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Published on: Sep 3, 2024
#Crypto 360
NFTs are cryptographically certified digital assets that represent ownership of an asset, which can be anything from an image, music file, video, or even a piece of land in the metaverse. While NFTs and cryptocurrencies are all based on blockchain technology, they serve different purposes.
➔ Non-fungible tokens, or NFTs, are virtual assets that can be used to prove ownership of digital items such as pictures, songs, and even virtual land.
➔ NFTs have gained attention due to their scarcity. They may generate passive profits for their owners, but they are also risky and volatile investments.
➔ When investing in NFTs, it is advisable to know how the market works, the technology behind it, and what gives them their value.
➔ NFTs differ from cryptocurrencies such as Bitcoin; every NFT is unique and cannot be equally traded for another NFT.
➔ As the NFT market gains adoption, so do risks such as market volatility, regulation concerns, and fraud increase.
Regarding digital art and collectables, the non-fungible token, or NFT, is the new ‘Mona Lisa.’ It gives value to art and turns them into liquid masterpieces. From pictures to music, video and games to land ownership, NFTs are changing how we own things in the digital world.
According to Statista, the NFT market is projected to reach $683.9 million in 2024 and a user base of 11.6 million by 2025. But what are NFTs, and why are they a popular investment among the crypto community?
To some people, NFTs are the future of digital assets as they provide a new means of owning, buying, and selling digital products. This article discusses NFTs as an investment option, what they are, the various categories of NFTs, what to consider before investing in them, and the advantages and disadvantages of doing so.
NFTs are cryptographically certified digital assets representing ownership of an asset, which can be anything from an image, music file, video, or even land in the metaverse. Unlike cryptocurrencies such as Bitcoin or Ethereum, every NFT is different and cannot be replicated, which makes NFTs valuable.
The idea of NFTs does not stop at digital art or memes; it can potentially change how the world works. For example, NFTs can refer to assets in the physical world, such as houses or concert tickets. Such tokens can help make transactions, eliminate middlemen, and even create new markets.
The creation of NFTs is known as minting. Minting a digital asset, such as an image or a video, converts it into an exclusive token within the blockchain. This token contains information regarding the asset, including who created it, who presently owns it, and whether the creator will receive any royalties from future transactions.
After an NFT is minted, it can be bought, sold, or traded on marketplaces such as OpenSea, Blur, MagicEden, and more. These transactions are captured on the blockchain, making the process transparent. In an NFT, you’re buying the ownership of that digital asset; however, the artist still retains some rights and can, for example, create copies of the piece.
Smart contracts are a key characteristic of NFT. They contain the terms of the agreement coded into the contract, allowing the creators to receive royalties automatically each time their NFT is sold, providing artists with a continuous source of income.
Image: NFT characteristics, by Finematics
Several factors give value to NFTs:
Most NFTs are created in a limited series or made available in very few quantities, which makes them valuable. For example, in art, a digital artwork created by a celebrity and sold as a single NFT could be useful and pricey due to its rareness.
Another advantage of owning NFTs is that they provide a history of ownership. Some investors are willing to buy items at a higher price if they have a history, were once owned by famous people, or are historically relevant.
Some NFTs provide extra value, meaning they have special privileges such as access to specific content, events, or real-life products.
NFTs can also be valuable due to their cultural meaning. For example, NFTs associated with memes, music albums, or virtual worlds can be expensive because they are relevant today.
Image: NFT vs. Crypto by ZebPay
While NFTs and cryptocurrencies are both based on blockchain technology, they serve different purposes and have key differences:
Cryptocurrencies such as Bitcoin are “fungible,” meaning each currency is the same and can be traded interchangeably. NFTs, however, are non-fungible, which implies that no NFT is interchangeable with any other.
The main use cases of cryptocurrencies are funds transfers, storing value, and as a unit of account. NFTs can be sold and bought as a form of token or digital ownership of an artistic, cultural, or entertaining asset.
It is easy to exchange cryptocurrencies for other cryptocurrencies or even cash. Due to their uniqueness, NFTs are not interchangeable and are bought and sold in certain marketplaces.
Some characteristics of cryptocurrencies include the ability to be divided into smaller units (like satoshis in Bitcoin), enabling small transactions. Most NFTs, on the other hand, are not fungible and exist only as whole tokens.
