What Are NFTS?
NFTs – or non-fungible tokens – have existed since 2014 but have reached new heights of popularity in the last year or two, primarily as a method of buying and selling digital assets such as digital art, GIFs, videos and more.
In the largest value NFT sale on record, which took place in March 2021, a digital artist known as Beeple sold an NFT comprising of 5000 artworks for over $69 million.
So, what exactly is an NFT?
In essence, a non-fungible token is a digital representation of an asset. The non-fungible aspect of the NFT refers to the fact that – unlike the physical currency or cryptocurrency – each NFT has a unique value and, as such, can’t be traded with other NFTs in the same way that cryptocurrency or paper currency can.
Each NFT has unique metadata – including information about the owner or even virtual signatures from digital artists on digital art NFTs – and an identification code that makes each token unique.
What are they used for?
Most commonly, NFTs are used to purchase and sell virtual ‘collectables’ such as digital artworks, GIFs, videos, sports cards and more – Twitter’s CEO even sold an NFT containing his first-ever tweet.
The NFT’s unique nature assures buyers that they own the original digital file.
In the past, items created digitally – such as artwork – could be duplicated and shared infinitely. Even if a party had the original digital file, there was no way to confirm this. Hence there was no way to monetise commodities such as digital art in the same way as traditional original paintings, which are so valuable due to being ‘original’ and ‘one of a kind’.
NFTs provide a way to verify that a digital asset is the original, providing the ‘one-of-a-kind’ allure that a physical piece of art creates. As such, they have become an investable commodity.
What’s more, NFTs can be programmed to allow an artist to receive royalties each time the NFT is sold, which is not typical of the traditional art market. They also cut out the middle man – removing the need for artists to go through galleries/auction houses instead of connecting directly to the customer.
This has the potential to disrupt several markets, as the elimination of the need for intermediaries can benefit both sellers and buyers.
Can NFTs only represent virtual assets?
More than a tool for the sale of digital or virtual assets, NFTs can be used to represent ownership of tangible investments, such as physical art and even real estate.
For the most part, NFTs relating to physical assets represent fractional ownership of the investment.
While it’s difficult to split up ownership of physical assets between many individuals, such as real estate or art – for example, you can’t split a house up into a hundred small parts. NFTs make fractional ownership significantly simpler by assigning a percentage of the asset to the ownership of the NFT holder, who will receive a portion of the profit from the sale or earn a fraction of rent being paid by a tenant to live in the property.
This can open up real estate and art investment up to many more types of people, as these asset classes are typically dominated by the elite and difficult to enter into unless you have a large amount of capital at your disposal.
NFTs has the potential to make art and real estate investment affordable by splitting up the investment into less costly fractions, allowing people with lower incomes to enter into these formally elitist investment markets.
How do you invest in NFTs?
Anyone can buy or sell an NFT online.
Typically, you’ll need to purchase NFTs with cryptocurrency. The type of cryptocurrency you’ll need will depend on what your chosen NFT provider accepts.
Before purchasing cryptocurrency, which you can do using most credit cards, you’ll need to acquire a digital wallet, which will allow you to store your cryptocurrency and NFTs.
You can purchase cryptocurrency on platforms such as eToro, Coinbase or even PayPal. After moving your cryptocurrency to your digital wallet, you’ll be able to buy NFTs from NFT marketplaces such as OpenSea and Rarible.
How is ownership ascertained?
Like cryptocurrency, NFTs are backed by blockchain, the system that makes the use of cryptocurrency possible.
Blockchain stores records of transactions involving cryptocurrencies such as bitcoin, or the transfer of ownership of virtual assets such as NFTs, ensuring that ownership is protected.
The system is maintained by multitudes of computers worldwide, so records of ownership of NFTs can’t be forged. This, coupled with the authentication built into the NFT, allows the owner to easily prove ownership of an NFT.
Should you invest in NFTs?
Although the NFT marketplace is booming, some experts predict that it’s a bubble that is destined to burst.
NFTs may present a riskier investment. Unlike other asset classes, demand is the only significant factor that decides the value of an NFT, so selling/re-selling prices are unlikely to be indicated by other economic factors.
As such, the price is entirely decided by what the buyer deems it worth. In the future, it’s possible that this could result in NFTs becoming unsellable, mainly because digital items such as art and GIFs can be reproduced and shared after being bought.
However, NFTs representing tangible assets may represent a permanent shift in how assets such as real estate and physical artworks are invested, making them an investment option with high potential for people with too little liquidity to purchase these assets outright.