While this technology has been around for a while now, NFTs have grown in popularity in recent years. And, they have created a lot of excitement for investors. However, many people like myself are still a bit confused about these assets. And some still aren’t certain what they are exactly. If you still have questions about NFTs and how they work, here’s what you need to know about them and how to start investing.
What Are NFTs?
Investopedia defines non-fungible tokens, or NFTs, as cryptographic assets on a blockchain that each have a unique identification code and metadata to distinguish them from one another. But what does this mean in laymens’ terms?
Essentially, NFTs are a new way of tokenizing assets through a blockchain, giving people the ability to buy, sell, and trade them more efficiently. While they have had a particular focus on digital artwork, they can be a digital representation of nearly any kind of asset.
For example, some NFTs represent content or ownership of real-world assets such as collectibles, artwork, gaming items, domain names, real estate, and other valuable items. NFTs can now provide an authentic certificate created through blockchain technology. While early examples focused on digital media and collectibles, they have evolved and expanded the definition of what they incorporate.
How Do They Work?
Thanks to the advent of blockchain technology, NFTs can be bought, sold, and traded like physical assets. During the creation process, it receives a unique identifier linked to a single blockchain address, validates the information, then closes the block. It also assigns ownership to manage the NFT’s transferability. Once they are created or “minted”, the information is recorded on a blockchain and remains publically available.
However, there are key features that distinguish NFTs from other types of assets. While fungible assets like currency can be traded and exchanged for one another, non-fungible assets cannot. Though they may exist on the same blockchain and look identical, they are not interchangeable or replicable. Instead, you can trade and exchange them for money, cryptocurrencies, and other NFTs based on their market value or the value the owner places on them.
Each NFT is unique and irreplaceable. Therefore, they aren’t inherently equal since people place different values on them. However, you can combine them to create a new, unique asset altogether.
What Makes NFTs Valuable?
NFTs have gained popularity since 2015 with the growing excitement around cryptocurrencies and blockchain frameworks. However, their value is subjective since it depends on the individual value assigned to them based on what people are willing to pay.
With that being said, there are a few characteristics that can increase the general value of NFTs. For example, the more people who see it online and instantly recognize it, the more valuable it becomes. However, they do provide unique benefits that you won’t get with other assets.
First and foremost, it offers greater security since each NFT has a unique identification code. This acts as a digital signature, so authenticity is easily verifiable and there is no chance of circulating fakes or replicas which is especially important with collectibles.
Many investors also feel this is a safer way of transferring assets since you can store personal information on an immutable blockchain. So, it can’t be accessed, stolen, or used without the key. As long as you keep the key secure, it can’t get lost, hacked, damaged, or destroyed.
Greater Efficiency during Transfer
Another valuable benefit is that it streamlines the transfer process. Like stocks, NFTs represent the ownership of an asset or even a business. Therefore, they can be bought and sold in much the same way as stocks. However, using NFTs automates the transfer of ownership. In addition to simplifying the sales process for better market efficiency, it also removes the middlemen so sellers can directly connect with their target audience, making NFTs accessible to everyone.
More Options for Investors
Lastly, new types of assets create new opportunities for investors. While they provide an entirely new way to invest in digital assets, they also allow the digital representation of physical assets. It also creates new options to fractionalize physical assets. Rather than needing significant capital to buy a single asset, people can purchase partial shares of collectibles, artwork, and real estate.
How Do You Purchase NFTs?
If you are wanting to invest in NFTs, you first need a digital wallet. You can start with an account on a crypto platform or exchange where you can buy and sell various types of cryptocurrencies. Each one offers different services. So, it’s a good idea to research which ones have the best features and support for your needs. Once you have a digital wallet, you can store and trade them.
The vast majority of NFTs exist on the Ethereum cryptocurrency blockchain, so you can buy many of them with ether (ETH). If you already have this in your digital wallet, you can purchase them on marketplaces like OpenSea, Rarible, Foundation, or SuperRare. However, you should be aware that many exchanges take a small percentage in transaction fees.
Is It Worth Investing in NFTs?
Now that we understand a little more about NFTs and how they work, I find myself questioning if it’s worth investing in them. And like all investment opportunities, it depends.
One of the greatest pieces of sage advice from Warren Buffet is don’t invest in a business you don’t understand. However, that doesn’t mean that investing in NFTs is a bad idea. If you find an asset that appeals to your knowledge and interest, it could present a good opportunity to diversify your portfolio.
However, at this stage, I don’t feel confident enough in my understanding to sink money into these types of investments. That’s not to say this couldn’t change in the future, especially if I understand the value of the underlying asset. But since I am still working to create a well-rounded portfolio, other assets are more beneficial to my long-term goals.
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Jenny Smedra is an avid world traveler, ESL teacher, former archaeologist, and freelance writer. Choosing a life abroad had strengthened her commitment to finding ways to bring people together across language and cultural barriers. While most of her time is dedicated to either working with children, she also enjoys good friends, good food, and new adventures.