Going with the flow has been the norm these days especially in the digital era. If you’re on Twitter or LinkedIn, you would probably have heard of how non-fungible tokens or NFT is the future of business and are changing the ecosystem of business and technology. It’s a buzzword that everyone on social media seems to be hooked into it but, do you really understand what NFTs are?
Nonfungible tokens are blockchain-based assets, similar to the makeup of bitcoin and other cryptocurrencies, but with a key difference: NFTs can be exchanged and it’s unique. The tokens are like virtual deeds of sale that confirm or validate your ownership of a product.
Each one gets uploaded to a digital ledger where it conveys key information on the date it was created, when it was sold, the price, and the buyer. In some NFTs, this information is conveyed through a cryptographic hash function or an algorithm that takes this information and converts it into a unique identifier.
This is something you can’t tamper with. In fact, the slightest change made in any information on that ledger would generate an entirely different identifier. You can just imagine how secure transactions can be with NFTs. This provides buyers that confidence in buying a pure asset that has not been touched or tampered with by other people. Additionally, the metadata could also be stored independently.
What are NFTs?
Same with how cryptocurrencies work, NFTs are stored on digital ledgers—or a blockchain—which cannot be altered and is verifiable. NFTs are unique digital assets that are secured through smart contracts. However, unlike cryptocurrencies, NFTs are unique or non-fungible and are not interchangeable.
NFT and art has been inseparable since day one. The unique quality of NFTs has made them very valuable in the world of art. In fact, a digital artist named Beeple sold his digital artwork for $70 million which happens to be the third-highest auction price ever for an artwork by a living artist.
NFTs are also now popular in the sports arena, especially with collectibles. NBA TopShot, a range of basketball cards produced officially by the NBA is just one example. These are not just limited to cards though or art because now with NFTs, you can actually buy and own momentous events or moments like a legendary slam-dunk from a basketball icon like LeBron James.
A lot of celebrities, artists or creatives, and influencers have also jumped into the NFT trend. More people are looking at NFTs through a different lens.
The Popularity of NFT
The popularity of NFT was just an offshoot of the explosion of digital assets or cryptocurrencies. As more people have been hooked into the digital space, anything has been made possible especially when it comes to digital transactions.
NFTs are extremely popular because it also follows the same scarcity blueprint as that of cryptocurrencies because each NFT is actually a limited edition. People would always jump into owning anything that’s desired by many and has unique properties.
NFTs provide you that access point which was unavailable for the majority of people today. This has been particularly true especially in the severity of this pandemic. Think about this: If you can’t go to museums, or go see musicians live, how can you interact and engage with their art? This is how NFTs can make it all real and lifelike for you.
NFTs are able to create a market of buyers and sellers who are willing to invest or open their wallets to own a digital product or collection. Without this, as with any product, there would be no demand or zero sales.
NFTs, give people that sense of community which is very important in branding and in every sales transaction. Unlike cryptocurrencies, buying an NFT doesn’t end with that single purchase or buying a collectible or piece of art but at the same time, you also get to engage and interact with a community of like-minded individuals. This could be for the purpose of selling your asset, or more importantly for engaging with a shared interest around a certain niche or topic.
Artists get to be much closer or intimate with their fans especially now that galleries are closed and no concerts are allowed. Virtual artworks are now coupled with perks like being able to watch or see the band in person. NFTs have actually made it possible for people to own a moment in time, more of digital ownership of something that is tangible and real which fuels engagement and solidarity in a community.
Are NFTs Valuable?
NFTs have the same valuation as cryptocurrencies which is highly speculative. In essence, if you buy collectible now for $100, it would either go up to $1000 in a matter of three years or it could be rendered worthless in that span of time. With that being said, NFT also behaves in the same manner. You cannot entirely predict its long-term financial value because it fluctuates rapidly and is unpredictable.
The technology may have opened new opportunities beyond the world of art and merchandise. More digital documents can be converted into NFTs in the future.
Blockchain and NFTs battle the same legal challenges when it comes to questions on sovereignty. Creating NFTs like blockchain also has a huge environmental impact as it produces massive volumes of carbon.
Many NFTs are hoping to switch over to ‘proof of stake’ mechanisms that are far less energy-intensive, although that transition is unlikely to be quick. Given the potential millions to be made from NFTs, their popularity seems unlikely to wane soon. Moreover, it feels like we’re only scratching the surface when it comes to their potential applications and uses. Like any fledgling technology, NFTs create an exciting opportunity for people to create and innovate in the space: those able to do so effectively could be heavily rewarded financially.
You can own an NFT which makes it very exciting and enticing to a lot of collectors. Minting an NFT is how a digital file becomes a part of the Ethereum blockchain. Similar to the way that metal coins are minted and added into circulation, NFTs are also tokens that get “minted” once they are created. Digital artwork can be represented as an NFT so it can then be purchased and traded in the market and digitally tracked as it is resold or collected again in the future.
NFTs are built on-chain just as cryptocurrencies are, so once ownership is transferred it cannot be reversed which makes this an attractive pursuit for those who want to own NFTs. Blockchains are, in their purest form, lists. Each blockchain records a series of events or transactions. NFTs, as “tokens,” possesses a unique ID that distinguishes them from other NFTs.
