If you’ve been on the internet, especially Reddit and finance Twitter, you might have heard of an investment opportunity through NFTs. So, what are NFTs, and why are people investing?
NFTs Defined
NFT stands for non-refungible tokens – reFUNGible, not reFUNDable. Fungible is a fancy word for goods that are mutually interchangeable. Dollar bills are fungible, as are commodities, but what does it mean for something to be non-refungible?
If a good is NON-refungible, it is unique and irreplaceable with another asset. Instead of exchanging a dollar for a dollar, these goods are one-of-a-kind, which adds inherent value by scarcity alone. In other words, the exclusivity of an object makes it more appealing and unattainable to the masses.
Now combine that concept with blockchain technology and cryptocurrency. We covered crypto in a previous blog, and to put the idea simply,
“[…] a blockchain is kind of like a game of telephone. […] In the same way that one person passes on a message, data is passed from one block to another. […] cryptocurrency is digital money stored within a blockchain to ensure that all transactions are private.”
So, to sum up NFTs: they are unique digital assets with a blockchain code that can only belong to the owner. These digital assets can be JPEGs, GIFs, or other formats, and they can be bought and sold as valuable assets like a real-life painting.
NFT Pros
NFTs represent real-world items or digital assets, which means you don’t have to worry about property management, storage, or logistics. The initial investment is often the least expensive part of the deal for property or fine art collectors.
As for other investments, stocks are often volatile and risky for new or intermediate investors. Unless you have a broker or fiduciary watching over your shares, it’s easy to lose track of how much you earn and what you lose per quarter.
Investing in gold or silver also comes with some risk. Despite the fact that the gold standard no longer backs the dollar, gold still has fluctuating value – removing the gold standard didn’t boost the price. Scarcity and ethical sourcing is also a primary concern when investing in gold or silver.
NFTs have almost none of the risks mentioned above. The price increases steadily with every sale, and there’s little effect on the “market” since they are representative of digital assets on the blockchain. Some NFTs are already reaching astronomical values, making them a hot investment.
This all sounds good, but are there any drawbacks to NFTs?
NFT Cons
Like other blockchain investments, there are drawbacks. For starters, NFTs are very new to the market, and few artists and creators have made significant contributions to the pool of tokens. There are a few standouts, mainly the monkey and lion series, but breaking into the NFT “scene” is especially complicated because of its newness.
Another issue is the blockchain itself. This technology allows users to make transactions outside of the regulated economy, which means the government or regulatory agencies can’t interfere if things go wrong. Because of this, there is no standard assigned to the value of an NFT – it depends entirely on the perceived value from the buyer.
For example, Picasso paintings have value because they are Picassos and because of their history. Art appraisers and historians can contribute niche knowledge about the piece and estimate a fair value for buyers. With NFTs, there are no appraisers or historians with decades of NFT experience to help define the value. This means that the seller is entirely responsible for setting a price regardless of quality or other factors.
This fact and the issue of non-physical tokens make NFTs a fraud risk. In other words, it’s easy to get ripped off if you don’t do your homework.
Tips for NFT Success
NFTs are a great way to invest, but because of their newness and novelty, it’s difficult to project changes in the “market” and how the value will increase or decrease over time. If you aren’t familiar with the blockchain or cryptocurrency, it might not be a good idea to make your first foray into the crypto world with NFTs.
For more experienced crypto investors, look into the NFT opportunities your currency has to offer. Ethereum has Decentraland, a virtual reality platform that allows users to buy real-world properties. Bitcoin may be getting more NFTs on the platform soon, which could help provide more stability to this emerging market.
Ultimately, it’s hard to say where NFTs will go because there are many incredible potential integrations with the real world. The best thing you can do is research, research, research. If you know someone who has had success with NFTs, don’t be afraid to talk to them about it! The (NFT) world is your oyster, and there are endless opportunities.
Happy investing!