapid crazes have a tendency to fade fast. 

'Some tokens may become collectors' items, in the same way as a physical work or art,' she says. 'But there is a risk that the initial frenzy of interest will wane and the asset could end up being almost worthless, in the same way as once sought-after vinyl records have ended up in charity shop bargain bins.' 

Investors should also be wary of their environmental impact. The ethereum blockchain requires a network of computers to validate transactions and this is energy intensive. The exact amount of carbon emissions is contested, but high enough that many artists refuse to issue NFTs on environmental grounds.

As ever, it is only really possible with hindsight to tell if a new collectable craze is a bubble or a new way of storing wealth. Current investors are hoping they are getting in early on a new trend that is set to run and run. But sceptics will point out that frenzies like this rarely end well.

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Streeter believes that however it plays out in the long term, the potential for NFTs is huge. 'The gaming and fashion industries and social media are likely to be the next frontiers,' she says. 'In-game purchases are already big business for companies such as Electronic Arts and Epic Games. The use of NFTs could allow players to buy unique accessories or even houses for their avatars, which they could potentially sell on as collectables, instead of becoming worthless if they leave the platform. There could be a market created for fashion designers to sell styles to add to personal profiles on social media.' 

David Kimberley, an analyst at investment platform Freetrade, believes NFTs could have long-term potential as a solution to securing ownership and authenticity on the internet. He says: 'It does seem like we're in the early days of this phenomenon and there's probably going to be a lot of teething issues along the way. 

'But it's easy to see how improvements in the underlying technology could cause a large-scale shift. Not just in how artwork is sold, but how we establish ownership of the bits and bytes that float around the internet.' NFTs are bought and sold with cryptocurrencies, so if you want to buy one you will usually need a cryptocurrency wallet. However, some marketplaces allow you to use an ordinary debit or credit card. 

Gary Bracey, chief executive and co-founder of NFT marketplace Terra Virtua, advises potential NFT collectors to take their time and do their own research before going ahead with their first purchase. He says: 'Make sure any NFT you are considering is genuine. It needs to be what we call 'minted' on the blockchain and thus authenticated forever.' 

Bracey adds that collectors should consider the rarity of an NFT as this may affect its potential long-term value. He also advises that collectors should never share the private keys to their cryptocurrency wallet with anyone.

Still confused? That's understandable. The whole notion of NFTs is mind-boggling. However, you may take confusion as a warning sign. Rob Morgan, analyst at wealth platform Charles Stanley Direct, advises: 'The principle, 'If you don't understand it, don't invest' tends to be a wise one with alternative investments like NFTs. Also be watchful for scams, which can be prevalent in an unregulated environment.'   

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