What IS An NFT? And Should You Invest In Them?

Amongst the investment and trading madness that has defined this past summer, from meme stocks to the Bitcoin death cross, one new asset class has emerged to the forefront of the media, namely NFTs.

You have probably read the headlines as you scroll through your news feed of the digital images that have sold for thousands and sometimes millions. Or have heard/read/seen the stories of the teenage digital artists who have turned their after school hobby into a lucrative sale by converting their art into an NFT.

Today, we are going to take a look at NFTs, what they are, how they work, and ultimately if this new asset class may be a benefit to you as an investor.

What Is An NFT?

You may be wondering, what does NFT stand for? An NFT is a Non-Fungible Token.

Ok so what the f**k is a non-fungible token?

I had the same question.

Fungible means that a currency, coin, or token can be exchanged evenly. Example you can exchange $1 USD for $1 USD because their value is equal. We see the same fungibility with cryptocurrencies. You can exchange 1 Bitcoin for 1 Bitcoin. Or 1 Ethereum for 1 Ethereum because their values are equal aka fungible.

An NFT differs because each NFT possesses a unique digital signature and therefore a different value meaning you cannot exchange 1 NFT for another NFT (in most situations) with an even exchange. Therefore these tokens are Non-Fungible.

What Kind of Tokens Are NFTs?

Most commonly an NFT will be one of the following:

-digital art

-in game items for video games

-virtual reality items

-video clips

-photos

-audio files

-tweets

It should be noted that NFTs are not limited to the above categories although they are the most commonly seen and traded at the time of writing.

Additionally, NFTs differ from other digital items because they either have a finite, limited supply or they are one of a kind which impacts their market value.

How Are NFTs and Cryptocurrency The Same?

Both cryptocurrency and NFTs are built using similar programming, namely blockchain technology.

Most NFTs utilize the Big Two cryptocurrencies, namely Bitcoin and Ethereum to create and store the NFT but we are seeing a rise in smaller coins that are being utilized to create and store NFTs, particularly those NFTs that are used in game or in virtual reality. One of the most notable recent additions that comes to mind is the coin Smooth Love Potion currently trading well under $1 USD per coin which is used to breed digital pets.

How Do NFTs Differ From Cryptocurrencies and Cryptocoins?

The answer lies is in the “F” word.

Fungibility.

Fiat currency like the US Dollar and cryptocurrencies can be traded for one another which earns them the classification of fungible.

NFTs due to their unique digital signature do not share a similar value and cannot be traded evenly. Therefore they are Non-Fungible.

Where Do NFTs Actually Exist?

Most commonly, NFTs exist on the Ethereum blockchain where they are created and stored. (Side bar: Just one reason why this writer expects the value of Ethereum to go up in value).

Other blockchains can be used to create and store NFTs but at the tume of writing Ethereum is the most common hands down.

How Are NFTs Used?

Digital artists use NFTs to create revenue by selling directly to the consumer vs traditional art which utilizes a broker/gallery/dealer to facilitate the transaction.

On the investment side, much like traditional art, NFTs are used as a capstone for the investor/collector that can be used for bragging rights as well as to create value in the future.

Should You Invest In NFTs?

Much like crypto, NFTs are a growing, lucrative and at the same time, volatile, asset class. Most NFT investors are purchasing as collectors and are not looking for short to mid term growth. They are prepared to hold for the long haul.

For the sophisticated investor, I think NFTs are a go but understand you may need to hold for some time.

For the less seasoned or monied investor, the wisest investment will not be into an NFT but rather the blockchain that is used to create and store the majority of them: Ethereum.