NFTs have managed to grab the attention of many individuals interested in the financial market. However, despite this topic being in the limelight, it’s often assumed that the reader is already familiar with the concept of NFTs, which is not always true. To avoid taking unnecessary investment risks, it’s important that you familiarize yourself with NFTs a bit more than simply knowing the meaning of the acronym itself.
Granted, not everyone has the time or the interest to spend dozens of hours to become some sort of NFT connoisseur; you might just want a quick rundown on the important bits, which is exactly what this article will aim to provide.
So what is an NFT?
NFT stands for non-fungible token. There are two important aspects to it, the first one being fungibility. Fungibility is the interchangeability of an asset for another one of the same type. For example, a $20 bill can be exchanged for other $20 bills, as they are all $20 bills and therefore worth the same. This is also true for cryptocurrencies, or rather, most currency types. That being said, a non-fungible good doesn’t have this interchangeability. Works of art, for instance, are non-fungible goods.
Another similarity to the art world is the fact that NFTs are usually tied to an artwork, often a character of sorts, but the subject can vary greatly — virtually anything that can be represented in a visual way can be made into an NFT.
The other important aspect of NFTs is the fact that they are blockchain-based tokens, which are digital assets. However, most digital assets can be reproduced infinitely. NFTs introduce the concept of non-reproducibility, and therefore scarcity, to a digital asset.
Why are NFTs suddenly so popular?
This is the part that can be guessed accurately for the most part: NFTs are seen as an opportunity to make quick money. Many individuals have had their first contact with NFTs by reading about how expensive some of them can be, more than likely the Bored Ape Yacht Club NFTs, which appear to be the most famous.
Nothing is wrong with that assumption — the NFT market has grown exponentially over the last year. It’s important to note, however, that minting a new NFT is an extremely simple process, and that most of them will, more likely than not, remain worthless.
How risky is it?
As mentioned earlier, countless NFTs are being minted every day but that does not mean it’s a futile investment, just that it’s not the safest. Many of them do, in fact, grow in value, but it’s worth noting that this is mostly due to increased interest in them, as they don’t possess any sort of intrinsic value. This sort of thing can very easily become a bubble, meaning it can be even more volatile than fungible cryptocurrencies. With NFTs’ perceived value eventually going down even faster than they went up, extreme volatility is to be expected.
Another risk in the NFT market is a practice known as wash trading, in which a user artificially inflates the value of their NFT by buying and selling that NFT repeatedly, giving the impression that it’s worth more than it really is. Even though this practice is not exclusive to the crypto and NFT market, due to a comparable lack of regulations, this environment makes it much easier to pull off successfully.
That being said, NFTs are a very high-risk investment, and no one should invest any money in them that they’re not willing to lose. It’s certainly not a reliable “get rich quick” scheme, something which arguably doesn’t exist in the first place. If you’re not confident in what you’re doing, chances are you’ll just lose money investing in them.
Hopefully, this provides some clarity on the nature of NFTs, from both a conceptual and an investment standpoint. This information should enable you to decide if you want to delve deeper into the topic, or if it’s simply not for you. It’s worth noting, however, that there are many different markets and uses for them: some people might simply want to have an NFT because they like what it represents, whether it be a character from their favorite videogame or a content creator they like.
What’s certain, however, is that they’re just one of the many things that blockchain technology will bring us in the upcoming years, and it’s important to remain up to date on them.