From Saturday Night Live parody skits to mainstream media coverage, NFTs (non-fungible tokens) are becoming a household name. We’re hearing about them more and more, but a lot of people still don’t understand NFTs. The concept can be confusing and often leaves investors wondering whether this is just a fad, is it a hobby or a bona fide investment opportunity. Should you be investing in NFTs? While that question is probably best answered by your trusted financial professional, we’re offering a quick introduction to NFTs and the potential risks and rewards involved with owning them below.
What Exactly Are NFTs?
NFTs are digital files attached to blockchain codes. Most people are somewhat familiar with digital currencies, so you’re likely aware that these blockchain codes are what identifies a digital “coin” and makes it tradeable to anyone who accepts that type of payment.
In this case, the code identifies the digital file in question as a unique item. This may be any sort of digital file from an image or a cartoon to a music or video file.
Fungible vs. Non-Fungible
When you trade one digital currency “coin” with another, they (despite having different blockchain codes) have the same value. The same goes for regular currency. A one dollar bill is worth the same amount as another one dollar bill. That’s “fungible.”
A “non-fungible” item would be a unique or rare item, something that may have a different value than something else. The difference would be comparable to an original Picasso and a painting you bought at a thrift store; while they are both paintings, and they both have value, they do not have the same monetary value as one another where the art market is concerned. That’s a “non-fungible” value.
What Is Stopping Me From Copying an Image an NFT Is Based On?
Even with the most basic skill level, digital items can be easily copied. Doesn’t that affect the value of the NFT? This can be answered by considering the difference in value between an original Picasso painting and a reprint or replica again. In real-world terms, it’s the blockchain code itself that offers the NFT its scarcity. The blockchain proves the Picasso’s value. While an original Picasso painting and a reprint may look the same, we know that one is worth far more than the other.
Where Are NFTs Created?
There are a handful of marketplaces that trade in these items. NFTs are often created at one of these marketplaces. Many artists, from painters and musicians to comic book illustrators, have used said marketplaces to supplement their income.
For instance, Star Trek actor William Shatner made a series of trading card-style NFTs, including one of his dental x-rays. The NFT trading cards were sold in packs and listed on the WAX Blockchain. All 10,000 packs sold out in under ten minutes. Depending on the marketplace, these artists can benefit from not only the initial sale but, unlike many other creative works, they can earn residuals from the NFT’s resale down the line.
Are there Financial Risks Involved in NFTs?
Like all collectibles, there is a risk. While the blockchain code might assure you that you are buying an “original” NFT, there’s nothing to guarantee that the token in question will gain or maintain any value. There’s also a possibility that this phase could pass, causing today’s NFTs to lose value, maybe even be worthless, in the future.
There are also many important legal, even philosophical, questions that are yet unanswered by the NFT market, things that may be addressed over time.
Like any collectible, non-fungible item, there is risk when you use NFTs as an investment tool. While it’s certainly a fascinating topic, there’s no way to know if these latest blockchain-coded offerings will have any staying power. Despite a slowly growing acceptance of digital currencies, it’s important to remember that they, too, are not yet considered mainstream.
NFTs are relatively new items and the marketplace is always evolving. NFTs could be adversely affected by a number of factors, including liquidity and new regulatory developments. While NFTs might be fun to read about or even to collect, you should always speak to a trusted financial professional before pursuing any type of investment opportunity.