NFTs (Non-Fungible Tokens) are tokens that can be used to represent ownership of unique items. They are stored on blockchains that certify these digital assets are unique and therefore not interchangeable. Things like art, music, videos, collectibles, even real estate can be tokenized.
While a fungible asset is something that can be readily interchanged, a non-fungible asset has unique properties which means it cannot be interchanged with something else. This uniqueness is why NFTs have value. These “one-of-a-kind” assets can be bought and sold like any other assets.
These tokens can be thought of as certificates of ownership for digital and physical assets.
Although the purchase of an NFT will transfer the proof of ownership to the purchaser, it does not stop people from copying or sharing the digital art. In many cases, the artist even retains the copyright of their work which means they can continue to produce and sell copies. Despite that, collectors often value the “digital bragging rights” more than the items itself and still buy NFTs. And the built-in authentication serves as proof of ownership.
Interest in NFT
Although NFTs have been around since 2014, they only began gaining popularity recently. The market for them exploded as mainstream companies and investors poured money into new DeFi trends.
While anybody can tokenize their work to sell as an NFT, the recent interest in NFTs has been fuelled by several multi-million-dollar sales. The sale of the first-ever tweet by Twitter’s founder Jack Dorsey for $2.5m and the sale of an NFT by digital artist Beeple for $69m are prime examples of the interest NFTs are garnering.
Risks of Investing in NFT
The market for NFT is booming. But that doesn’t mean they’re a safe investment. For all the benefits and hype surrounding them, NFTs come with significant risks to the investor.
1. Value
The market for NFTs is relatively new and is still maturing. A lot of the NFTs that are being traded do not have an intrinsic value. Retail investors usually get caught up in the frenzy around them and don’t always look for the value. Also, the purchase of an NFT only transfers the ownership of the asset and not its copyright. This would mean that artwork, image or video can still be copied or used by anyone. This has made a lot of people sceptical of the value of NFTs.
2. Illiquidity
Liquidity, the ease of exchanging an asset for cash, is a major factor when considering an asset. But unlike cryptocurrencies and stocks, NFTs are relatively illiquid. While cryptocurrencies and stock can be bought and sold easily, in the case of NFTs every seller needs to find a buyer who is willing to pay a certain price for a particular, one-of-a-kind item. That can put NFT collectors in a tough spot if they spent a huge amount on an NFT purchase and later the market begins to tank.
3. Ownership
What most people don’t realize about NFTs is that the token (a record of ownership that lives on a blockchain) and the asset it refers to (a photo, video, or digital art) are usually.........
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