Many types of NFTs are based on different types of digital or physical commodities. The most common types include:
This is one of the most common types of NFTs currently on the market. NFTs are digital works of art signed by famous artists that are sold as collectables; an example is the NFT by Beeple, which was sold for $69 million in 2021.
More and more musicians and audio creators now use NFTs to sell their music, albums, or exclusive content. Artists can generate revenue streams through limited drops or by giving their audience special access.
Short clips, a series of pictures, or even a feature movie can be converted into an NFT. Some examples of video NFTs include sports highlights, movie clips, and original animations.
Users can purchase and sell virtual properties as NFTs in virtual worlds and metaverses such as Decentraland and The Sandbox. These digital real estate assets can be applied in several ways, including developing virtual commercial ventures, providing experiences, and hosting events.
NFTs also enable digital ownership of trading cards, game assets, and digital pets. Such items are as rare and valuable as physical items such as baseball cards or stamps.
Domain names, which are built on the blockchain, can be purchased as NFTs. For example, on the Ethereum Name Service (ENS), these domains can be applied to websites or act as identities within the blockchain environment.
Some NFTs are used for utility purposes, as they offer individual access to services, experiences, or content. For example, a utility NFT could allow its holder to enter a particular club or event virtually or even physically.
Recommended Read: Cryptocurrency Investment Strategies for Beginners
Buying NFTs can be confusing for beginners. Below is a simple guide on how to get started.
It is recommended that you research and learn about NFTs, the market, and its various categories. You should also know the best NFT marketplaces, relevant funding rounds, and innovations in the space.
To invest in NFTs, you must choose a marketplace. Some of the most popular platforms are OpenSea, Blur, and MagicEden. All of them are unique and focus on various kinds of NFTs, so you must choose the one that meets your needs.
To get started, you need a digital wallet that can handle non-fungible tokens. Some of the most used are MetaMask and Trust wallets.
When your wallet is ready, you must fund it with a blockchain-related cryptocurrency (like ETH for the Ethereum network-based NFTs).
Once you have funded your wallet, you can explore the different marketplaces to search for and purchase NFTs. When buying an NFT, it is essential to look at the rarity of the NFT, the creator, and its use. Some platforms also offer bidding, allowing you to bid for an NFT instead of buying them at a fixed price.
You can trade NFTs in the marketplace or hold them as an asset. Some investors buy NFT with the hope of selling it in the future at a higher price, while others trade NFT to join the market trends, or hold a rare digital asset that especially meaningful to them.
The NFT market is fast-moving, and new projects are consistently coming up. Always read the news, join NFT groups (especially on Discord), and engage in conversations to ensure that you are well-equipped with solid knowledge to make sound decisions.
As with every investment, NFTs have advantages and disadvantages. Consider the following before you decide to invest in them.
• Potential for High Returns: Certain NFTs increase in value, allowing initial investors to make substantial profits by holding or flipping them.
• Ownership of Unique Assets: This means that NFTs are one-of-a-kind digital items. They can be art, music, or even a piece of land in a virtual world, which may interest collectors.
• Support for Creators: By investing in NFTs, investors directly or indirectly support the creators, artists, and developers. Some NFTs come with royalties, so the artists still get a cut from every sale of their work.
• Blockchain Security: NFTs are backed by blockchain technology, which gives an open and unchangeable ledger of the item's owner.
• Diversification: NFTs can be used to diversify portfolios as they present an opportunity to invest in the digital world and the emerging blockchain sector.
• Market Volatility: The NFT market is volatile, and prices can change drastically even within a short period of time. This can present a challenge as you can lose a lot of money if the NFT in question depreciates.
• Lack of Regulation: It is essential to know that the NFT space is not heavily regulated, which leaves room for market manipulation, fraud, and other legal concerns.
• Liquidity Issues: While trading stocks or cryptocurrencies, you can buy and sell easily, but the same cannot be said about NFTs. If an NFT is not popular enough, it may be a long time before you can get a buyer willing to give you the price you are asking for.
• High Costs: The cost of an NFT on the Ethereum network, which is one of the largest in terms of NFT adoption, can include a relatively high gas fee. These fees can be costly, and when added up, they may negatively impact your overall profitability.
