One of the newest trends in investing is the rapid rise in popularity of NFTs. But what exactly are NFTs, how do they work, and are they a wise investment choice for your hard-earned money?
What are NFTs?
NFT is an acronym that stands for ‘non-fungible token,’ which is basically a fancy way of saying something is unique and, unlike cash, can’t be exchanged for an equivalent. NFTs are used to establish ownership of digital assets, such as art, music, or videos. Last year, an NFT by one popular artist sold at auction for almost $70 million US.
Artwork has been one of the most common forms of NFT, but they’ve also been created to establish ownership of videos, collectible items, music, and even tweets.
How do NFTs work?
Each NFT has its own unique digital code, or fingerprint, which is stored on the same kind of blockchain technology associated with cryptocurrencies. Blockchain is a sort of digital ledger, a vast and secure database of information stored chronologically, and ‘chained’ together in chunks. Different but identical versions of this ledger exist on computers all over the world, and are routinely checked against one another to maintain accuracy and prevent digital piracy.
Even though digital files such as music or images can be easily copied and shared, NFTs represent a secure way for an individual to establish ownership of these items. Think of it as the difference between downloading a copy of an image from the internet, and owning a file with the artist’s digital signature embedded within it.
What’s important to note, however, is that NFT ownership does not represent the difference between having a print of the Mona Lisa, and having da Vinci’s original canvas. In some instances, artists sell multiple NFTs associated with the same work, like trading cards. While each NFT technically has its own unique signature, the image or video associated with it is identical for each owner.
How are NFTs bought and sold?
To trade NFTs, buyers need access to the same kind of digital wallet used to purchase cryptocurrencies, but one that is NFT-compatible. From there, buyers can shop on a range of different marketplaces. Some NFTs are sold at fixed prices while others are auctioned to the highest bidder. Once you own an NFT, you can try to sell it for a profit, or keep it in your digital wallet in the hopes its value will continue to grow over time.
Are NFTs a smart investment?
Historically, art collecting has been a worthy investment, rewarding educated buyers with long-term growth in value. However, the same isn’t necessarily true of NFTs, which have only been around for a few years and don’t have an established track record.
Although NFTs are trendy and popular today, there’s no guarantee that will still be true in the years ahead, and the value of NFTs will drop precipitously if people stop buying them. Additionally, the exchanges where NFTs are traded are also relatively new, and changes in that sphere could have a significant impact on the value of NFTs. Then there are the fees associated with creating and selling NFTs, which can seriously dent the profits associated with any sale.
Even if some NFTs are able to hold their value over the long term, that doesn’t mean they all will, and those that aren’t as unique or interesting may become worthless while only a few select pieces maintain their value and appeal. Buyers who aren’t knowledgeable about art creation and collection should seek out expert advice before making any NFT purchase.
Furthermore, there’s always the possibility of a digital disaster, such as a lost or corrupted file, or even a theft, wiping out the value of your NFT investment.
While soaring prices and an active market may seem tempting in the short term, the risks associated with NFT investing are too big to be ignored. Prospective buyers should be aware of potential pitfalls and follow the same strategy of diversification that applies to all investments, rather than rushing to try and cash in on the current NFT craze.
