The global hope and hype around non-fungible tokens or NFTs is ever increasing. Investors are increasingly considering NFTs as an asset class to be included in their portfolios. There is also more and more talk about NFTs being the future of digital transactions, creating a new and augmented form of ownership verified on the blockchain. Millions are being traded in the industry, and more and more investors are being drawn in for a piece of the action.
If you have been wondering about the investment craze in NFTs, here is all you need to know – whether or not you should fear missing out on this investment fad.
What is An NFT?
An NFT or Non-Fungible Token is a one-of-kind digital token that can be used to represent real-world assets like art or digital assets like images. This unique token is therefore linked to a particular asset and encrypted with the creators signature, thereby validating its authenticity and ownership.
Since each NFT is unique and cannot be replicated, it is represented as a non-interchangeable unit of data stored – a uniquely identifiable token. On the blockchain, it is represented in an interactive format with visual representation. The record of ownership of this cryptographic asset cannot be changed since its existence is time-stamped on the blockchain.
What Are Some Examples of NFTs?
Non-fungible tokens can digitally represent any asset – both online-only assets and real word physical assets. Online-only assets represented as NFTs include digital artwork, pictures/images, music, videos, and games/in-game items like avatars, domain names, event tickets and more. Real-world physical goods on the other hand include art, sculptures, memorabilia, real estate, vintage wine and more.
Essentially, and at the end of the day, anything can is tradable as an NFT.
Why Are NFTs Important?
The world of finance keeps evolving and developing even more sophisticated trading and loan systems for different assets. This has further deepened and increased market access. The advent of cryptocurrencies has created a step forward for the reinvention of structures of ownership and utility of assets in the form of non-fungible tokens.
So why are NFTs so important to us as investors?
Digital Representation
The idea of digital representation of physical assets is not new. But, combined with the benefits of a secure blockchain of smart contracts has created a new frontier for change in the industry. Now, we are creating new forms of ownership and utility programmed around objects enabling democratized investing by fractionalizing physical assets like real estate opening access to locked capital and creating a more egalitarian, sustainable society.
Market Efficiency
Increased market efficiency by removing intermediaries/agents, allows artists/traders/investors direct access to markets or audiences in the case of artwork.
Traceability
Non-fungible tokens are also increasing traceability of goods along supply chains, allowing ease of tracking of the provenance of wine for instance through the entire process, from production to sale.
Identity Management
Governments and other stakeholders are using non-fungible tokens for identity management. They are creating identity-based management systems verified on the blockchain to develop NFT based individual passports, vaccine passports, property rights and more. Unique identifying characteristics are programmed around individuals or assets. In the case of individuals, it’s allowing the streamlining of entry and exit in jurisdictions.
Are NFTs Safe?
Non-Fungible tokens that use blockchain technology like cryptocurrency are secure, that is tamper-resistant. The building block of blockchain technology is based on a distributed ledger technology, where everyone has access at the same time. Thus, this makes it difficult to hack or alter the system as the system is distributed and transparent. This creates an immutable record of assets within the blockchain. Full real-time access and public transparency of ledger changes preserve the integrity, which creates trust in the asset.
Notably, blockchain technology has great stamped out fraud, thus reducing some level of investment risk within transactions. However, the greatest risk you may face, just like with any other investment, is the loss of access to your asset, in the following instances:
- If the platform hosting your NFT goes under goes out of business, then you will lose asses to your non-fungible token.
- If someone gains access to unauthorized accounts (not through hacking). A case exists, where a musician by the name of 3LAU sold his entire album for $11Million using NFTs on NiftyGateway. It later went missing. According the NiftyGateway, this happened through direct access of the users specific account.
If you are sure that your account is secure. The platform you are hosting your NFT with won’t go out of business anytime soon. Then, the biggest question for you remains…are non-fumble tokens a good investment?
Are NFTs A Good Investment?
Investors use NFTs as speculative investments as their value could easily go to zero or turn around 100. The limited and scarce nature of NFTs, where access is only available through being the owner, allows for their value to grow over time.
How to Make, Buy & Sell NFTs
Non-fungible tokens are made, sold and bought on various marketplaces. Popular of which include OpenSea, Rarible, Foundation, SuperRare and more.