Beyond directly purchasing NFTs, investors can also gain exposure to the NFT market through NFT-linked assets. These assets provide an alternative way to invest in the growth of the NFT ecosystem without owning individual tokens.
Several publicly traded companies are involved in the NFT space through direct participation or by providing platforms and technology for NFTs. Investing in these companies' stocks can offer exposure to the NFT market's growth. Examples of NFT-related stocks include:
• Cloudflare (NET): Cloudflare provides security and content delivery services that support the infrastructure of blockchain networks, including those that support NFTs.
• eBay (EBAY): eBay has integrated an NFT marketplace into its platform, allowing users to buy and sell NFTs directly.
• Shopify (SHOP): Shopify has introduced features that allow merchants to sell NFTs through their online stores, integrating the NFT market with e-commerce.
NFT-linked funds are another way to gain exposure to the NFT market. These funds invest in a portfolio of NFT-related assets, including stocks, cryptocurrencies, and other investments tied to the NFT ecosystem. Examples of NFT-linked funds include:
• Bitwise NFT Index Fund: This fund offers exposure to a diversified portfolio of NFT-related assets, including companies involved in the NFT space and cryptocurrencies linked to NFTs.
• Grayscale Decentraland Trust (MANA): This trust exposes the Decentraland platform, a virtual world where users can buy, sell, and trade virtual land and assets as NFTs.
Many NFT coins are directly related to the NFT market. They fuel NFT marketplaces that let people mint, purchase, and sell NFTs and can facilitate the development of specific NFT platforms or projects. Popular cryptocurrency coins involved with NFTs include:
As the initial home for NFTs, Ethereum is strongly correlated with developing the NFT market. Ethereum is the biggest non-fungible token (NFT) blockchain, with a market dominance of 72.3% and a trading volume that surpassed $8.54 billion in 2023.
Bitcoin, known by its BTC coin, is another blockchain that is increasingly becoming a top choice for NFT creators and collectors. The same report from CoinGecko also reports that the first coin’s trading volume rose 15X or 1.495% between Q3 and Q4 of 2023, rising from a mere $0.08 billion to $1.20 billion.
Solana, the chain of the SOL coin, is the third-biggest NFT chain with a comprehensive NFT ecosystem of its own. Magic Eden is the network’s biggest NFT marketplace with a volume of $756.5 million in Q1 2024 alone.
Flow is a blockchain developed for NFTs and digital collectables. The network and its FLOW coin support applications like NBA Top Shot, an NFT marketplace for sports highlights.
The emerging NFT market of non-fungible tokens is still in its early stages regarding regulatory frameworks and adoption, and investing in NFTs involves both opportunities and risks. By investing in NFTs, you will own rare digital assets, but it is also essential to be careful about which assets to invest in.
To minimise the risks and make the right decisions, we advise you to do your own research in the market, measure the risks, not put all your eggs in one basket, and make informed decisions. You can also use this guide to get started with NFTs and manage your investments, whether to hold them long-term or trade actively.
Like with any investment, it is important that your decisions are aligned with your financial goals and risk tolerance. While NFTs come with risks, they have created a broad space of digital asset-owning opportunities that will be leveraged increasingly.
NFTs are digital assets that certify ownership of an item, while cryptocurrencies are divisible tokens that act as a means of exchange. NFTs are not interchangeable, as opposed to cryptocurrencies such as Bitcoin, which are swapped one for one.
To buy NFTs, one must have a digital wallet compatible with cryptocurrency, especially Ethereum. After funding your wallet, you can buy NFTs on Blur, OpenSea, and MagicEden, among other platforms.
As with any other investment, NFTs can be good if the buyer knows what they are doing and is willing to face the risks. Still, they are risky and unpredictable, so they may be ineffective for every investor.
The most common forms of NFTs are digital arts, music, videos, virtual real estate, and collectables.
The major challenges identified include the risk of market fluctuations, the lack of a legal framework, challenges with liquidity, high transaction costs, and environmental impacts.
This article is for informational purposes only and not intended as investment or financial advice. It contains opinions and speculations that are subject to change without notice.
The author and publisher disclaim any liability for decisions made based on the content of this article. Readers are advised to conduct their own research and consult a financial advisor before making investment decisions.
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