Considering that blockchains are generally open or anyone can view the history of transactions—it’s easy to spot any errors or forgeries. In these ways, NFTs are verifiable like historic artworks: they travel securely between parties and they possess certain qualities that distinguish them from copies.
With today’s technology anyone can just copy, crop, and paste images freely without anyone knowing its history or what the art is all about. Today, NFTs are able to change that through the public history of transactions, which provides a very rich history of the interactions people have with media on the internet. Information flows, and value can flow as well.
The Value of NFTs
The Mona Lisa example has been widely used to explain how NFTs derive a value: you can take a photo of the Mona Lisa in the Louvre or buy a print from the museum gift shop but that doesn’t mean you own the original artwork. The same can be said of modern art forms like digital art which can be downloaded from the internet and printed.
That’s where NFTs come in: NFTs can be used to trace an object’s digital provenance, allowing a select few to prove ownership. Broadly speaking, it’s a way to create scarcity – albeit artificial – so that you can sell something for higher prices thanks to its scarcity.
Forbes notes that according to a subjective theory of value or STV, a good or service is not valuable in and of itself but, rather, in proportion to how important it is to a consumer – a product’s value is decided by how scarce or useful it is to the individual. NFTs such as a plot of land in a 3D world, or digital artwork, or an in-game item, maybe worthless to some people, yet highly attractive to a few. NFTs are unique and non-reproducible – and that swings the supply-demand curve far towards one direction.
History of NFTs
NFTs have actually been around since 2012 but its popularity boomed in 2017 with a game called CryptoKitties, which enables players to buy and also breed these cute limited-edition virtual cats. From there, game developers adopted NFTs in a big way to allow gamers to win in-game items such as digital shields, swords or similar prizes, and other game collectibles.
Besides gaming, NFTs are frequently used to sell a wide range of virtual collectibles, including NBA virtual trading cards, music, digital images, video clips, and even virtual real estate in Decentraland, a virtual world. It’s amazing how you can own real estate in a virtual world that is made possible by NFTs.
What to Look Forward to with NFTs
With the pandemic going on, NFTs have opened a lot of opportunities for artists and celebrities to reach their audience in a digital way. Artists are interested in NFTs because they offer a way to sell work that there otherwise might not be much of a market for. Also, NFTs have a feature that the creator can enable that will pay back a percentage every time the NFT is sold or changes hands, making sure that if an artist grows in popularity and balloons in value, they will see some of that benefit.
Trading card games have been a natural fit for NFTs from the beginning. A physical card game like Magic the Gathering is much more than just a game. It’s an entire economy, with dozens of companion sites and marketplaces for buying, selling, and bartering. The third-largest NFT “asset class” (after gaming and digital art) is naming services, similar to “.com” domain names but based on decentralized technology.
While most of the experiments in NFTs have been in collectibles and games, other use cases are gradually coming online as well. NFT marketplaces are springing up at an increasing rate, reflecting the newfound popularity of NFTs online.
There is a lot to choose from, and which one is best for you should only be decided once you’ve done some proper, investigative research into the pros and cons of each. Some of the best and trustworthy marketplaces for buying and selling NFTs would be Rarible, OpenSea, Nifty Gateway, and SuperRare.
Storage of NFTs
Storing your NFTs securely is vital for protecting your investments in the longer term. Some NFT platforms offer their users the option to keep their tokens on-platform. However, there have been several examples of theft from platform-based accounts.
Therefore, NFT holders should consider a safer, self-custodied wallet. Depending on which blockchain your NFTs have been minted on, you will need a different kind of wallet. Some NFT marketplaces have integrated with crypto wallets that have browser extensions, like MetaMask.
Anytime that you create a crypto wallet of any kind, be sure that the seed phrase is visible to you and you only. Only create wallets with trusted providers. Ensure the site you are using to generate your wallet is not a phishing scam.
Should You Invest in NFT?
Investing directly in a non-fungible token can be risky. If you don’t feel comfortable with such a high level of risk, you might consider investing in stocks related to the NFT market.
Even with NFT stocks, however, there is a varying level of risk. Each level of risk depends on the business model of the company that is issuing the stock. For example, is the company offering a platform that people can use to create NFTs? Or are they issuing NFTs themselves? Or something else?
When you’re considering whether or not to invest in an NFT stock, make sure you keep the following in mind:
- How long has the company been in the industry? What is the company’s annual rate of growth of earnings from investments?
- How volatile has it been in the past? Can you calculate the Price/Earnings (P/E) ratio? How about the Price/Book Value Ratio (P/B ratio)?
- What is the company’s business model? In other words, how does the company plan to earn a profit?
- Does the company have a competitive advantage?
Investing in NFT
When you have chosen a piece of digital art or music, a digital trading card, or another kind of digital collectible, the next step is to purchase it. The methodology of purchasing a non-fungible token depends on the NFT marketplace in which you will be making your purchase. Some NFT marketplaces may allow investors to buy their tokens with credit cards; others will require that you use cryptocurrencies directly.
If the latter is the case, the type of cryptocurrency you will need to make the purchase will depend on the blockchain that the NFT has been created on. So, there are NFTs that you can purchase using ETH while there are those that can be bought with BTC. NFTs are here to stay and an investment that will help you win the long game.