Here’s a quick TL;DR before we jump into it. NFTs are digital tokens stored on the blockchain where each NFT is unique and can be sold as a way to prove ownership over a digital file. This is unlike cryptocurrencies, where each coin is the same and thus fungible.
Making & Selling Non-Fungible Tokens
Actual NFT artwork for instance isn’t stored on the blockchain. However, the link to the file where the asset is stored, along with the token that acts as proof of ownership is. Therefore, you can technically make and sell any digital file as an NFT.
To do so, you should be looking at marketplaces with easy minting tools. However, there are a few considerations you may want to take into account before you make an NFT – transaction fees and the blockchain to use.
Transaction Fees
The majority of NFTs are sold on the Ethereum blockchain. Every transaction on the blockchain costs fees that are paid to the miners. Almost everything you do on the blockchain attracts a transaction fee. Transactions range from minting an NFT, bidding, to the actual sale and transfer – which may or may not pull through in the end.
Notably, there are some marketplaces like OpenSea that allow you to create NFTs and put it up for sale for free. These NFTs are placed up for sale without being written on the blockchain. Only upon sale, the NFT attract a bundled fee. The fees are for writing the NFT on the blockchain and transaction fees such as transfer fees to the buyer. However, there is a catch. To use this service, you’ll need to initialize your account which can be quite expensive.
Blockchain of Choice
So, there are a dozen of platforms you can use to make and sell your NFTs. These platforms can be found across a wide variety of blockchains. This industry is big, and you’ll need to read deeply into each blockchain and choose which suits your needs.
Note:
A few things to note about NFT creation.
If you find these fees impossible, you can create your non-fungible token by yourself. Though quite technical, you can create your smart contract and deploy it to the blockchain of your choice. You can also mint your tokens using it.
Also, note that there is no rule that two or more NFTs cannot exist for the same file. That is different editions of the same file or limited copies. Additionally, no rule that stops someone from taking the file you’ve used for your NFT and creating their own. The blockchain will note the creator as them and not you.
Buying & Selling Non-Fungible Tokens
Just like in traditional investing, the principles of buying high and selling low apply to NFTs as well. Investors can buy NFTs early – hold or flip right away – and sell them for a profit. The market value and price of NFTs is driven by the crypto community that is willing to trade them. As such, NFTs have no intrinsic value like stocks or bonds unless they are real-world asset-backed NFTs.
To trade in NFTs you’ll need a few things:
- Cryptocurrencies, stored in a digital wallted linked to your markeplace of choice. NFTs are mostly bought and sold with Ether, thus making Ether the most accepted crypto by NFT providers.
- A digital wallet to store your NFT.
- A marketplace to purchase your NFT such as SuperRare, Rarible or OpenSea for purchase.
Drawbacks
It hasn’t been all rosy for the NFT market, which has now surpassed over $40 Billion in 2021. Most NFTs are created and traded on the energy-intensive Etherium blockchain. This has drawn much criticism to the industry for its negative effects on our planet’s climate. The high energy costs associated with cryptographic assets resulting from validating blockchain transactions has become a major problem.
Are you an environmentally-conscious investor? If you are, know this – the sale of just one piece of NFT consumes as much energy as a studio uses in two years of operation. It’s just unsustainable. Whilst, the NFT industry is just riddled with shenanigans, scams and legal fights; creators are still making millions.
Takeaway
As an investor, here are your key takeaways:
- An NFT or Non-fungible Token is a unique digital tokens that exists on the blockchain network and cannot be replicated.
- NFTs are mostly written on the Ethereum blockchain, ergo mainly bought and sold using Ether.
- There various marketplaces such as OpenSea, Foundation, SuperRare, Rarible that you can use to make, buy and sell NFTs.
- The price NFTs is driven by market demand. Thus the value is based on what someone is offering to pay for it.
- NFTs are used to represent real-world physical assets or goods like real estate or artwork.
- Transforming real-world tangible assets into digital tokens allows them to be efficiently traded, reducing the probability of fraud.
- Before you invest, fully understand the market in order to make better and wiser decisions, and avoid getting swept into the NFT craze.
Image Credits: Top by Rostislav Uzunov from Pexels