An NFT- non-fungible token – is a digital asset that represents a real-world object, like a video or photo. NFTs are bought and sold online, typically with cryptocurrency, and are generally encoded with the same software as many other cryptocurrencies.
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NFTs have grown largely in popularity since the pandemic due to the overarching presence of viral videos and social media. Although NFTs have existed since 2014, they are gaining notoriety now as they are becoming an incredibly popular way to buy and sell digital artwork. Artists, collectors and speculators have taken to the movement as cryptocurrencies and other digital assets have skyrocketed.
What Is the Appeal of an NFT?
NFTs are generally one of a kind, or at least one of a very limited collection of art or media and each NFT has a unique identifying code. An NFT is a record of a digital file with entirely unique information stored and linked to blockchain technology.
One of the greatest appeals of NFTs is their endless diversity. NFTs can be collectables, domain names, digital records of artwork, trading cards, virtual property and more. Investing in NFTs expands and creates excellent variety within your portfolio. As NFTs are not an asset class, but blockchain technology validates ownership of a digital commodity or item, they are seen as certificates or deeds of intangible assets that cannot be replicated.
What Are Fungible Assets?
Fungible assets are individual commodities that are interchangeable and therefore cannot be distinguished from one another. Fungible assets simplify the exchange and trade process, as fungibility implies equal value between the assets. By economic definition, the currency is a fungible asset as it can be exchanged for other items of equal value. For example, when £20.00 is exchanged for two £10.00 notes, the spending power remains the same.
It is important to note that while NFTs are non-fungible assets due to being unique and not interchangeable, other cryptocurrencies are generally considered fungible assets.
What are Non-Fungible Assets?
Non-fungible assets are those that cannot be exchanged for the same value because the item’s unique properties cannot be exchanged with that of another. The most popular example of non-fungible assets is non-fungible tokens and collectables such as digital art, trading cards or videos.
Assigning a monetary value to collectable, non-fungible items is completely subjective due to the individual properties that make them sentimental and priceless to others, especially when stored and sold in excellent condition.
Different Types of NFTs Available to Invest In
There is no extent to what can be defined as an NFT due to its diverse use. NFTs’ unique existence can be attributed to their growing scope for developing infrastructure and scope for innovation.
There is a range of NFTs that are available to invest in:
- Artwork
Possibly the most popular form of NFTs, artworks are a unique creation of technology and creativity. Most NFTs that circulate today are artworks as artists were quick to capitalise on the conception of NFTs. Artwork is also one of the most expensive forms of NFT to own and can sell for millions.
Virtual artworks typically consist of digital pictures, GIFs and short videos sold online as though they are physical items. For example, artist Damien Hirst sold a series of pieces as physical artwork or NFTs – those who chose NFTs were told that their corresponding physical piece would be destroyed. This was explained, by the artist, as completing the transformation into NFTs by burning the physical versions.
- Collectables
Collectable items and trading cards are being sold for thousands as digital trading cards or can be kept as collectables. Collectable items are one of the most subjective traits of NFTs as they hold different sentimentality and value to different people. The NFT market is full of different types of trading cards and collectables listed by companies.
- Music and Media
Media files can now be linked to NFTs with true ownership claims available to own as an individual. The transition of music from fungible goods and services to being tokenised has benefitted the industry in several ways. Music and media as an NFT allow artists to reach a new audience and provide premium experiences to listeners.
- Gaming
NFTs are commonly used as in-game items within online gaming platforms. Non-fungible tokens aid the growth of in-game economics through immutable ownership records for in-game items.
- Domains
The NFT market has made it possible for users to register, trade and sell domain names. You are able to avoid additional payments to third-party companies by acquiring a domain via the NFT market. An NFT domain provides exclusive rights on the name ownership.
What Is the Difference Between NFTs and Cryptocurrency?
NFTs and cryptocurrencies should not be confused, though they are built using similar technology, there are key differences. For example, NFTs are non-fungible, meaning that they cannot be interchanged, whereas cryptocurrencies can be interchanged in replacement for another currency. NFTs, however, can be purchased using cryptocurrency.
Cryptocurrency is similar to physical money in the sense that they hold an agreed-upon and widely understood value. As a pound equals a pound, one Bitcoin equals one Bitcoin. However, NFTs hold their own unique structure and identification, which makes them intangible and dissimilar to one another.
What Do I Need to Invest in NFTs?
- Open an account to trade or invest
Trading or purchasing NFTs will require you to make payment using cryptocurrency. The NFT marketplace will allow you to buy, sell and trade digital art, collectables, in-game assets and more. In order to make any of these purchases, you will need a digital wallet. The most popular wallets include Metamask, Math Wallet, AlphaWallet and Coinbase Wallet.
Once your wallet is set up, you will need to own cryptocurrency to make purchases. If you already own some form of cryptocurrency elsewhere, you will be able to connect it to your digital wallet in order to use it to create and sell NFTs.
- Decide whether to invest or trade
When buying NFTs directly, you will be investing and owning a digital asset. When looking into NFTs, you have the decision to either invest or trade. When investing in an NFT, you will buy and subsequently own the NFT shares or ETFs outright. When you choose to trade an NFT, you will take a shorter-term position without the underlying NFT stocks and ETFs.
- Select your marketplace
You will need to research an NFT marketplace to find a platform that suits your goals. For example, NBA Top Shot is a basket-ball-focused marketplace. It is important to note that some marketplaces require their own cryptocurrency.
- Choose your investment
The most important decision when investing in NFTs is determining which unique digital asset you wish to turn into an NFT if you are selling, or which type of NFT you wish to own. If you are looking to sell NFTs, you will need to own the intellectual property rights to the item you are selling.
Are NFTs a Profitable Investment?
There are a range of reasons why investing in NFTs is a clever investment choice. Some investors are keenly interested in owning the underlying asset, while others focus on the value of the asset being tokenised into an NFT. Certain physical collectables, such as art, have a historic record of appreciating in value, and digital art can exhibit the same appreciation.
If you have an eye for art or a personal interest in music, collectables etc. Investing in NFT could be an excellent way to invest in something that suits you. Despite the fact that NFTs are relatively new to the world of investment, they are a promising front in the world of technology which is bound to grow.
It is important to remember to diversify your investments to limit the risk of a single asset derailing your entire portfolio. NFTs can be a complex investment choice, especially for those who are not familiar with existing cryptocurrencies, therefore, it is recommended that you seek advice from a specialised investment advisor or financial advisor before committing to any long-term investment.
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