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Non-Fungible Tokens (NFTs): How Do They Work & Are They Worth Investing in?

By Myles Leva

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Last Updated: February 16, 2022

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NFTs are constantly making the news these days.

It seems that every few months, a multi-million dollar transaction for an NFT takes place. In December 2021, a new record was set as one NFT sold for $22.5 million more than the runner-up. So, what gives?

In this article, we will go over:

  • What NFT means
  • What exactly NFTs are
  • NFTs as investments
  • NFT examples
  • How you can buy NFTs

 

What are NFTs and how do they work?

NFTs Meaning

Non-fungible tokens (NFTs) are unique digital tokens representing ownership over a digital asset.

The “non-fungible” in non-fungible token means that the token is not interchangeable. One Bitcoin is worth just as much as any other Bitcoin. NFTs, however, each represent unique value propositions.

For this reason, they are often compared to sports trading cards.

As for how they work, the starting point is the blockchain. Most NFTs are currently a part of the Ethereum blockchain.

The “blockchain” is the technological basis of cryptocurrencies from Bitcoin to Ethereum to all the others. The Ethereum blockchain, with its smart contracts, supports stores of information with strict executable codes.

This is why it is used to store NFTs. It makes them, in the simplest terms, unique, verifiable, and easily tradeable assets.

The main use for NFTs is to transform works of digital art into unique collectibles. The umbrella term “digital art” is very liberal, however. For example, Twitter CEO Jack Dorsey’s first Tweet was turned into an NFT and sold for $2.9 million.

While many NFTs appear trivial on the surface, the amount of money being exchanged for them is quite serious. Digital images, GIFs, video clips, and more can sell in the hundreds of thousands or even in the millions.

 

Are NFTs a Good Investment?

NFTs, from a conventional financial standpoint, must be viewed as speculative assets.

You may buy an NFT and hold it as an investment. However, the NFT's value is simply in whatever others are willing to pay for its ownership.

At best, an NFT can be considered a legitimate investment if the investor thoroughly understands what the NFT is used for. At worst, NFT trading is a wasteful speculative expense.

The difference between the two above cases, as should be expected, is research and fundamental understanding. If you want to approach any NFT as an investment, it’s necessary to understand what you are getting into.

As has been the case in many parts of the crypto economy, participants in the NFT market are often in a speculative craze, sometimes bordering on mania.

This makes these assets a great deal for the person who sells them at the ideal moment, but bad for all other market participants. To make the right decision, a deeper understanding is needed. Otherwise, it isn’t even correct to refer to an NFT as an “investment”.

With the above all understood, the traditional principles of investing still apply in the NFT space. To succeed is to buy low and sell high. However, it cannot be repeated too often how NFTs should still be thought of as “investments” that could suddenly go from millions to zero, making them extremely speculative instruments.

The greater fool theory applies more in the NFT space than elsewhere.

 

What is an example of an NFT?

The most high-value NFT transactions have strictly been works of digital art so far.

NFT examples such as these are on the highest-priced end of the NFT market.

The most expensive NFT sold at the time of writing was “The Merge”, a piece of “fragmented art” created by someone going by the pseudonym of “Pak”. The NFT was sold in early December of 2021 for $91.8 million.

Another older example is the current runner-up in terms of transaction value. “Everydays – The First 5000 Days” is a single-piece work of art. It’s a collage of 5,000 images, added one at a time over the course of 13 years. The NFT sold on March 11th, 2021, for $69.3 million.

 

How to invest in NFT (Where to Buy NFTs)

You can invest in NFTs on any NFT marketplace. NFT marketplaces are platforms dedicated to the display, advertising, buying, and selling of NFTs. With an account on any of these platforms, you can start trading for NFTs.

NFT transactions are normally an exchange of cryptocurrencies for NFTs. So, you will need to acquire some Ethereum (or perhaps other cryptos) before investing in an NFT. Most NFTs are on the Ethereum blockchain and are thus purchased with Ether (ETH).

It’s about as simple as that. All that should be added is the importance of research and informed decision-making. Taking the time to develop a thorough understanding of your investment is necessary to avoid the many grave risks in the NFT market.

Looking at different ways to invest? Read this next: Investing in Cryptocurrency: Is it Worth the Risk?

 

Conclusions

NFT art and other NFT products are a new and volatile asset class.

The NFT market is a unique one, but is certainly one that holds immense potential. However, it’s important to not lose sight of the speculative nature of NFT trading/investing.

Photo by Andrey Metelev on Unsplash

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