A Non-Fungible Token (also known as an NFT) is a unique digital certificate, registered on a blockchain, that represents ownership of a specific asset or piece of content. Think of it as a digital deed. The “non-fungible” part is key: “fungible” means something is interchangeable, like a dollar bill—any dollar can be replaced by another. “Non-fungible” means it's one-of-a-kind and cannot be replaced, like the original Mona Lisa. NFTs apply this concept of unique ownership to digital items like art, music, videos, or even a tweet. This digital receipt is stored on a decentralized public ledger, most commonly the Ethereum blockchain, making the record of ownership transparent and theoretically tamper-proof. While the technology promises a new way to own digital goods, for the value investor, NFTs have become a poster child for rampant speculation and an asset class largely detached from fundamental value.
At its core, an NFT is a snippet of code—a smart contract—that lives on a blockchain. This code contains important information: who created it, who has owned it, and who owns it now. When you “buy” an NFT, you are paying to have the blockchain record you as the new owner. It's crucial to understand what you typically don't get. In most cases, the actual digital file (the JPEG, GIF, or MP3) is too large to store on the blockchain itself. Instead, the NFT usually just contains a link pointing to where the file is stored on a server somewhere on the internet. This creates a bizarre situation: you own an unbreakable, cryptographically secure receipt that points to a potentially very breakable, insecure link. If the server hosting the image goes down, you could be the proud owner of a digital deed to a dead end.
The 2021-2022 period saw NFTs explode into the public consciousness, with digital art pieces selling for tens of millions of dollars. This frenzy was a textbook speculative bubble, driven less by a sober assessment of value and more by a potent cocktail of hype, social media marketing, and intense FOMO (Fear of Missing Out). Celebrities endorsed cartoon ape collections, and auction houses legitimized digital art sales, fueling a cycle where prices became completely unmoored from any underlying reality. For students of market history, the NFT boom was a fascinating, real-time replay of past manias, from Tulip Mania to the Dot-com bubble, where the story behind the asset became more important than the asset itself.
From a value investing standpoint, the popular conception of NFTs as digital collectibles is deeply problematic. Value investors seek to buy assets for less than their intrinsic value. The challenge with most NFTs is finding any intrinsic value at all.
A true investment is a “productive asset”—it should generate cash for its owners.
An NFT of a digital cartoon, however, produces nothing. It sits in a digital wallet, generating no cash flow. Its price is determined entirely by what someone else is willing to pay for it in the future. This isn't investing; it's pure speculation based on the Greater Fool Theory—the hope that you can always find a “greater fool” to buy the asset from you at a higher price before the bubble pops.
Beyond the lack of fundamental value, the NFT market is a minefield of risks for the unwary.
While the market for million-dollar JPEGs is a speculative sideshow, the underlying technology could have interesting future applications. Imagine an NFT as a concert ticket that can't be counterfeited, a university diploma that can be instantly verified, or even a deed to a physical house. In these cases, the NFT serves a functional purpose, acting as a secure and transparent vehicle for proving ownership or access. However, these use cases are still in their infancy and face significant legal and logistical hurdles before they become mainstream.
For now, an investor following the principles of Capipedia should view NFTs—especially in their current form as digital collectibles and art—as speculative tokens, not investments. They are lottery tickets, not businesses. While the technology may one day underpin valuable real-world applications, the current market is a casino. If you choose to participate, do so with a clear head, understanding the enormous risks, and using only a tiny amount of capital that you are fully prepared to lose. The foundation of sound investing remains unchanged: buy productive assets with a margin of safety. NFTs, as they exist today, do not fit that description.