Blockchain technology has opened up new markets for investment and consumption. And one of the hottest trends in this field has been the production and sale of non-fungible tokens (NFTs).
NFTs are unique, authenticated digital files (e.g. Artwork and Collectibles). The fact that they cannot be easily copied has made some investors excited about their ability to hold and gain value.
The hype surrounding NFTs was so intense that some were selling for millions of dollars. Is this a emerging asset class you should jump into? Read on to learn more about what NFTs are, how to invest, and how to decide if you should.
What are NFTs?
Non-fungible tokens (NFTs) are crypto-based tokens that are unique, authenticated and highly valued in the crypto scene. Companies like SuperRare.co and others enable the buying and selling of NFTs in the secondary Bitcoin market.
The first widely recognized NFTs were “CryptoPunks,” launched in June 2017. This was a collection of 10,000 unique symbols authenticated through the Ethereum blockchain. According to the LarvaLabs website, these NFTs sold for an average of $ 26,013 last month.
Since that time, NFT has proliferated and investors and digital art enthusiasts can purchase unique art in the Etherum blockchain across multiple markets. The NFT market is also thriving in gaming communities and music enthusiasts. And even professional athletes are starting to make NFT trading cards.
Fungibility means that resources can be exchanged one to one. US dollars are often considered to be the most fungible commodity in the world. They can be exchanged for goods, services and other currencies quickly and with low transaction costs.
Other resources like cryptocurrencies, gold bars, and lesser-known currencies are still fungible, but a little less so. Raw materials such as sawn timber, wheat or oil are sometimes viewed as fungible. However, these items are not perfectly interchangeable (as an petroleum chemist will be happy to explain).
In the physical world, objects range from perfectly fungible (money) to perfectly non-fungible (a child’s blanket at 8:30 p.m.). Of non-fungible items, art is typically an asset that is non-fungible and often increases in value over time.
The same trends that make works of art valuable in the offline or physical world are driving the value of works of art in the digital world. Interestingly, the cryptocurrency makes the world of art sales more transparent.
Since all NFT activities are carried out on the blockchain, it is almost impossible for anyone to fake the origin of the digital work. And provenance is one of the greatest aspects of authenticity (and potential value).
NFT investment outlook
If the world of cryptocurrency investing is the wild west, then NFT is the border with Alaska. They’ve been for sale since at least 2016, but the market has only recently started to recover. It rose 299% in 2020 alone, according to the annual report on non-fungible tokens.
Whether or not to invest in a market like NFT is a personal choice. Experience with stocks, ETFs, or even cryptocurrencies is unlikely to help you become a lucrative investor in this space.
Why is this? Because the supply for a certain NFT is static due to the design (there is only 1). Changes in demand for that one item will therefore affect prices rather than fundamental or technical indicators or the economic outlook.
Many people can potentially dip their toes in the NFT waters by purchasing inexpensive digital artwork that is valuable to them personally. Even if it turns out to be unsaleable in the secondary market, it will be fun as long as the investor owns it.
How do I invest in an NFT?
If you want to buy NFT, you will most likely have to use Ethereum (ETH). Once this cryptocurrency is in your wallet, you can search websites like Rarible or SuperRare to find the best digital graphics. These websites show the prices and (if applicable) the price history for digital works of art.
However, the NFT market is still highly decentralized. CryptoKitties (another very popular NFT style) hosts its own market, as does CryptoDozer, CyberPunks, and Gods Unchained (a gaming site filled with NFT games).
Potential investors may want to browse all of these websites before committing to any NFT investment style. It’s also worth noting that many NFTs can be purchased for around $ 100 to $ 200, while the most popular NFTs are priced well in excess of $ 10,000. For those just trying to see what it is about, buying at a lower price might be better than buying in five figures.
You can make a fortune by investing in NFTs early on. But you might as well lose all your money. At this point it can make more sense to reserve NFT for a kind of “sandbox” position in your portfolio.
In the long run, real assets like stocks, real estate, and even boring index funds are likely to generate investment returns above inflation. It remains to be seen whether blockchain-based art can also generate such returns.