Unless you've been disconnected from the world for the past decade, you've probably heard of NFTs and blockchain technology. What exactly is an NFT, and why do people buy NFTs anyway?
This article will explore the NFT space and explain why digital ownership has become so popular nowadays. It will delve into the advantages and disadvantages of investing in NFTs. If you're curious about NFT and NFT ownership, you'll better understand why people worldwide have been spending so much on NFTs. You might even be prompted to purchase NFTs yourself.
What are NFTs?
Let's start with the basics. NFT stands for non-fungible token. Non-fungible means that a particular item possesses unique characteristics, so it's one of a kind. A thing that's non-fungible is composed of individual units that cannot be interchangeable.
Unlike cryptocurrencies with millions in supply, NFTs only have a single unit. While they cannot be interchanged or reproduced like exchanging fiat currencies, NFTs can be traded like any other traditional artwork.
People utilize blockchain technology to validate the unique characteristics of NFTs. Hence, people can confirm if an NFT is a counterfeit right away. For example, when your friend borrows a motorcycle, they can't replace that unit with another bike even though it's the same model. NFTs work the same way.
NFTs exist on a blockchain network, a distributed public ledger that records digital transactions. To be specific, most NFTs are held on the Ethereum blockchain. However, other blockchain networks support them as well.
An NFT can be created or 'minted' from digital assets that represent both intangible and tangible items. These may include the following:
Video and sports highlights
Video game skins
Even tweets count as NFTs. One of the biggest NFT news in 2021 was when the first post by Twitter founder Jack Dorsey was sold for 2.9 million dollars. Its resale value plummeted when the collector tried to sell this particular NFT in the NFT marketplace.
What's great about NFTs is that creators can make money off their digital artwork even after it's been sold in the market. NFTs allow them to receive commission once their piece has been resold. The creator of the NFT can even add their digital signature to an NFT's metadata.
In essence, an NFT is like a digital collector's item. Instead of receiving an oil painting that you can hang on the wall, you get digital art. Moreover, people get exclusive digital asset rights when purchasing an NFT. One person can only own an NFT at a time, and NFT owners can easily be verified with another connected to the blockchain.
On the other hand, when you buy NFTs, it doesn't mean other people can't access your digital assets. Anyone can save a photo or video on their mobile device or computer for free. So why do people invest in NFTs?
NFT projects work like traditional art. When you own an original Monet painting, its value is much bigger than the knock-off artwork you can find in the museum souvenir shop or on the streets. When you own NFTs, you have the digital file or the original. Thus, if your non-fungible tokens become popular and in demand, you can sell NFTs at a higher price.
What are the advantages of owning digital assets?
The hype surrounding NFTs shows no signs of stopping, and for a good reason. Here are some of the reasons why many people have ventured into buying NFTs.
Anyone can purchase digital art.
Unlike cryptocurrencies that require thousands of dollars, you don't need much to start an NFT collection. While some digital files can cost millions of dollars, you don't need to be a millionaire to buy an NFT. You can buy NFTs in NFT marketplaces if you have a digital wallet. Some NFTs cost as low as 10 dollars.
Moreover, asset ownership that is tokenized in NFTs can be easily transferred around the world. Hence, you can buy NFTs from anywhere, anytime. If its value increases, you can sell NFTs at a higher price, providing you profit from that investment.
The blockchain secures NFT ownership.
As mentioned, NFTs are created through the blockchain. The blockchain has a highly sophisticated system that's tough to hack, delete or alter. Hence, NFT owners are given assurance that their digital items are in good hands.
All NFTs stored on the blockchain has distinct records confirming their authenticity and chain of ownership. In theory, this technology prevents theft and mishandling of assets. Once new data is added to the chain, it cannot be changed or deleted. Hence, digital scarcity and authenticity are preserved. This technology gives people the confidence to collect NFTs.
The NFT market fosters marketplace efficiency.
One of the advantages of buying NFTs is the potential to make markets more efficient. Transforming physical art into digital can streamline processes, eliminate the need for intermediaries, enhance supply chains, and bolster security.
Thanks to NFTs, the art world has been enjoying the great profit. Artists have been able to connect to buyers directly. Hence, they don't need agents or go through auction houses to sell their works. Moreover, artwork digitalization is improving its authentication process, further streamlining transactions and lowering costs.
NFTs can be used to divide ownership of physical assets.
Today, dividing ownership of real-world objects like real estate, fine jewelry, and artwork can be challenging. It is much easier to fractionalize a digital version of a building among various owners than a physical one. The same principle applies to an expensive piece of jewelry.
Through digitalization, the market for valuable assets can be expanded immensely. This leads to greater liquidity and higher prices. On an individual level, buying NFTs can expand one's portfolio and provides opportunities for precise position sizing.
NFTs provide diversification opportunities to an investment portfolio.
It should be highlighted that digital ownership of NFTs is different from traditional investments like bonds and stocks. NFTs have distinct qualities and offer benefits. Given the possibilities of smart contracts and blockchain, we've only tapped the tip of the iceberg.
Thus, when you invest in NFTS, you can potentially reap the benefits of advancements in the blockchain. Ownership opportunities are only limited by the innovations in the blockchain.
What are the disadvantages of investing in the NFT marketplace?
While there are plenty of attractive opportunities when you buy NFTs, there are inherent risks. Before you invest in NFTs, you should know what you're getting into. Understanding the cons of NFTs is essential for you to make informed decisions in the future.
NFTs are volatile and illiquid.
Much like cryptocurrencies made with the same blockchain technology, NFTs are highly volatile. To put things into perspective, NFTs are not widely understood, and many people don't even know what non-fungible tokens are. Thus, the number of potential buyers and sellers is small.
Given the market size, it can be challenging to sell or trade NFTs, especially during times of distress. This disadvantage has been highlighted by the vast resale decrease of the first ever Tweet that was once sold for millions of dollars.
NFTs do not generate income for collectors.
Unlike cryptocurrencies, you can't make money by storing NFTs in your digital wallet. There is no guarantee that the underlying asset of your NFT will increase in value in the future. Thus, NFTs are like traditional collectibles and artwork. Its value depends on its demand and popularity.
Moreover, there is no guarantee that NFTs will continue to enjoy their popularity. You can't get your money back if the world suddenly stops buying NFTs at popular NFT marketplaces.
NFTs can be used for fraud.
While blockchain's integrity is unquestionable, the same is not the case for NFTs. Many artists have reported that their artwork has been sold without their consent. This fraudulence undermines the primary intention of NFTs, which is to empower more artists.
After all, the value of an NFT is tied to a physical artwork through a unique token. This unique token assures its owner that he also owns the original piece. A huge problem can arise if someone decides to mint an electronic image of a physical piece and put it up for sale. There is no link to the original art.
NFT minting can harm the environment.
Another disadvantage of purchasing NFTs is the effect it has on the environment. Since NFTs are digital assets, this may be unclear to some people. However, it's essential to lay out the consequences of buying NFTs.
It takes a significant amount of computing power to create blockchain records. Thus, there's an ongoing debate on its repercussions on the environment. Carbon emissions from mining cryptocurrencies and NFTs are increasing as more people invest in NFTs. On the other hand, blockchain enthusiasts argue that because NFTs are revolutionizing the traditional marketplaces, the environmental effects are being offset in the long run.
You may need Ether to purchase NFTs.
As mentioned, most NFTs are stored on the Ethereum blockchain. The Ethereum blockchain has a native currency called Ether, and you may have to buy Ether to buy NFTs. Thus, the value of the NFTs you purchase relies on the value of Ether. Ether, like other cryptocurrencies, is highly volatile.
However, you may opt to purchase through other cryptocurrencies or even fiat money. There are different blockchains that let you buy NFTs, but you will be limited in terms of options. Your best bet to buying the best NFTs in the market is through the Ethereum blockchain.
What does the future of NFTs look like?
We are only in the early stages of NFTs, and they're getting more and more attention as tech enthusiasts embrace the technology. Some people take pride in being an NFT owner of something popular like Bored Ape Yacht Club or luxury brands like Louis Vuitton.
As the blockchain continues to grow, more opportunities are open to people who invest in the NFT market. As blockchain offers the chance to streamline processes and eliminate the need for intermediaries, more people have found transactions more economical.
While there are people who still thread around NFTs with caution, the overall future of NFTs looks bright by the looks of the market today.
Should you invest in NFTs?
Now that we've covered the pros and cons of NFT ownership, you better understand what you're getting into when you buy NFTs. Starting your collection doesn't take much, which makes owning NFTs so attractive for people.
However, you shouldn't buy an expensive NFT right off the bat. Before purchasing an NFT, you should carefully review the process and build confidence. You can opt to buy a more affordable option first and then level up to pricier ones when you're confident enough to leap. Thus, you shouldn't spend all your hard-earned money on NFTs. Once you understand the risks, venturing into NFTs can be fun and exciting.