Sparked by artwork like “Everydays: The First 5000 Days” selling at Christie’s for nearly $70 million and Elon Musk selling an NFT Tweet with a song about NFTs, the virtual world of NFTs continues to grow. Entrepreneurs with ideas like selling NFT NBA cards at NBA Top Shot are raking in money, as some cards have sold for over $200,000.
For people who enjoy investing but don’t know much about the virtual world, the NFT fad can be confusing. While the idea behind non-fungible tokens is simple, creating them is not.
What is a Non-Fungible Token?
An NFT or non-fungible token is a unique digital file that belongs to a creator. Through blockchain technology, the token has a solitary mathematical identity that is unhackable. It works like cryptocurrency but as crypto-collectibles that are not fungible.
To better understand an NFT, you must know the term “fungibility.” When an asset is fungible, you can trade it with other assets of equal value. Through the NFT market, each NFT has a unique value and is not fungible, so you cannot exchange it with a similar item. For example, you could swap $1 for $1 because these items are fungible.
You cannot exchange an NFT with an equal NFT because an equal one does not exist. Each NFT is unique, like the Mona Lisa. While copies exist on posters, t-shirts, and digital files, the original Mona Lisa by Leonardo da Vinci is the most valuable. If you have enough money, you could buy the original, which is how people buy NFTs.
Even though people can buy and trade NFTs, they cannot exchange them with NFTs that are the same. You could exchange an Elon Musk NFT for an NBA Top Shot digital card, but they aren’t the same NFTs therefore, they are non-fungible. They are two different things but are both NFTs.
For a deeper dive, check out our article on What Is An NFT.
How are NFTs and Ethereum Cryptocurrency Connected?
NFTs and Ethereum need each other. Ethereum is similar to cryptocurrency, like Bitcoin, but involves exchanging for virtual products and services. People use Ethereum to buy virtual products and services to create NFT digital art.
Ethereum gives the NFT digital collectibles their value. Buyers use Ethereum tokens to create, purchase, and store their collections using decentralized and open-sourced blockchain. With smart contracts, NFT marketplace investors do not need art dealers. Instead, they buy and sell on their own in the virtual world.
What are the Popular NFTs?
NFT collectors enjoy Cryptokitties. The little video game involved building, trading, and selling virtual kitties using the Ethereum blockchain. One of the most expensive Cryptokitties in the art world sold for about $170,000.
Some people have spent excessive amounts of money on NFTs. One investor bought a short video by Grimes for nearly $400,000. Another costly NFT was a $6.6 million video by the digital artist Beeple (Mike Winkelmann) that sold at the auction house Christie’s.
Because of the NFT craze, some digital artists have become millionaires creating digital items like drawings, videos, GIFS, music, and other creations to sell like real estate agents sell unique homes and buildings.
How Will the NFT Craze Affect the Future of Investing?
In the real world, one-of-a-kind art needs to be protected. Ultraviolet light wears down paint quality. Sculptures wear down from people touching them. In the virtual world, NFT digital artwork can wear down through bit rot. Image quality deteriorates, and file formats become outdated.
People who hold their digital assets in password-protected wallets and safes will forget their passwords. Ironically, digital art seems to be as fragile as art held in brick-and-mortar museums.
What does this mean for the future of NFT investments? The answer is difficult to predict. NFTs are untested, and the market is too young to deduce any long-term benefits. People who spend millions on digital art might not get their money back, but then again, they might.
Because NFTs are not fungible, people cannot use them as currency. At this point, NFTs don’t divide into coins like dollars do. Therefore, experts predict that NFTs will not replace cryptocurrencies like Ethereum, Bitcoin, or dogecoin.
While the first Tweet from a famous person might be valuable as crypto art in the digital world, it is not usable as currency in the real world.
Is It Wise to Invest in NFTs?
All investments have risks. Digital assets and blockchain currency are changing the way people invest, and NFTs have added even more complexity to the world of digital investments. Consider the popularity of Beanie Babies in the 1990s. They were incredibly valuable in the short term, but their value dropped quickly and dramatically. Now, they are practically worthless.
When it comes to investing in unproven assets, no one knows for certain what the future holds. The fun in NFTs is owning something unique and artistic. For many NFT investors, the real joy is owning something created by a digital celebrity or an influencer.
NFTs have created more opportunities for digital artists and have opened a new collectibles market. No one knows for sure whether digital artists will continue to have so many opportunities or if the digital collectibles market will increase in value.
How Do People Trade NFTs?
People who buy NFTs need to have the ability to exchange their digital art like a meme through a digital ledger. The first NFTs appeared in online gaming apps. Later, Nike created CryptoKicks and authenticated them through a patented app. Eventually, Christie’s auction house got involved in valuing and trading digital art.
Currently, NFTs move through the marketplace by users uploading their files and saving them in secure digital wallets with digital certificates using digital tokens as currency. People do not trade NFT art like they once exchanged baseball cards or trading cards. They must use Eth to make a purchase.
When auction houses hold them, they have to be able to deliver them safely to the winning bidder. Interestingly, the original creator always holds ownership of the original piece. However, at an auction, the winning bidder’s name is entered into the ledger that cannot be hacked or duplicated, creating a smart contract between the creator and the item holder.