Ever since its inception, blockchain technology has revolutionised various industries. Even though most people find it synonymous with cryptocurrencies, there is more to blockchain technology.
One of the latest crazes in blockchain technology is the digital presentation of arts and collectables. Unlike before when you bought a physical painting or sculpture, you now can buy art in the form of a unique digital token known as an NFT.
So far, various NFTs have been sold for millions.. As blockchain technology expands, there are predictions that it will be a big part of the future of digital assets. To take advantage of the possible boom, you have to understand everything about NFTs.
That is where this guide comes in.
What is an NFT?
NFT stands for non-fungible token. A fungible asset can be exchanged for several other items without losing value. Therefore, what are non-fungible tokens? NFTs only exist for a single owner at any given time.
NFTs are the digital asset representation of real-world objects like art, videos, music and in-game items. You can also buy real-life collectibles in the form of NFTs, however, there are only a few at the moment. By buying the NFT you get the ownership and sometimes copyright information of the item, although this isn’t the case with all NFTs.
NFTs are generally traded online through cryptocurrencies. They also operate in the same underlying cryptocurrency code. If you buy the NFT, you will store it in a wallet as you do with cryptocurrencies.
The beauty of NFTs is all about uniqueness. Every item that is sold as an NFT has a unique signature. As such, no matter how many times the music or video is shared or viewed, the owner retains the unique piece.
How do NFTs work?
Traditional artworks derive their value from their uniqueness. One of a kind artwork tends to be quite valuable compared to other easily accessible items. This can become a challenge in the digital world as anyone can view a digital asset if the owner retains the full ownership rights. They can also be duplicated and used by others online.
NFTs, however, is all about tokenising the artworks thus creating a digital ownership certificate that allows for selling and buying of the unique item.
Due to its operations on the blockchain, all the transactions involving the NFT are recorded on a public ledger. The ledger is readily available for anyone, such that you can view the history of the item’s ownership.
Predominantly, NFTs operate on the Ethereum platform. However, you can also find them on other crypto platforms as long as they support smart contracts. Such other chains include Solana, AVAX, Tezos and VeChain.
NFTs have become an investment opportunity. Like the physical arts, it’s not the ownership that matters, instead, it’s the ability to attract the highest bids during sale. When you sell an NFT at a higher price than you bought it, then it’s worth the investment.
Is investing in NFTs worth it?
The NFTs explosion has seen various arts and digital assets fetch millions of dollars on the digital market. For example, Twitter CEO, Jack Dorsey sold his first tweet in the form of NFT for more than $2.9 million. Several more items have also collected great sums of money.
The only concern remains, are these items worth the investments?
Given NFTs work like any other physical artwork, their worth also works the same. Therefore, what matters when looking to invest in NFTs is caution. You have to first do your due diligence to confirm the value of the digital art you are purchasing and its ability to grow in value.
Just like buying a vintage car, you can never be too sure whether you are investing in a valuable masterpiece or a complete lemon. As such, it’s your due diligence that sets apart the value of the NFT you purchase. Proper research becomes more crucial given the NFTs are still new to the market. There are claims of the NFT bubble which might end up bursting, leading to losses.
All the various revolutionary ideas have experienced bubbles before. So that should not be a hindrance to investing in NFTs. For example, the dot-com bubble saw various companies like Amazon become the multi-billion entities they are today, some of the companies at that period never did as well. Even Amazon shares went down to $5 from the highs of $100, before regaining to reach the current price which is over $3000.
The 2017 crypto boom is another example. Bitcoin rallied to trade at highs of around $20, 000. However, it would later burst to go to the lows of around $3000 by the end of 2018. It since clawed back to trade new all-time highs of around $64000.
NFTs are also likely to have similar growth patterns. At the burst of the NFT bubble, most of the items’ value will fall. However, some of the most useful will be regained in time. Therefore, to understand the worth of an NFT, do not look at the current value. Instead, understand its use cases and the possibility of growth in the long run.
Like any other market, the value of NFTs depends on demand and supply. The more the supply with less demand, the lower the value. The value of NFTs had grown due to limited supply. However, as more copycat projects arise, we may begin to see buyer fatigue and a drop in demand.
As a new form of asset, the returns on NFTs are unassured. Therefore, the best you can do is to limit the risk of losses. Don’t invest in whatever is hot at the moment. Instead, look for a wide variety of assets to spread risks. While most of them might fail, you can still get lucky with some.
The other way to look at what NFTs are is to not view the NFTs as investments, instead, look for your interests and hobbies. If they bring returns in the process, then that’s a bonus. However, failure will not be an issue. Also, only place money on NFTs that you are willing to lose.
How to invest in NFTs
Now that you understand if investing in NFTs is worth it, you can proceed to invest. Unlike cryptocurrencies, NFTs are not publicly traded in exchanges. They are extremely diverse with different value drivers and less commonly traded. It is not easy to jump right into investing as a newbie.
There are various things to note when investing in NFTs, such as;
A new market
Before investing in the NFTs, you first have to understand it’s a new market. It has no market analysis to predict future price movements. While you might want to rely on the forecast based on cryptocurrencies, the crypto market is also volatile hence an unreliable market predictor. Therefore, investing in NFTs is like playing a lottery or investing in a small business without a clear outcome.
Susceptibility to fraud
While the NFTs take pride in security, they are not immune to fraud. For example, on Opensea, there are lots of scammers that try to sell fake NFTs of popular projects for low prices. These fakes are essentially worthless. Often scammers will bundle a real project NFT among a range of fake ones to mislead investors. This is why it’s important to ensure you have the right contract address before making a purchase.
The other fraud concern is the possibility of hacking tokens from a wallet. Some shadier NFTs have code in it that ask for wallet permissions that once approved can drain funds from your wallet. When giving permissions to your wallet, be diligent in watching what access you give.
While there are quite a few NFTs that give full copyright and commercial rights to the piece, this is not yet reflected in the law. This creates copyright issues, as, although you should have the copyright, legally you still don’t. This can be expected to change, but currently this is what the law in many jurisdictions stipulates.
Other than the possibility of hacking, you have to understand the security of the item you purchase. The ledger only stores the link to the item. You then have to ensure the product you own is safe from unauthorised access, tampering and theft. It is good practice to see if your NFT is attached to an image stored on IPFS.
Should you buy an NFT?
Buying an NFT at the moment is risky due to market volatility. However, that should not deter you from owning the assets. However, only invest when you understand the risk of losses. The best advice is to always do extensive research and assess your individual risk appetite before investing into any asset class.
Where can I buy NFTs?
There are several popular NFTs markets you can use to buy your items. The other way to get the NFTs is through exposure to the underlying blockchain networks that support the tokenised items. An example of a place you can get invested this way is through CoinSpot and their NFT related listings. You can read our CoinSpot review to learn more about this exchange’s great features.