Prior to this year, if I told you that you could buy a tweet, a GIF, and a 30-second internet video, you might laugh and ask why would you pay for any of those. However, this year, the first tweet by Twitter’s founder, a cartoon cat GIF, and a video of an NBA dunk, collectively sold for more than $3 million. These items are referred to as Non-Fungible Tokens (NFTs). And the sales described above pale in comparison to the recent sale at Christie’s auction house of an NFT art collage for almost $70 million.
Although NFT sales may sound bizarre to anyone who grew up before the internet, this development is really just a digital addition to what is referred to as the collectibles market; original art, sports memorabilia, and other collectibles that have value due to their scarcity and uniqueness.
Most investment professionals urge investors to avoid collectibles as an investment, but nevertheless investors do invest in collectibles. If you are considering investing in collectibles, you should do extra due diligence, only invest what you can afford to lose, and consider not only the traditional risks of investing, but also the unique risks of investing in collectibles. Some of these unique risks are set out below.
The price of collectibles can go up or down in value dramatically due to the limited pool of potential buyers and the fact that valuations are very subjective.
The transactional costs of buying/ selling collectibles can be costly due to commissions or other compensation paid to professionals who connect buyers and sellers.
The collectibles market lacks regulation. As a result, the chances of buying a forgery or otherwise being scammed are higher in the collectible markets than in more traditional investment markets.
Finally, if someone tells you that collectibles can help to “diversify” your portfolio and act as a hedge against losses in other investments, consider this: The limited buyers for your collectibles will likely have less to spend on collectibles and less interest in collectibles if their own stock, bond, commodity, and real estate portfolios are dropping in value at the same time your traditional portfolio is losing value.
Remember, whatever it is, let’s make sure our money is working for us and not for somebody else. ¦
— Chris Vernon is an attorney with Vernon Litigation Group who represents investors in financial disputes throughout the United States. He is also licensed as a Registered Investment Advisor. Courts have accepted Mr. Vernon as an expert on investment-related issues as both a lawyer and an investment professional.