As if the cryptocurrency craze of this year were not enough, the digital economy is now reeling from the rise of NFTs. Without fully understanding the technology involved, thousands of people are investing in these digital assets with the hopes of making large returns.
And this hope is not totally unwarranted. In fact, a digital artist, who prior to the NFT craze had not sold an item for more than $100, recently sold an NFT of his work for $69 million.
So, what exactly is occurring here? Here is everything you need to know about NFTs.
What Is an NFT?
NFT is short for “non-fungible token” – this refers to something that is unique, with only one original in existence. NFTs primarily refer to digital assets: photos, videos, GIFs, artwork, audio files, songs, etc. Whoever owns an NFT owns the art it contains, as well as the rights to use it as they see fit.
The easiest way to conceptualize it may be to think of an NFT as a digital version of a painting or some other form of collectible art. The owner of a Picasso may pay a hefty sum for it, but will then get to display it where and when they like. There may be copies of the painting in existence, but only one is the original – the same goes for NFTs.
Most importantly, NFTs are secured and validated by blockchain technology – this ensures that a record of the purchase history and owners remains incorruptibly documented.
Why are NFTs Important?
Many are heralding NFTs as ushering in a new era of art collecting. Some collectors believe that this has opened the gates for art to become more accessible, and where there is a larger market, the potential for artists to make a livable wage from their art is dramatically increased.
Indeed, NFTs are already helping artists of all kinds to earn much more in the digital economy than they can in the physical one. For those looking to support their favorite artists, NFTs offer a simple way to both provide the artist with much needed funds while making an investment themselves.
NFTs further represent the development of blockchain and its cementation into the financial infrastructure. If the NFT market can mature and last, it may be a positive signal for cryptocurrencies operating on the same technology.
Should I Buy an NFT?
Another key aspect of the NFT market is their investment potential. Unfortunately, similar to the story of many new technologies, the asset may be trading at a premium due to the “greater fool” theory: this means that many people investing in NFTs are not doing so because of the intrinsic value of the item (in fact, they might think the item is worthless), but because they believe someone else who is even more foolish will buy it from them, at a later date for a higher price.
This dynamic makes NFT investing rather speculative, which can carry substantial risk.
If you are buying an NFT because you love the product, or are investing a modest sum to test the asset class, you will likely make out OK regardless. But avoid spending money you absolutely need for house payments or other bills in hopes of doubling it overnight in an NFT – that may not happen.
What Does the Future of NFTs Look Like?
The future of the NFT space will largely be determined by the heat of the market – if NFTs continue to sell for millions of dollars, we may see the craze continue. However, if the market cools and prices normalize, the market may have a chance to mature into a more widely accepted, legitimized asset class with ramifications for the creation of investment products supported by large financial institutions.
For now, proceed with caution, and enjoy the ride.
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