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2023-08-07

    NFT - Should You Invest in It?

    Recently, non-fundable tokens have been everywhere. From art to music, these digital assets are selling very well but is the hype worth the risk to invest in NFT? Let’s find out. 

    What is an NFT?

    The abbreviation of NFT stands for non-fundable tokens. NFT is a cryptographic asset with unique identification code and meta information that can come in the form of art, music, in-game items, video, and more. The NFT allows artists to reach new customers and sell their works in an alternative way with the help of cryptocurrency. These digital assets grow in popularity because they can protect the ownership of the digital art available online. Artists all around the world do not need a gallery to show their works to the audience, NTF allows them to monetize their art online. But how does it work? 


    NFT exists on a blockchain that records transactions. The NFTs are usually held on the Ethereum blockchain. The NFTs can be items such as gifs, videos, music, sports recordings, virtual avatars, video skin games, collectibles, and more. Even social media posts can be converted to NFT. 

    Is the NFT cryptocurrency? 

    The NFT allows artists to reach new customers and sell their works in an alternative way with the help of cryptocurrency. These digital assets grow in popularity because they can protect the ownership of the digital art available online. Artists all around the world do not need a gallery to show their works to the audience, NTF allows them to monetize their art online. But how does it work?


    NFTs are very similar to the physical collector’s items that exist online. The items get exclusive ownership rights and can have only one owner at a time. The blockchain makes it easier to record and track who is the actual owner of the item. 


    Let’s say for example that you buy a painting. The one will be delivered physically to your home and you will have the original item hung on your wall. Buying a painting as NFT will not make you an owner of a physical asset but a digital file. 


    The creator of the token may also put metadata about the author of the file which will make it easier to identify who was the one who created the asset in case there is an attempt for a scam. 

    Although NFT has been around since 2014, the assets started gaining popularity a few years ago. In 2021, the worth of the NFT market was calculated at 41 billion USD. The amount was approaching the total value of the global art market. 


    The technology the NFT is using is very similar to the one used by cryptocurrency but is the NFT a cryptocurrency?


    While both cryptocurrency and tokens are digital assets, there are a few differences between them. Cryptocurrency is decentralized and usually is used as a medium of exchange. On the other side the tokens can be centralized and decentralized, they are fungible or non-fungible assets. The knowledge of the fungible assets in classic finances may help you to get a better understanding of these digital assets' nature. 


    Fungibility is the nature of the items to be interchangeable with other identical items. A good or service can be fungible if it can be replaced by another asset. 


    Non-fungible items can not be replaced by identical items because their value is not similar. Each NFT is unique. The value of these items is higher than the value of the fungible items. 


    The pros of using non-fungible tokens are:

    • NFTs are built on blockchain which makes them secure and transparent;

    • NFTs are unique digital assets that can not be replaced by identical items;

    • NFTs are providing diversification benefits to the investment portfolio;

    • NFTs can be used to store additional data; 


    The cons of using non-fungible tokens are: 

    • NFTs can not be used for generating income;

    • NFTs are volatile and illiquid;

    • NFTs can be used for fraud; 

    • NFTs can have a negative impact on the environment.

    How to buy an NFT? 

    NFTs can be created, sold, bought, and traded. Everyone with access to the internet can do that with the help of the marketplace and online exchangers. The creator or the current owner of the asset can choose at what price to sell the NFT. Another option is to create an auction and buyers will have to bid for the token. Depending on the marketplace there are maybe different fees associated with each transaction. Also, you can see the value of the transaction in cryptocurrency or US dollars. 


    To add any NFTs to your investment portfolio you will need to have a digital wallet where to keep your tokens and digital currency. 

    Should you invest in NFTs? 

    This is largely a personal decision. The NFTs are risky because their future is uncertain and we do not have historical information to judge their performance. The NFTs value is entirely based on how much someone else is willing to pay for the item. Also, the NFTS may gain taxes just like when you sell stocks at a profit because the NFTs are considered as collectibles. 


    Whatever decision you make it is important to make research, understand the risks and proceed with a healthy dose of caution. 


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