If you have been following the world of cryptocurrency as of late, there is one term popping up more and more, and that is “non-fungible tokens” or “NFTs” for short. Some of the most prominent examples of NFTs are NBA’s digital collectibles, or music albums such as that of the Kings of Leon being sold as a limited edition “golden ticket.”
Whichever the case, the bottom line is that NFTs are starting to take the crypto-world by storm and are selling for some very considerable price tags…but should you invest in them?
This article covers:
- What Are Non-Fungible Tokens (NFTs)?
- Why Are NFTs Becoming Popular?
- How do NFTs Work?
- Why Can’t NFTs Simply Be Recreated?
- How to Buy or Trade NFTs?
- Why Are NFTs Valuable?
- Beware of NFT Scamming
- Are NFTs a good investment?
What Are Non-Fungible Tokens (NFTs)?
In simple terms, NFTs are unique digital “items” (a form of cryptocurrency) that can be kept or traded for a profit. A good way to understand how they function is to compare them to pieces of art or collectible cards. Initially, they are sought after enthusiasts and collectors, but due to their unique and rare nature, demand can push their value up.
Why Are NFTs Becoming Popular?
Before answering that question, it is important to understand what fungible and non-fungible mean.
A fungible cryptocurrency means that all of its units (or tokens) have the same and equal value. Everything is on exactly the same playing field. A good example here is real money. 1USD bill is exactly the same and worth exactly the same as another 1USD bill.
On the other hand, a non-fungible cryptocurrency means that each unit (or token) is 100% unique. Just like pieces of art, there is only one authentic Mona Lisa or Guernica.
The current hype surrounding NFTs is much like the craze of collecting and investing in fine pieces of art (or more recently, sports card collectibles.) Similar to their physical counterparts, unique, digital objects also share a sense or rarity, exclusivity, ownership pride, and most importantly value.
This is precisely why the niche has recently blossomed and encompasses a multitude of projects involving artwork, sports, and gaming.
How do NFTs Work?
NFTs work differently from platform to platform, however, the majority are created and traded on Ethereum. When an NFT is created on Ethereum's blockchain, it comes with certain attributes:
- Once created, it cannot be altered or recreated. It is 100% unique.
- They can be created, bought, or sold without asking for permission.
- Created NFTs can be viewed by anyone.
As previously mentioned, NFTs are a lot like physical pieces of fine art. They can be displayed for anyone to admire but can be owned by only one person at a given time. In this situation, that person is the holder of the cryptocurrency wallet.
Why Can’t NFTs Simply Be Recreated?
Multiple analogies have been made comparing NFTs to fine pieces of art. If an NFT is a piece of art, much like physical art pieces, the image being displayed can be replicated but it’s never the original. It’s its existence as a digital object on the blockchain that makes it unique. Much like the Mona Lisa, there are multiple posters and recreations of the famous painting, but none hold the uniqueness, rarity, and value of da Vincy’s painting.
How to Buy or Trade NFTs?
NFTs are bought and traded exactly like any other cryptocurrency. The only difference is that, instead of buying a certain amount of tokens, you buy a single token (the “item”). There are however a few things that need to be considered before diving in.
Where will you be buying your NFTs from?
Which wallet is necessary for connecting with the platform and purchasing your NFTs?
Which cryptocurrency is necessary to complete the purchase?
Is there a specific time in which the NFTs you want to buy are being sold i.e. via a pack or art drop?
As mentioned, certain NFTs can only be bought on specific platforms. If you want to purchase NBA Top Shot packs, for instance, you would need to create an account with NBA Top Shot, then create a Dapper wallet, and fund it with either the USDC stablecoin or supported currency options. But it doesn’t end there. You would also have to wait for one of the card pack drops to be announced. Once announced, as with any limited product, you would have to make your purchase before the item is sold out.
Why Are NFTs Valuable?
The value of NFTs comes from their unique "one-of-one" nature and the exclusivity of owning one. In other words, NFTs are valuable for the same reason everything else is perceived as “valuable.” Just like most collectible or investment assets, the value comes from owning something that is “special” to you, which so happens to also appeal to other investors and collectors in your niche. A good example is the 1986 Fleer Michael Jordan rookie card. The value of this card has astronomically risen in 2020 and is continuing to break records in 2021. It’s sought after though not solely as an item to be “flipped” for a profit. It is sought after because it is also a limited card depicting one of the sport’s greatest players of all time, and collectors and fans want it.
There is a counter-argument to this however. Since most NFTs currently are images, what stops you from just finding an image like it online and just saving it? The same can go for the Mona Lisa; why not just get a poster? Or the 1986 Fleer Michael Jordan Rookie; why spend over $600,000 and not just get a low-graded, poor condition version of the card? It will still be in your collection…
Just as no copy will ever be the original Mona Lisa or the original source card for the 1986 Fleer Michael Jordan rookie, NFTs are truly unique and reside on the blockchain. They are the true “one-of-one.” This makes them extremely hard to copy in their entirety.
The blockchain entry also transparently tells you who created the NFT. So if a famous artist verifies their Ethereum address then that NFT’s authenticity can be verified on the blockchain.
Beware of NFT Scamming
Because NFTs are still an emerging market scams are a potential threat, especially to those with limited knowledge. For instance, someone with two cryptocurrency addresses can buy multiple NFTs and then "sell" them to himself for millions. This will artificially inflate their price. So it’s important to be careful, and remember that just because some NFT was traded for a lot of money, does not automatically mean that all other similar NFTs share the same value.
What are The Most Expensive NFTs?
The one that put the trend on the map was CryptoKitties which sold virtual cats for tens or even hundreds of thousands of dollars. Something that started off as a perceived “fad” exploded into the multimillion-dollar market it is today.
The most popular and perhaps most confounding NFT market is none other than NBA Top Shot. Showing massive growth in the past months alone, NBA Top Shots has processed over $250 million in sales and there are no signs of it slowing down.
Another great example is music producer 3LAU who sold a collection of 33 limited edition NFTs for more than 11 million dollars. Finally, the musician Grimes even sold her digital art collection for $7,500 apiece, yielding a total of $6 million in sales.
Are NFTs a good investment?
It depends on what returns you are expecting and by when. Like colored diamonds, fine art, and even collectible cards, the passage of time is required for true value to build (assuming that there is demand for your item.)
Despite the multiple analogies given in this post, the digital nature of NFTs makes it hard to effectively and directly compare them to physical pieces of art. Under “normal” circumstances, demand, rarity, and time would drive an item’s value up, but in the world of cryptocurrency, things are much more volatile. For instance, a single Bitcoin can skyrocket to over $50,000, or plummet 20% in a matter of hours.
Whichever the case, if you are considering investing in NFTs, just like with any other investment asset, a good amount of research and understanding is imperative.
For more reading on colored diamonds, see the links below: