NFTs may be a relatively new way to invest, but there are a lot of people who still aren’t sure what exactly an NFT is, despite the numerous high-profile celebrities who are seemingly jumping on this current trend.
But will it truly stand the test of time and retain its value, or is it a passing craze that will die down and decrease in value once the initial hype is over?
If you’re looking for an investment opportunity and you want to get in early on the NFT hype, you’ll need to learn more about it before you put your money into it.
Otherwise, you could end up with a bad investment that you’ll regret in the future and could result in a loss.
So, what’s the deal with NFTs? That’s what we’re going to talk about in this article.
We take a look at the definition of an NFT, what type of assets they can be, who is currently buying them, and most importantly, why, as well as some of the advantages and disadvantages of investing in NFTs.
Plus, we take a look at the question of whether or not NFTs are here to stay and hold their value.
Without further ado, let’s get right into it.
What is an NFT?
Defined as a non-fungible token, NFTs are an asset that cannot be easily exchanged the way that money and transactional goods are, differentiating them from cryptocurrencies like Bitcoin or Ethereum.
However, these digitally authenticated assets can still be thought of as using the same system for determining value that we use for other collectible items.
The majority use the Ethereum blockchain to digitally record transactions, with each NFT being as entirely unique as the digital asset it is tied to, whether that be a piece of artwork, music, or video.
You could even use a tweet, although we’re not promising it’ll have value. Not unless you’re the founder of Twitter and you sell an autographed tweet as an NFT.
Despite their recent spike in popularity and the sudden interest generated in NFTs thanks to sales like the digital artwork piece that sold for $69.3 million and a Christie's auction, which has overtaken cryptocurrency itself in terms of hype, the technology was developed in 2015.
No, you didn’t just read those numbers wrong. Unique artwork really has been sold for the insanely high price of $69 million, which, to put things into perspective, is a value that is equal to one of Pablo Picasso’s most famous pieces of art, which is the second-most expensive painting to have ever been sold in Europe which was only in recent years.
Musicians have been benefiting from the creation of NFTs as much as artists, with headline bands like Kings of Leon making millions of dollars from selling assets to their fans which can be used in exchange for bonus perks like concert tickets or unique band artwork.
You might be thinking to yourself, “but how can something that can be downloaded by anyone hold rare value?” To answer this question, think about it as you would a physical piece of art that you’re collecting.
A Picasso print can be owned by anyone, but only one person can have the original artwork, which is where it gets its value.
To show you an example of how anything can be an NFT if people determine that it has value, someone paid almost $390,000 for a video from Grimes that was 50 seconds long, and another person paid a whopping $6.6 million for a video made by Beeple.
Your favorite videos of your pet being cute might be priceless to you, and there’s technically nothing stopping you from selling them as an NFT, but without holding value to anyone else, it’s unlikely you’ll be able to sell them for anything anywhere near these kinds of prices.
Why Are People Buying NFTs?
Wondering what the point of it all is? Stick with us.
There are a number of reasons why people are choosing to invest their money in NFTs as opposed to more traditional, physical assets, which we’re about to delve into.
They’re As Safe As Houses
The blockchain technology NFTs use to authenticate and prove ownership over a valuable asset is one of the many advantages to this technology, which is a much more simplified process compared to authenticating older, physical paintings and artwork, for example.
Blockchain technology also prevents people from being able to replicate the original NFT by creating counterfeit copies.
In its most simplified terms, it does this by generating a random combination of numbers that add up to a specific value, known as a hash value, which is near impossible for anyone else to crack, and this unique code cannot be copied.
That’s not to say that NFTs can never be stolen once acquired, however, and there have even been instances where art has been stolen and sold as NFTs by someone other than the original artist, but we’ll get into this in more detail a little later on in the article.
No Storage Space? No Problem!
Stored as a digital file with no physical counterpart to show your investment, you’ll find any purchased NFTs in your crypto wallet, where any other cryptocurrencies you own are kept.
There’s also something to be said for the enduring survival of digital artwork, as although there’s Bit rot where file formats no longer open or there’s a deterioration of image quality, physical art can also be fragile even when it’s stored in optimal conditions in a museum.
Support Your Favorite Artists
Some of the examples of successful NFT sales we’ve given throughout this article are of artists who have sold NFTs that offer exclusive usage rights or bonus material to fans.
This has allowed people to support their favorite artists in a way that’s a bit different from just buying their regular merch, giving them bragging rights or unique mementos and tokens.
However, it’s not just fans who are investing in music-based NFTs. A lot of buyers are actually already invested in cryptocurrencies and their patronage extends to other artists as well, which speaks to the collectability of these digital assets.
Did The Pandemic Give NFTs a Popularity Push?
There are people, like Rodriguez-Fraile, who believe the global Covid-19 pandemic prompted an acceleration in the growth and interest in NFTs, though he clarifies that he had no doubt the younger, tech-driven generations below would bring it about eventually anyway.
Though the pandemic has brought about difficult times for many, some people have been able to save through this time and are now sitting on a bigger investment to play with, leading more and more people to look to options like cryptocurrencies and now NFTs.
It also seems like there is less confidence in the US dollar as the economy currently stands, leaving NFTs as a viable alternative option for those looking to invest their money.
Who Can Buy NFTs?
Anyone can invest in NFTs, but that’s not to say that everyone should. You’ll need to do your own research and consider your investment options before making a decision about whether or not this is the right investment option for you, as it’s not something we can decide for you.
There are many people who truly believe that the future of assets and fine art collecting lies in NFTs, in which case it will become the playground for the 1% to disperse their fortunes.
On the other hand, there are also the likes of Logan Paul, who reduce NFTs to something of a meme. Just as anyone can buy NFTs, it’s also true that anyone can sell them, so make sure you’re not buying from or investing in NFTs from an opportunist just for the sake of it.
In order to purchase an NFT, you may need to purchase Ether, which is the cryptocurrency that is currently used for Ethereum, and this will allow you to use marketplaces such as OpenSea which is a mainly crypto-based system.
There are still options for credit card NFT purchases, however, but you’ll still need to create a crypto wallet to store your NFTs.
Essentially a digital wallet as the name suggests, you can keep both your cryptocurrencies and your NFTs here where they remain safe from fraud.
Are There Any Downsides I Should Consider Before Buying NFTs?
As many arguments as there are that you could make for the purchase of NFTs, it’s always important to consider every angle of a potential investment and to think about what the disadvantages are to your purchase. When it comes to NFTs, this can include the following.
Seeing as NFTs are still in their infancy in various ways, there’s been some discussion over whether or not they will even exist in 30 to 50 years time from now. Who knows what advances there will be in technology or whether regulatory issues will arise?
The sheer unknown itself is enough to push these investment tokens into the high-risk category, but there are also a few security issues to be ironed out as well. While they can’t be changed or copied, NFTs can be stolen once it’s been bought which could be a huge loss.
There’s also a chance that something new could come along and, like NFTs have taken the attention away from Bitcoin, could cause the value of NFTs to drop or become obsolete. Similarly, the influx of investors could fizzle out and cause a steady decline in value.
Unfortunately, NFT transactions consume an enormous amount of energy which has negative consequences for the environment.
Enough power is used up in just one transaction that you could equally use to run an entire house for 2 and a half days, in turn producing 70.32 kWh or 34 kg of carbon dioxide, the equivalent of 5,700 hours of streaming.
The blockchain technology used in transactions of NFTs is responsible for this high consumption of power and electricity, which is the price for its high security and safety.
The reason this is as damaging for the environment as it is is that NFT transactions are often powered by coal due to most NFT networks being based in coal-rich areas.
Inability to Digitize Physical Art
Despite some of the eye-watering prices that NFTs have been selling for, there’s a chance that people will one day realize that they’re paying all that money for a piece of artwork that they can’t even admire or hang on a wall in their home to display.
There’s something special about viewing the original, physical artwork that can’t be digitized or translated into file formats, which is one of the drawbacks of this type of investment.
How Do I Know if NFTs Will Gain And Maintain Value?
There’s no guarantee that the value of NFTs will increase, which is the scary thing about any investment that you plan to make. No matter how much research you do or how confident and informed you feel about your decision, it’s almost impossible to predict the future market.
Although it feels a bit like a bubble, like the ICO craze in 2017, for example, NFTs hold real value because they’re linked to the authentication of a real asset, collectible, or piece of artwork, and they’re rare and unique enough to provide bragging rights to their collectors.
However, there is still a chance that NFTs could go the way of the Dutch tulip bubble, which is when the value of these bulbs was shooting up and people bought in at high prices on the basis that the value would only continue to increase, which it did - until it didn’t.
Like we’ve already said, as with all investments, there’s no way to guarantee that NFTs will continue to gain or even be able to maintain their value, so you should think carefully about your options before choosing to invest in this new craze of digital collectibles.
Market demand is ultimately what drives the price of goods and services, and NFTs are no different. Rather than the bubble bursting, there’s every chance that NFTs could ride the wave of its popularity and go on to be the start of a new future digital revolution.
How is Value Determined?
The exact value of an NFT will depend on the type of asset you’re authenticating, as it could be any number of different digital items. There are, however, four main categories that investors can look at to determine the value of an NFT they’re potentially going to invest in.
Obviously, the most useful something is, the more valuable it is. For example, if it’s transferable, you’ll know that it has a higher value as it can be used for a higher number of purposes which increases its utility.
The development of NFTs and the whole economy of this type of trading will likely see even more applications for NFTs, which will work to increase their value.
History and status can go hand in hand, and being able to reliably trace back to the origins of an NFT will increase its value as it provides context to your NFTs content.
If, for example, the NFT you have purchased was formerly owned by a celebrity or otherwise well-known famous person, and you can authenticate or validate this, your NFT will be worth more. Luckily, Blockchain technology is pretty good for keeping track of this information.
This one can be hard to pin down, as the value can both appreciate and depreciate over time for seemingly no apparent reason, which makes it difficult to predict with any level of accuracy.
Like with cryptocurrencies, however, if you do invest in an NFT that starts off with a low value but then appreciates in value over time, you could be set to make a huge profit.
Lastly, let's talk about liquidity premium, which is the reason for a higher value being attributed to blockchain assets over off-chain tokens.
NFTs are easier to trade if you’re already invested in Ethereum, which is a group of potential buyers that grows every day.
The NFTs based on non-Ethereum blockchain have less liquidity premium at the moment, which is something to consider when you’re choosing where to invest your money.
Ultimately, any investment is risky to some degree, and with NFTs being so new to the market, there’s a higher element of risk again, but with their current popularity and rocketing success at the moment, there’s no reason that you shouldn’t consider adding NFTs to your existing portfolio.
As we’ve stated many times, however, that will come down to you alone.
We hope that whether you’re setting aside a theoretical budget already or you’re still feeling cautious, we hope that we’ve at least been able to provide you with a better idea of what the deal is with NFTs, what they are, why people invest in them, and the downside of NFTs.