NFTs For Dummies
NFTs have exploded in popularity over the past few months. From art to music to even toilet paper — some of them are even selling for millions of dollars.
Some people claim that they are nothing but a craze, like the dot com bubble or Beanie Babies, but others claim these things are here to stay, and that they will change investing forever.
But with all this hype surrounding them, it can get difficult to take a step back and start asking the most obvious question
But what even is an NFT?
An NFT, or non fungible token is a digital asset that represents a real world object, like art, music, videos and even games. They are bought and sold online, and are encrypted using a blockchain, the same technology that is used to encrypt crypto.
But before we move on to discussing NFTs, and what makes them special, we need to take a look at the technology that makes it special.
Blockchain 101
Simply put, a blockchain is a way for information to be stored in such a way that anyone can add to it, yet no one can change, and is not controlled by a single person or entity, and the responsibility of keeping track of everything is spread out to everyone over the network instead of a single person or institution.
These properties are often described with very technical-sounding language like “distributed ledger,” “peer-to-peer,” and “cryptographically hashed,” but these are the basic properties that those words describe.
Blocks are what store data on the blockchain
Chains are used to “link” the blocks together, allowing each block to be defined with reference to the blocks in front of it and behind it.
This is obviously a massive oversimplification, and we haven’t even touched on the more technical aspects of a blockchain, but that is a topic for another day.
What makes NFTs valuable
In the crypto world, there are two types of tokens, fungible and non fungible tokens. Fungible tokens are like currency, a one hundred rupee note is only worth one hundred rupees regardless of the serial number on that specific note.
On the other hand, non fungible tokens are unique and cannot be replaced by any other token.
Essentially, what makes an NFT so valuable is the fact that it’s ownership can be verified, and the fact that they can be traded on various platforms.
How to calculate the value of an NFT
The value of an NFT depends on many factors, each of which contributes to the overall value of the NFT differently. These factors can be used to determine whether it is worth investing in an NFT or not, the two most important of which have been discussed in brief below.
- Utility — The value of an NFT is dependent on how it can be used. Two major categories where NFTs have high utility value are game assets and tickets. For example, this Star Trek Crypto Space Commander battleship was sold for $45,250 in 2019, and the value of an NFT ticket is the price of an event ticket.
- Ownership history — The value of an NFT obviously stems from who it was created by, and who its past owners were. Much like physical art, the value of an NFT increases if it was issued by a famous artist or a company with a strong brand value, and is affected by its previous owners. For example, the first authorised NFT of a Formula 1 car was sold for over $100,000
Where to buy NFTs
If you are interested in buying NFTs, you are not alone. Regardless of the risks involved, these digital assets are in extremely high demand.
Some of the most common marketplaces among NFT investors include
- OpenSea.io is the world’s largest marketplace for digital art. On the platform, you’ll find the classics like CryptoPunks and CryptoKitties, alongside newer forms of crypto-related art ranging from digitized images to trading cards, sports tokens, virtual worlds, and other collectibles.
- Decentraland is essentially an entire digital world that lives on the blockchain. At Decentraland, users can buy and sell pieces of digital land, avatars, artwork, games, and more. The platform also gives users the ability to test their creativity by creating their own digital artworks. So, not only can you buy works created by others, you can try your hand as a digital artist.
- Nifty Gateway is where you’ll want to go if you want GIF-style image assets. Instead of static assets that don’t move when you load them, these assets feature animations that move, depicting a scene. The prices of “Nifties” generally range from a few hundred dollars to tens of thousands of dollars.
The Pros and Cons of NFTs
As with purchasing any artwork, NFTs are an investment, after all, there is a massive market for art, whether the work be digital or physical.
And as such, just like any other form of investment, one should be aware of the pros and cons that come with putting their money into the next digital masterpiece.
The Pros
- Value Growth : As with anything, the value of an NFT can grow after they are bought. For example, CryptoPunk #3100 first sold for $2,127 on July 6, 2017, and was worth a staggering $7.5 million on March 11, 2021.
- Ownership of something unique : The novelty of knowing that one owns a one of a kind piece is something that many people are willing to pay millions of dollars for.
- New revenue stream for artists : NFTs were partially created to help artists earn more money in a digital landscape that hasn’t been particularly kind to them before. If their artwork accrues more value — which it gains when it becomes popular on the internet — the artist realizes gains income.
The Cons
- ‘Physical Art Can’t Be Digitized : The reasons to own physical art and the reasons to own digital art are often different. You can’t digitize physical art. There’s an allure to seeing a one-of-a-kind painting with your own eyes that these tokens simply can’t provide.
- Uncertain Value : buying an NFT does not mean that you have its copyright. Oftentimes, the original creator of an NFT will retain the reproduction rights to any art you buy.
- Environmental Cost : Any record entered into the Ethereum blockchain takes significant computing, which requires the use of significant amounts of energy. The widespread trading in NFTs and other blockchain-based assets isn’t necessarily an environmentally friendly process. In fact, a recent Cambridge University study suggests just about everything having to do with the blockchain is highly unsustainable from an environmental standpoint because of the amount of energy used.
In conclusion, NFTs are here to stay — whether you like it or not. Trading NFTs has become a billion dollar industry, and the fact that a lot of them exist on the same blockchains as some of the most popular cryptocurrencies, means that they have become something pretty permanent. That said, approach NFTs just like you would any investment: Do your research, understand the risks — including that you might lose all of your investing money — and if you decide to take the plunge, proceed with a healthy dose of caution.
