Could NFTs be today’s ‘Bowie bonds’, helping struggling artists and musicians to get going?

Hyperbole aside, a useful spin can be put on NFTs through their ability to securitise an underlying asset, offering a form of share ownership
However, it’s still early days and the process of acquiring an NFT can be costly and risky

Richard Harris

Published: 1:30am, 4 Jun, 2021

Why you can trust SCMP

Elon Musk, the chief of car maker Tesla, demonstrated his influence-by-tweet on the markets recently, when he pointed out the massive energy costs required to mine bitcoin – and depressed its price. We are probably expected to believe this was not at odds with his previous tweets in support of crypto tokens.

The energy consumption required to mine tokens is variously described as falling between that required to power Argentina or the Netherlands, and at these rates is expected to surpass Italy by 2024.

Some 75 per cent of this energy is burned by huge servers in China, including Inner Mongolia, where subsidised coal-fired power stations and a cool climate are ideal for bitcoin mining. It brings to mind the co-location of resources, where the proximity of iron ore to coal in central England fired the 18th-century industrial revolution.

Somehow, the dawn of industry appears somewhat more useful to the human race than the burning of polluting coal to make an abstract asset that has no visible means of support.

02:27

Cryptocurrency volatility highlighted by China’s recent crackdown and Elon Musk comments

Bitcoin is fungible in that one token (like coins) can be switched with another, with ownership recorded on the blockchain as a “hash” number.

This number can also certify ownership of an asset through a non-fungible token (NFT) that can’t be switched and includes metadata about the asset, such as the previous owners and where to find the file on the blockchain.

Digital NFTs may therefore represent collectable assets, such as art, photos, and audio and video files.

In March, a digital-only artwork by “Beeple” was sold at Christie’s for US$69 million, despite the fact that you can’t hang a digital picture on a wall.

Often, the actual ownership remains with the artist or a collector, but the proud owner of a hash number enjoys … bragging rights. Twitter’s founder Jack Dorsey’s sold his first tweet as an NFT for US$2.9 million. The literary masterpiece said, “just setting up my twttr”.

Budding Hong Kong artist dips toe into global craze surrounding NFTs

The NFT market is nothing if not inconsistent. Although NFTs are regularly sold in crypto tokens, prices are quoted in dollars. Art specialist Noah Davis has waxed lyrical about the craze: “This past year … really did break down that kind of membrane between the virtual life and the real life.”

Hyperbole aside, a useful spin can be put on NFTs through their ability to securitise an underlying asset, offering a form of share ownership.

A distant potential income stream might seem to have as much risk as owning Dorsey’s tweet, but you can tell your grandchildren that you invested in these guys when they were nobodies. Let us not forget that Decca Records turned down the Beatles.

05:15

SCMP Explains: What are NFTs?

Carolyn Wright, a business reporter who also presents RTHK’s weekend music show Sunday Escape, says NFTs could be an opportunity to help grass-roots musicians make an album, who thus far have been using options like crowdfunding from their fan base by offering, for example, front-row seats to their eventual concert or a special vinyl album.

NFTs provide a way to turn creative potential into the cash needed to get going. Aspiring musicians become less dependent on being picked up by a big label.

As a physical music collector, Wright recalls the hunt for a limited numbered album. “We would go through the record shop to find the lowest number possible, because you felt like somehow that was important. You can see how this might actually translate to that blockchain ledger, that you have a number within that system”.

Opinion: Climate-friendly or not, NFTs could open up new vistas to artists

We may think we’re smart but, really, we’re just digitising old ideas.

Established stars can package their back catalogue and make millions. Last year, Bob Dylan sold his for more than US$300 million.

In 1997, David Bowie bundled his pre-1990 royalties into bonds worth US$55 million, paying 7.9 per cent per annum. Taylor Swift has re-recorded her early work, bar for bar, to take back some ownership of her back catalogue.

Digital artwork Creation of My Metaverse by Serwah Attafuah is pictured ahead of an NFT auction. Photo: Sotheby’s/Reuters

They are, like any entrepreneur, big enough to cash out a lifetime’s work. NFTs as a risk asset might provide a way for young emerging musicians to raise start-up cash from friends, family and potential fans.

But we are in the early days of cyber-token applications, a little like the early cars that were preceded by a man with a red flag. One BBC reporter who tried to buy an NFT of a cat picture (don’t ask) found the net result was slim pickings even if your asset makes a profit.

It can be costly to establish a digital wallet and one has to pay a “gas fee” to a miner for a hash number, as well to sell the asset. You risk losing your whole investment if someone outbids your gas fee at an NFT auction, if the digital asset is deleted from the internet, or if the website with your wallet number goes offline – or if you forget your password.

Yet, it’s important to have another avenue for small artists, and entrepreneurs of all stripes, to bootstrap their creativity. The future is bright, we just haven’t got there yet.

Richard Harris is chief executive of Port Shelter Investment and is a veteran investment manager, banker, writer and broadcaster, and financial expert witness