What exactly are NFTs? It’s the question everyone is asking as the value of digital art skyrockets. While NFTs have been around for a few years, it took Beeple, CryptoPunks, and Bored Ape Yacht Club to popularise this new technology. Since then, Adidas, Nike, Disney, McDonald’s, and a slew of celebrities have become involved with NFTs.
NFTs are still difficult to grasp, and the more they make headlines, the more difficult it is – after all, if a snapshot of an NFT bin sells for $252k, anything is possible.
What Are NFTs?
Basically, NFTs are a standard for a digital token on the Ethereum blockchain. The standard is being created by Ethereum’s Fungible ERC-721 token standard and has a little over a 100 projects listed as using it, including CryptoKitties, which was the first mainstream dApp to use this technology. Unlike their fungible counterparts (which are interchangeable, like most cryptocurrencies like BTC and ETH), NFTs are unique digital collectibles and assets. That is, each one is special and represents something different. For example, CryptoPunks are the digital equivalent of the sticker cards you collected when you were growing up, except you could never find another one like it; they’re simply unique.
There are three basic things that make NFTs so different:
1. They Are One-of-a-Kind
NFTs are like collectibles in that they can be only be purchased once, at which point they’re forever stuck in that owner’s account. Unlike collectible coins or art, however, they’re not quite the same because they can be used in games and they can be traded.
2. Their Scarcity Is Guaranteed
The only way to sell an NFT is to transfer its ownership to someone else, which means the owner can always sell it or trade it again. For example, it might be possible to sell a CryptoPunk for 3 ETH, but then someone else may purchase that same CryptoPunk for 4 ETH. The same goes for CryptoKitties, too; the price of a CryptoKitty falls over time, and the price that you can sell that CryptoKitty for is always going to go up.
3. They Can Participate in Games
This is the most notable difference between NFTs and other digital assets. Most cryptocurrencies and tokens are used to transfer money or ownership over to other individuals, but NFTs allow for a special kind of interaction, like the ability to submit your CryptoPunk to a special kind of fighting arena and have it fight other CryptoPunks from all over the world.
So, Are NFTs a Good Investment?
Investing in an asset just because it has been tokenised into an NFT is a bad idea. NFTs are not investments in and of themselves; therefore, be sure you understand the underlying asset’s value before purchasing the NFT.
Another thing to note is that buying an NFT is a difficult procedure. To get started, you’ll need an Ethereum-compatible crypto wallet and some ether and the ability to connect your wallet to an NFT marketplace – a lot of hoops to go through. NFTs are also vulnerable to cryptocurrency hacks and frauds, which are becoming more widespread and complex. A Google search for “NFT frauds” demonstrates how easy it is to get into trouble.
Then there’s the issue of value and utility. NFTs are not like stocks or bonds, where the underlying value of the investment is usually known. A successful NFT is comparable to a strong brand in that others give it a lot of value; thus, it is only as valuable as someone else is prepared to pay for it.
Long story short, NFTs are a new and cool technology, but it is not necessarily worth investing in these new technologies, especially without understanding how they work.
The NFT space has been a big surprise for investors in the very early days of the crypto market. Not only do NFTs provide a way for the crypto market to be used for something tangibly useful, but they also gave us the rise of CryptoKitties, which was a very fun way to spend some of our ETH.
NFTs may be a good place to start if you’re looking to get into crypto. If you’re thinking of investing in NFTs, be sure you do a lot of research into the individual NFTs you’re considering before you commit to any purchases.
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