Analyst Insights
NFTs are the relatively new digital assets that have become popular among young investors. As most assets that have become popular in recent times, the returns on NFTs can be very significant but of course, they present clear risks that match these potential returns. In this article we decompose NFTs as we add it to the list of tracked assets within the alternative investment space.
What are NFTs? – Non-Fungible Token
NFTs are collectible digital assets that hold value and cannot be replicated. NFTs can take several forms, including digital drawings, art, music, etc. Most recently, art has become the popular NFT asset and like physical art, the value is based entirely on what someone is willing to pay for it. NFTs turn digital assets into one-of-a-kind by creating a unique digital fingerprint that defines ownership of the specific asset which can then be bought and sold for real money, cryptocurrency or other NFTs. How is this accomplished? NFT creates a blockchain-based digital certificate for digital assets. This certificate gives the artwork a unique identity. The underlying technology and programming language used by NFTs are the same as other cryptocurrencies, the underlying technology being the blockchain and the “proof of work” algorithm, Ethash or Scrypt. Effectively, NFTs are digital tokens like cryptocurrencies such as Bitcoin and Etherum. However, unlike cryptocurrencies, an NFT is unique and can’t be exchanged like-for-like, hence non-fungible. Now, the original file of an NFT that identifies ownership can be bought and sold just like any type of art and like with physical art, the price is mainly set by market demand. One must understand that while the original pieces of art are bought and sold, there are also copies of an NFT that still are valid parts of the blockchain but they don’t hold the same value as the original. This is very similar to fake physical art works. Consequently, ownership of an NFT often comes with a license to use the digital asset but unless specified in the contract, it does not automatically confer copyright ownership. As a result, the copyright owner may still reproduce the work and the NFT owner gains no royalties.
Where can you buy, sell and create NFTs?
First, you will need to set up a crypto wallet before engaging in NFTs transactions. If you’ve ever used eBay then you will have a pretty good idea of how to buy NFts. Most NFT marketplaces are run like an auction house, you place a bid using your crypto (mostly ether, the currency of Ethereum blockchain that most NFTs are a part of) and wait to see if you win the chosen NFT. Popular marketplaces are Mintable.com and OpenSeaio. Creating your own NFT is quite simple, first, you will need an image, video or music file you want to upload and your pre-funded crypto wallet. Then you can go the marketplaces mentioned above and follow the instructions on how to mint your very own NFT. In addition, you can mint NFTs directly from the sellers in a primary market transaction before it reaches secondary markets like OpenSea. Selling an NFT whether bought or created is done in the same fashion by using one of the NFT marketplaces. Whether selling or creating an NFT, there will be fees attached and these are dictated by the marketplace.
The metaverse and NFTs
Most recently, Facebook announced the renaming of the Company to Meta, a name which aligns the with the Company’s future goals and aims. The metaverse which doesn’t exist today, at least not yet, is a superset of virtual reality, augmented reality and the internet. It introduces another form of social connection which allows people to socialize, learn, collaborate and play in ways that go beyond what’s possible today. Last week Facebook announced that the company’s metaverse will support non-fungible tokes (NFT). “This will make it easier for people to sell Limited Edition digital objects like NFTs, display them in their digital spaces and even resell them to the next person securely,” Facebook Head of Metaverse Products Vishal Shah said. One can even speculate that art is just one part of a new economy of blockchain-based virtual worlds where buildings, land, avatars and even names can be bought and sold as NFTs. How NFTs may or may not grow with this new adaption of the multiverse is still highly speculative at the moment, however, we will keep a close eye on this space and update our readers when necessary.
Concluding Thoughts
We urge investors to approach with caution as while significant capital is flowing into NFTs, the associate risks are elevated. Further, the potential exists for fraudsters in a market where many participants operate under pseudonyms. It is also good for newcomers to realize that NFTs in various farms have been around for several years but we are hearing about them more often because of the large amount of money being generated within the space. Investors also need to realize that NFTs are a lot like the initial coin offering craze that came with cryptocurrencies which resulted in a many scams. That being said, we are not saying all NFTs are scams but at the same do not risk your financial stability trying to chase these elevated returns.
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