NFTs have been around since 2014 but have only recently entered mainstream media. Many of us are still wondering: what exactly is an NFT?
An NFT or non-fungible token is a unique digital asset that’s bought and sold online using cryptocurrency. The one-of-a-kind tokens are used to indicate ownership of a particular digital item, usually a digital artwork.
For those new to NFTs this can be a strange concept to wrap your head around, so below we’ve outlined the basics behind NFTs.
What Does Non-Fungible Token Mean?
Fungible is an economic term for a good or asset that is replaceable by another identical item. For instance, a pound coin is fungible as it can be swapped for another pound coin of the same value.
If something is non-fungible it is unique and non-interchangeable. Art is a great example of a non-fungible asset as every piece of art is unique and valued subjectively.
An NFT shows exclusive ownership of a particular digital asset, which could be anything from a piece of digital art to a tweet. Because NFTs are non-fungible their market value is likely to fluctuate, so the price you pay for your NFT isn’t set.
How Do NFTs Work?
Most NFTs are part of the Ethereum blockchain. Ethereum is a cryptocurrency, like bitcoin, but its blockchain also supports these NFTs, which store extra information that identifies them as a unique NFT rather than a standard ETH coin.
So NFTs are bought and sold using cryptocurrency – but they are not cryptocurrencies themselves as cryptocurrencies are fungible. For example, if you trade one Ethereum for another Ethereum, they both have the same value. By contrast, NFTs are unique and have no equivalent value.
What Do You Get When You Buy an NFT?
When you buy an NFT, you’re paying for a token that represents a unique item. So basically, you’re paying for a digital record that’s sent to your address on the blockchain.
Having ownership of this token means you can prove that you own a specific item and that the item you own is authentic. So, once you own an NFT you’ll be the sole owner of that token, unless you choose to sell.
An NFT is essentially a record of ownership or authenticity of an asset, not the asset itself. Although you’ll own the exclusive rights, you won’t be able to choose who gets to look at or share that particular artwork.
For example, Beeple’s Everydays: The First 5000 Days is the most expensive NFT sold to date. While it’s officially owned by Vignesh Sundaresan, this image has been seen, copied and shared by millions of people.
An NFT can be any digital asset. So far NFTs have included:
- In-game purchases
- Domain names.
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Why Would Anybody Buy a Non-Fungible Token?
It’s hard enough to wrap your head around the concept of NFTs let alone why someone would decide to purchase them. The main reasons NFTs attract investors are:
As NFTs can only have one owner there’s a sense of scarcity around each token which generates interest. Scarcity encourages potential buyers as there’s novelty to being the exclusive owner of an asset.
NFTs have no true value other than what the market assigns them. This fluctuating worth provides a sense of collectability. Investors collect NFTs in the hopes that they’ll gain value.
Should You Invest in NFTs?
NFTs are highly speculative in nature as it can be difficult to determine how much a digital item is worth. The value of your NFT is dependent really on how much someone else is willing to pay for it.
For this reason, NFTs are appealing to high-risk investors as they provide a unique opportunity to make huge profits, but it’s important to understand this only happens rarely. If you’re looking for a reliable way to invest your money a better place to start is with index funds.
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If you want to start investing and you’re not sure if NFTs are for you, contact our experts at Count today.