NFTs have become a hot investment property in recent months; but what are they and what's so valuable about a digital file? Adam Maguire explains.

Last week, an online collector paid almost $340,000 for a piece of art sold via the website of British artist Banksy.

It wasn’t a physical drawing, but a digital one, backed by an 'NFT’ that claimed to verify its authenticity.

The only problem was, it wasn’t a Banksy drawing. Instead, it appears as though Banksy’s website was hacked, with a page linking to the digital auction added. Many were fooled into thinking this was the artist dabbling into a growing trend, with one paying well above the odds to secure the resulting piece.

There is a relatively happy ending - as the hacker returned the payment to the collector.

However it marks the latest twist in the strange world of NFTs, which have captured the imagination (and dollars) of artists, developers, collectors and investors alike.

What is an NFT?

NFT stands for 'Non-Fungible Token'.

To put that into plain English, it's essentially a one-of-a-kind, digital receipt.

As an NFT cannot be duplicated or replicated, attaching one to an item (like a file) can distinguish it from the countless other versions that might exist (which are, otherwise, technically identical).

Are NFTs a cryptocurrency?

No - but they are built on the same technology - called 'blockchain'.

Blockchain is the technology that helps to make an NFT or unit of cryptocurrency unique, as it creates a public record of each item - logging its creation and every transfer of it from then on (like when it is moved from one person’s ‘digital wallet’ to another’s).

That means it is very hard to forge a blockchained item, or falsify a transaction. It also makes it difficult - though not impossible - to steal and pass on something linked to a blockchain, as everyone will be able to see it being transferred (though they won’t necessarily be able to know who it’s going from or to).

In some cases cryptocurrencies can also be used to buy NFTs - but there's nothing to stop them being traded for traditional currencies either.

So what has that got to do with art?

While an NFT can be attached to any kind of file, it's its use by artists that has gained it the most attention in recent months.

That's because painters, designers and musicians have used them to add value to their digital work.

Digital artist Beeple is perhaps the most successful example, with a number of his NFTs selling for millions of dollars.

That includes 'EVERYDAYS: The first 5,000 days' - a collage of his earlier drawings, which was sold by auction house Christies for $69m earlier this year.

A collection of pixelated avatars called CryptoPunks have also sold well - with prices ranging from $355,000 all the way up to $7.6m.

Generally, someone buying an art-linked NFT is buying the file only - the artist continues to hold the royalty and reproduction rights.

But it's not just art that is selling well.

Everything from original copies of popular memes like Nyan Cat, to the first ever message sent out on social media platform Twitter, have gotten the NFT treatment.

Anyone can copy the files - so why are people paying big money for their NFTs?

There are lots of reasons why people are interested in NFTs at the moment.

Some may just be drawn in by the novelty factor of being involved in something at such an early stage. Others may be looking to make a quick buck.

But many also draw parallels between NFTs and the real world, and suggest that they are the modern equivalent of a very old tradition.

They argue that, for example, two copies of the same album contain the same art and offer the same experience to listeners. But there’s a reason why one might sell at auction for hundreds of thousands of euro, and another might be found for €20 in a record shop.

Likewise, the Mona Lisa is perhaps the most recognised picture in the world with countless copies - including replicas, forgeries and digital reproductions - but the one in the Lourve is the one that holds real value.

An NFT is like a certificate of authenticity for the digital world, and investors believe holding one makes their file more valuable than all the others.

Some hope that that will eventually lead to a return when they sell it on down the line, while others may simply want the bragging rights that come with holding an 'original'.

Just like with physical art.

Is there not a big risk in investing in something digital?

Of course.

Much like any investment, there’s no guarantee that the price paid for an NFT today will be the same it commands in the future.

Unlike other investment types, NFTs are a relatively new concept, so their longevity is yet to be tested.

And then there are the very specific issues that might arise around digital files.

There’s nothing to say, for example, that a future change in format will make a digital file inaccessible.

There have also been numerous cases of people being locked out of valuable cryptocurrency stashes, because they forgot the password to their digital wallets.

And, much like the physical art world, investors need to be wary of bad actors.

Theft on the blockchain is tricky, but it does happen.

Meanwhile the recent Banksy scam shows that fraud is possible too - and some will go to great lengths if they think they can trick others into handing over large sums of money.

Do buyers at least get anything real to go along with their digital item?

Not necessarily, but some companies have linked NFTs to real world items.

In May, Kinsale Spirits sold a token that represented a cask of 20-year single malt whiskey.

The buyer, who paid €83,000 for the NFT, will get more than a file - they’ll also get the cask of whiskey too.

Meanwhile US band Kings of Leon recently sold multiple NFTs as part of a promotion of their latest album.

However the tokens also doubled up as a kind of VIP pass, offering buyers limited edition vinyl and front row seats at their live shows.

Is this just a fad?

Possibly - it’s far too early know if the current activity around NFTs is because of their novelty, or the start of a sustainable investment industry.

It will simply be a case of 'wait and see' in terms of how the market develops - and whether people are still interested in NFTs in the coming years.

The only thing that will keep investors and auction houses interested is if NFTs continue to appreciate in value, and if a high-paying market continues to exist into the future.

However there may well be a role for NFTs beyond high-end digital art.

Patreon pages and tip jars are an increasingly common source of revenue for online creators, as they allow fans to show their support when buying a physical product may not be possible. NFTs could be an exclusive extension of that.

Some suggest they could also be used as a kind of online accreditation - perhaps as proof of a qualification someone attained online.

Some firms are also trying to find ways to apply NFTs to more traditional businesses.

For example, Cork-based Equideq aims to use them in the racing and breeding bloodstock industry, allowing people to join a syndicate for a relatively small amount of money.