What Are NFTs?
Non-fungible…what?!
Non-fungible tokens (NFTs) are cryptographic assets on a blockchain with unique identification codes and metadata that distinguish them from each other. Unlike cryptocurrencies, they cannot be traded or exchanged at equivalency. (Investopedia)
NFTs are one-of-a-kind – you don’t trade one for a replicate or use them like cryptocurrencies/money in a way of transacting. They can be anything digital, although most commonly you can see NFTs sold as digital art (you’ve seen those monkey ones, right?) and in the wider form of collectibles. People are purchasing the ownership of these digital pieces, but it doesn’t stop them from actually being downloaded and people having their own copies…
“If all of this sounds bizarre, that’s because it is. The idea of paying for the symbolic ownership of a digital image that lives somewhere on the web and can be captured on a screenshot or right-click-download within seconds is so alien it seems either idiotic or ironic.” (Wired)
Forms of NFT include:
- Graphic art
- GIFs
- Videos and sports highlights
- Collectibles
- Virtual avatars and video game skins
- Designer sneakers
- Music
Similar to cryptocurrencies, NFTs exist on a blockchain which records a secure and decentralised ledger of transactions, firstly on the Ethereum network, but now on others. Like physical art, its value is based on its demand — apparently, a rainbow trailing, Pop-Tart cat can be sold for $690,000! That may be mind-boggling, but I once saw a candle made of wood in an art gallery – called “dumb candle” – valued at a similar price…
How Are They Used?
As mentioned, they have been popularly used to buy and sell digital art, amassing a whopping $174 million spent on NFTs since November 2017. And remember how anyone can view these images, screenshot and download them — you may ask, what’s the point? Well, essentially, this is for glorified bragging rights that come with the proof of ownership.
Each to their own.
On the surface, NFTs present an opportunity for artists to monetize their creations without the need for physical galleries, shops etc. This cuts out the “middle man” costs and keeps more profit for the artist, with options for royalties to be distributed when their product is sold onwards – definitely an attractive attribute for digital creators.
Brands have also joined the movement, such as Taco Bell and the NBA selling their own NFTs in the form of images and trading cards. It reminds me of collecting McDonald’s toys and Pokémon cards as a kid…but it was less than $10 for a Happy Meal and a pack of cards at the time!
Investing With NFTs
When it comes to investing, you can buy and sell NFTs based on speculation that you can profit later down the line. In this regard, this is akin to purchasing physical collectibles as investments to make gains by selling them at a higher price – albeit, a less common and a not-so-great way to “invest”, compared to a structured portfolio of diversified investments held over the long term.
As with fine art, NFTs feel like an alternative investment at present. Whilst physical collectibles are prone to losing value based on condition and run a huge risk in doing so, NFTs don’t suffer that same fate. However, they both suffer from popularity and emotional factors surrounding it – a popular “Bored Ape” NFT now may be all the rage, but how quickly will that die? Will value increase over time and fall short? It’s a risk you must take into consideration.
If you’re looking to sell NFTs for profit — what if you’re left possessing a pitiless amount of pixels when the hype ends? Remember, you’ve purchased the ownership of the NFT, whereas others simply have a copy of the very same thing. Food for thought.
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It may sound like I’m not a fan of NFTs, but this is not the case. My concern is from the standpoint of using them as an investment, in which I see people jumping in blindly (as they have done with cryptocurrency) and throwing a lot of their money into it, without having more stable investments in place or even having an emergency fund set up.
There’s no harm dipping your toes into the NFT market, but not if you’re putting all your eggs into that basket. NFTs can be a part of diversification, and if you hold for the long-term it could most certainly be a worthwhile investment as part of a growing community.
As always, be sure you understand – at least fundamentally – what you are getting involved with, rather than throwing money at something just because it may seem all the rage; have your financial priorities in place before getting involved in more volatile areas.
…and if you want a comical low-down of some “interesting” things sold as NFTs, check out this article here!
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