The concept of non-fungible tokens, or NFTs, which depict a virtual item of artwork or other collectable online objects, is the newest investment trend. “Fungible” refers to something that one can readily exchange for another item of equal value. For instance, a banknote is fungible because the owner can exchange it for another bill of the very same denomination.
A non-fungible object is one-of-a-kind and cannot be replaced with another. Therefore, NFTs allow the purchase or sale of a one-of-a-kind work of digital art, with the buyer being the sole owner of the original.
While NFTs are a new form of capital, many have already traded for tens of thousands of dollars, demonstrating their potential for profit. However, is investing in NFT’s good for you?
How do NFTs Work?
NFTs are digital tokens that are stored on a blockchain. Each token contains details about a specific digital piece of artwork.
The forms of art that are eligible as NFTs are nearly infinite. Jack Dorsey, the CEO of Twitter, hit the news by trading the first-ever tweet as an NFT for $2.9 million. A 10-year-old meme’s animated GIF sold for more than $500,000. And Beeple, a digital creator, sold a $69 million digital painting.
When the resale price of the artwork is considered, NFTs become an opportunity to make money. Like purchasing physical works of fine art, possessing the art itself is not always profitable; it is selling the art at the right price that generates the most revenue. If you can acquire a high-priced NFT and then sell it for much more than you charged, you could earn a decent profit.
Additionally, the blockchain component of NFTs is designed to combat fraudulent activities. For instance, although others can duplicate an original work of digital art, there is still only one original — and the actual belongs to the individual who holds the NFT for that work of art.
Like physical artwork, you can purchase a replica of the Mona Lisa, but only one authentic Mona Lisa will ever exist.
Are NFTs the right investment for you?
Due to the fact that NFTs are a pretty modern type of investment, there is still much to learn about them. Additionally, it can be challenging to value digital art, which makes NFTs an especially dangerous venture. When you buy shares, the stock price indicates the value of the purchase. Thus, if you purchase a stock at a particular value and then sell it at a higher value, you will benefit.
However, the value of digital art is contingent on how much someone is prepared to pay for it. Regretfully, there are no rules for determining the value of a meme, a GIF, or a tweet, so it is up to one’s guess how much you’ll be willing to sell it for – if you can sell it at all.
If you are committed to investing in NFTs, establish a spending cap and purchase only what you can afford to give up. Since NFTs are purely volatile, one should not enter them with the intention of being wealthy.
Additionally, it is prudent to invest the bulk of your money in safer assets such as index funds or exchange-traded funds. When most of your portfolio is invested in relatively secure assets, you are better equipped to take on riskier investments.
Though NFTs are an intriguing new investment class, they are not ideal for all. However, if you are enthusiastic about NFTs and have some extra money, it might be worthwhile to dip your toes in. Otherwise, it is better to remain on the sidelines and watch this development happen from a distance where your funds are safe.
However, a much more severe problem with NFTs is the possibility of losing the entire value — literally. A stock’s value can fall, wiping out all your profits, but you can still hang on and wish for good days. However, with NFTs, an investor’s digital property could vanish into cyberspace if it is not properly stored, or they may lose access to their multimillion-dollar digital picture.
An NFT maintains a permanent mark of who produced the digital picture, the buyer, and any future buyers through the blockchain. It acts as proof of purchase and can store a small amount of data on the token. Since it usually is prohibitively expensive to hold the digital file on the token itself, data on the token would point to the location of the digital image or document. However, the NFT acts as a standard certification of copyright, and the image cannot be altered or replicated, ensuring that it is exclusive.
The NFT can contain a URL directing the purchaser to a directory where the image is stored or hosted, or, more commonly, a connection to a file on the InterPlanetary File System (IPFS). IPFS is a peer-to-peer network that enables data transfer and storage through a distributed database.
The problem occurs when the URL becomes invalid, or the organization that hosts the website and digital image goes bankrupt. As a result, the investor will lose access to their prized and costly digital work.
There are numerous available art NFTs, most of which are mediocre, mirroring more developed art forms. However, they are all accessible together online, creating much visual clutter that requires some experience and perspective to filter through.
Unless you have an exceptional understanding of what makes an art form unique or of the market mechanisms that can cause something as transient as a digital painting to appreciate over time, you might be doomed to fail as an investor with NFTs.
This is one of the reasons investors are advised to be cautious of NFTs, even though they are entertaining to indulge in. Do not jeopardize your financial security. Essentially, NFTs are now worth what consumers are willing to spend, and nothing else matters.