What is an NFT and Should You Invest in Them?
The world of cryptocurrency has turned traditional finance on its head over the past decade but the rise of non-fungible tokens (NFTs) has taken it to a whole new level. As digital assets designed to represent rare and unique items, NFTs have the potential to revolutionize the way art, collectibles, and other items of value are bought and traded. But what exactly are NFTs, and should you invest in them?
What is an NFT?
Put simply, an NFT is a type of cryptocurrency that represents a non-interchangeable, digital asset. Unlike other cryptocurrencies, such as Bitcoin and Ethereum, each NFT is unique and cannot be exchanged for another. Think of it, in literal terms, as a digital token that verifies the ownership of an item.
One of the most popular examples of an NFT is a digital art piece. NFTs are often used to represent digital artwork, allowing artists to keep complete control of their work; the artwork is tokenized so the buyer knows exactly what they are buying and will be the sole, legitimate owner.
Aside from digital art, you could use an NFT to represent any other digital asset; whether providing access passes to an online event or a verified trading card from a limited-edition set. NFTs are even used to create unique rare digital items, like CryptoKitties, that run on the Ethereum blockchain.
So, how do NFTs work?
NFTs run on blockchain technology and are created using the ERC-721 protocol. The two terms may mean nothing to you right now, so let’s break it down.
Blockchain technology is a ledger system that allows the safe and secure transfer of digital assets. It is publicly available, meaning that anyone can view the transactions taking place, yet is also entirely decentralized, which gives it added security.
ERC-721 is a technical standard used by “smart contracts,” software programs that are stored on a blockchain and trigger various events when executed. Most NFTs are designed to use the ERC-721 protocol, which allows for the creation of non-fungible tokens that represent an asset.
Benefits of NFTs
The big benefit of NFTs is their ability to give you complete ownership of a digital asset that would otherwise have existed online in intangible form. It’s a way for you to prove the legitimacy of a digital asset, giving you the peace of mind that comes with knowing it hasn’t been copied or pirated.
The added transparency of NFTs allows you to keep track of each item you own, while their decentralized form means that third parties can’t manipulate ownership records. All in all, this makes them a much better way of trading digital assets than using traditional methods.
In addition to this, the potential for digital scarcity means that rare digital items, such as limited-edition artwork and trading cards, can be authenticated and protected.
Investing in NFTs
Now let’s come back to our question: should you invest in NFTs?
To answer this, it’s important to understand the risks associated with investing in NFTs. As with any other cryptocurrency, the value of an NFT can be very volatile, so investors must be prepared for considerable market swings. The fact that some of these tokens are backed by real-world assets doesn’t necessarily mean that their cost is stable.
Aside from market volatility, some of the risks associated with NFTs include potential fraud, liquidity issues, and an unregulated marketplace. These are all important considerations to make when investing in NFTs.
That being said, there’s no denying the potential of NFTs. A surge in digital assets during the pandemic has seen NFTs become increasingly popular and prices for some digital collectibles have skyrocketed. More investors are turning to NFTs as a possible route to making money and the trend looks set to continue for some time.
Non-fungible tokens are a fascinating development in the world of cryptocurrency and represent a possible route to creating real-world value from digital assets. Understanding the risks associated with investing in NFTs is essential to ensuring you make sound investments but, should you decide to take the plunge, you could be well rewarded.
