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Bitcoins and NFTs continue to baffle even the well-informed

The advent of blockchain technology has lifted investor confidence to such an extent that collectables under the NFT and Bitcoin are heading for the stars 

March 17, 2021 / 09:12 AM IST

Two developments, not entirely unrelated, have set the financial and investment world agog. Bitcoin, the quintessential cryptocurrency, which hit the $50,000 mark in December, soon crossed another milestone on March 13 when it hit the $60,000 mark, leaving many mouths agape and many minds nonplussed.

Adding to the mystic of cryptocurrencies is the newfound phenomenon of Non-Fungible Tokens (NFTs) doing the rounds in the world of collectables, notably arts. On March 11, the BBC reported how auction house Christie's sold a digital-only artwork for $69m. Far from the usual sculpture or painting, the new owner the art work will get a unique digital token, the NFT.

The fear of hacking or that of data or ownership of an asset being compromised is what has made investors embrace the NFT and cryptocurrency. At the centre of both is the blockchain technology. Blockchain does away with centralised creation of an asset and storage of related data. Instead, thousands of computers store the same data with each fresh transaction heightening the already existing block, making it a chain. With thousands of computers together storing the data, a hacker must insidiously penetrate at least 51 percent of the computers to succeed — and that’s a near impossible task.

The most primitive form of digitisation of records started with dematerialisation of shares and other securities held with depositories. But depositories own a single database, whereas under the blockchain principle, thousands of computers would share the same data and would be privy to its embellishment or change.

While the obvious strengths of blockchain technology in protecting data and keeping hackers at bay are well acknowledged, the mind-boggling valuations of cryptocurrency and now the NFTs continue to mystify the plebeians as much as the well-informed.

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Those who have their reservations about both the valuation of cryptocurrencies and the growing demand for NFTs (especially in art) predict that the apocalypse is not far away — they warn that the bubble is going to burst. How can Bitcoin that has no underlying asset to justify its dizzying valuations or sovereign guarantee to legitimise it hold sway over investors and sweep them off their feet? As for the NFTs, while there is an underlying asset, to be sure, their stratospheric valuation has more to do with cloying sentimentality than with the worth of the asset.

“Just setting up my twttr” — the first tweet by Twitter founder Jack Dorsey went live for sale as an NFT and the highest offer so far is for a mind-blowing $2 million. The money will be converted to Bitcoin and it will be donated for charity in Africa.

While the world of collectables has always defied comprehension with its seemingly bizarre valuations, especially for vintage cars and timeless postal stamps, the huge premium commanded by Bitcoin, touted as a counter to the hegemony of the US Dollar as well as to replace fiat currencies, is gobsmacking.

Come to think of it, if Tesla were to accept Bitcoin as payment for its premium electric cars, the buyer would be able to buy it for just two Bitcoins, assuming the car is priced at $120,000 and Bitcoin remains steady at $60,000. Will it pass muster as payment or barter? Bitcoin is not a member of the Bank of International Settlements headquartered in Switzerland. Indeed, it cannot be as it does not represent a particular country.

The advent of blockchain technology has lifted investor confidence to such an extent that collectables under the NFT and Bitcoin are heading for the stars.

The moot question, however, is whether a cryptocurrency with no legal tender status nor backed by any underlying assets, like in the case of the NFTs, should be allowed to disrupt the existing international payments and settlement regime.
S Murlidharan is a chartered accountant and columnist. Views are personal.
first published: Mar 17, 2021 09:12 am

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