A few years ago, many of us would be quite perplexed if someone tried to get us to invest in a Non-Fungible Token (NFT). But today, it seems everyone is talking about them. What are these mysterious types of assets? Where did they come from? Should we be investing in them?
Mind Your Dollars talked to a few experts to get the inside scoop on what NFTs are, how they work, and whether or not they’re something a tactical investor should be putting money and time into. As with all other types of assets, it turns out that NFTs have upsides and downsides.
Read on to discover what we’ve learned about NFTs in today’s investing market.
What Are NFTs?
NFTs are a brand-new type of investment asset based on modern technology. These digital assets have only been in existence for less than a decade. For some, that makes them even more exciting. The possibility that an NFT could make someone rich is enough to get the attention of even the most traditional investors. However, being as new as they are, it’s wise to understand exactly what NFTs are before you even consider investing in one.
“A Non-Fungible Token is data added to a file that creates a unique signature,” says Jordan Figueredo, a consultant with Pelicoin, the most secure crypto ATM network in the Gulf South.
According to Figueredo, an NFT can be a song, a tweet, an image file, a piece of artwork, or even something as basic as text somebody posted to a website. There are countless other physical and digital formats, which means “someone can own a digital file, and it has a code that differentiates it from digital replicas.”
Who Created the First NFT?
NFTs have only been around since 2014. The first one was created by Kevin McCoy and Anil Dash.
Kevin McCoy and his wife, Jennifer, are known for creating multimedia artwork. Dash, meanwhile, is the CEO of Glitch, a company that advocates for “a more humane, inclusive and ethical technology industry.”
The NFT created by McCoy and Dash was the first of its kind. It was a tradable blockchain marker that was linked to a unique work of art. The exchange was incredibly simple: McCoy used a blockchain service called Namecoin to register a piece of art in the form of a video clip that he and Jennifer had created. Anil Dash then purchased the video clip on the blockchain for four dollars.
“I certainly didn’t predict the current NFT mania, and until recently had written off our project as a footnote in internet history,” Dash wrote for The Atlantic in April of 2021. “The idea behind NFTs was, and is, profound. Technology should be enabling artists to exercise control over their work, to more easily sell it, to more strongly protect against others appropriating it without permission.”
The Appeal of NFTs
Investors are causing such a stir around NFTs because they are excited about the idea that tech can be used to sell digital copies of art. For example, musician Grimes has sold $6 million in NFTs of her digital art. This is why folks are so excited about the potential of NFTs; they do seem to have a lot of money-making potential. Other artists and celebrities who have sold NFTs include:
- Snoop Dogg
- Lindsay Lohan
- William Shatner
- Cara Delevingne
- Shawn Mendes
- Paris Hilton
- Tony Hawk
- Rob Gronkowski
- Steve Aoki
- Jack Dorsey
- Lewis Capaldi
- Kings of Leon
- John Cleese
- Emily Ratajkowski
- Soulja Boy
- Kate Moss
- Ellen DeGeneres
The appeal of selling NFTS, as Figueredo explains, is that “the artist will still retain the copyright and reproduction rights, but the purchaser will have ownership of the original piece. For artists, NFTs give them a new way to sell their work and sell their work in a market that did not exist before. NFTs also pay the artist a percentage every time the NFT is sold or changes hands.”
How Is an NFT Different From Cryptocurrency?
Artists like Grimes can therefore continue to make money off their original art each time the NFT is sold. This is where NFTs collide with the world of blockchains and cryptocurrency. Krishna Jedi of ChangeHero explains:
“Non-fungible tokens are assets issued on the blockchain to represent a wide variety of tangible and intangible items in real life. An artist can issue an NFT on one of their paintings and secure it on the blockchain with all the necessary info. If the NFT is up for auction, anybody can bid on it and buy the original painting along with the NFT.”
This is also great for the original seller (and each reseller after) because the exchanges happen quickly and easily. The blockchain allows these exchanges to occur rapidly, increasing the potential value of the NFT.
“These NFTs cannot be exchanged with one another instead sold on marketplaces or through mutual agreements,” says Jedi. “Verifying ownership is quick and easy through NFTs and this will make it tough for forgeries.”
NFTs aren’t just exciting to the sellers, though; plenty of buyers want to get their hands on an NFT. This is what’s making these assets so trendy and exciting.
“As a buyer, NFTs allow individuals to support artists and invest in the art that the value will go up and increase your profit,” Figueredo says.
What Does ‘Non-Fungible’ Mean?
Something that throws a lot of people off when it comes to NFTs is the financial jargon contained. The name itself is enough to make a new investor hesitate. “Non-fungible” isn’t exactly a household word.
Scott Nelson, CEO of MoneyNerd and a financial services expert, explains what it means for something to be non-fungible. A fungible asset like money can be swapped for another asset of the same value. For example, one $20 bill can be exchanged for two $10 bills. In such an exchange, Nelson explains, both parties end up holding assets of equal value.
A non-fungible asset, on the other hand, cannot be interchanged with something else.
“Just as in the real world, where a unique item such as a painting or a house can be replicated or photographed, there can only ever be one original,” Nelson says. “NFTs are the same, only digital. They can be bought and sold in the same way any piece of tangible property could be.
“Because NFTs are by their nature non-fungible, each one is unique – in theory, as unique as its owner. Thus, it would be possible to create an identity verification system using NFTs.”
Nelson also breaks down how an identity verification system could work. “Individuals interacting online [would be] identified using a unique token stored in a web-compatible wallet,” he says. “Their ownership [would be] verified on the blockchain every time they authenticated to a web3 service.”
What You Should Know Before Investing in NFTs
Before you make your first big NFT purchase, consider a few words of wisdom from the experts. This type of asset is new and exciting, and it’s tempting to get in on the ground floor of what could possibly become the next big thing. However, we know well that investing is fickle. What seems like a fantastic opportunity could just be smoke and mirrors if you don’t play your cards right.
“For those interested in getting involved with NFTs, it’s the same as any other investment; you need to do your research, understand your risks, and proceed with caution since the cryptocurrency market is volatile,” says Figueredo.
It’s absolutely essential that you understand what you’re getting into when purchasing an NFT, just like it is with any other investment. Ask yourself if the risk of entering the blockchain market is worth it, because it will take tact to choose the right NFT for you.
It also may not be the kind of investment you want to partake in. For example, the co-creator of the first NFT, Anil Dash, is disappointed with the way NFTs are being used.
“Look at the history of other gold rushes,” Anil Dash wrote in his essay about the creation of NFTs. “When someone buys an NFT, they’re not buying the actual digital artwork; they’re buying a link to it. And worse, they’re buying a link that, in many cases, lives on the website of a new start-up that’s likely to fail within a few years. Decades from now, how will anyone verify whether the linked artwork is the original? All common NFT platforms today share some of these weaknesses.”
Before you invest in an NFT, consult with an expert. It may not be wise to add such an asset to your portfolio at this time. If you do feel like it would be beneficial to enter the NFT game, just make sure you do your research beforehand. These assets are very exciting, so it would be wise to first pause to analyze where the market goes in the next few years. Is this a fleeting craze, or the wave of the future? Time will tell!