What Are NFTs? A Guide For Investors

If you want to know more about NFT, here is what you need to know.

Last Updated May 21st 2022
12 Min Read

If you’d mentioned the words Non-fungible token to the average person on the street 18 months ago, chances are they’d have no idea what you were talking about. Yet between 2020 and 2021, the NFT market value soared from $100 million to over $21 billion.

The opening weeks of 2022 have seen a downturn in the cryptocurrency market, yet the NFT market is continuing to soar, with everyone from sports personalities and celebrities to institutional investors looking to profit from this exciting new technology, which has the potential to revolutionise the way we see digital assets. 

Whilst Non-fungible tokens have been around for a while now, it could be said that they really came to the world’s attention back in March 2021 when Twitter CEO Jack Dorsey auctioned the first-ever tweet as an NFT, fetching a price of over $2.9 million. Since then, several major firms have moved into the NFT marketplace, including Nike, Mercedes-Benz and Walmart.

If you’re thinking about investing NFTs but are unsure where to start, then hopefully the following article will be able to shed some light on the subject for you. There is certainly a lot of potential in the market and now is definitely a good time to get involved, but it’s important to have a firm understanding of exactly what NFTs are.

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Amongst other things, the following article will explain:

What Are NFTs?

In the simplest possible sense, a non-fungible token is a digital version of an asset or object. Jack Dorsey’s Tweet is one example. Another example would be the short clip of basketball player LeBron James’s slam dunk that sold for $208,000 back in April 2021. The NFT is in effect a derivative - a digital way of proving ownership, thus it can be bought and sold like any other asset. 

What’s important to note here is that each NFT is unique. The word ‘fungible’ refers to something that is mutually interchangeable with another identical version - i.e. a dollar bill. Ergo, non-fungible means that something cannot be replaced. A non-fungible token is a one-of-a-kind, or in some cases part of a limited group. 

As we’ve noted above, NFTs are actually not that new. They emerged in 2014 and have always attracted a certain amount of interest, but they really took off in 2021. To date, it is estimated that a total of $165 million is estimated to have been spent purchasing NFTs. 

Before NFTs, creators of digital content, such as videos, music files and pictures, effectively relinquish ownership of them in any real sense once they are published online. Numerous sites and servers will endlessly repost such content until it is possible for everyone with computer access to effectively have their own copy. An NFT changes things as it provides contains an authentication protocol or code which serves as proof of ownership. 

Don't Miss: The Top 10 NFT Protocols And Tokens in 2022

How Is An NFT Different From Cryptocurrency?

For the uninitiated, confusion often arises as to the exact difference between a non-fungible token and a regular cryptocurrency, such as Bitcoin or Dogecoin. There are certainly similarities - both rely on blockchain technology and there are similarities in their underlying programming. 

However, cryptocurrencies - just like fiat currencies - are fungible. For example, if you were to pay for a new car with 5 Bitcoin tokens, it doesn’t matter which particular Bitcoin tokens you use, as their value is always equal. 

NFTs are minted on smart chains using smart contracts and stand as a unique token. Inevitably, Ethereum is amongst the top platforms for creating the tokens, but they can also be minted on Cardano, Solana and Binance Smart Chain, among others. 

Because Non-fungible tokens cannot simply replace one another, what you end up with is a unique digital asset. Therefore, the aforementioned Jack Dorsey’s Tweet NFT and LeBron James basketball clip are not of equivalent value - they are two completely different assets that are as distinguishable in digital form as they are in real life. 

NFTs - Art, Videos And… Tweets

We have already seen how digital video clips and tweets can be represented by NFTs and therefore bought and sold as collectables. However, the underlying principle of NFTs has a huge amount of potential and could very realistically transform industries such as real estate, automotive and retail.

However, as it stands, investing in NFTs has become particularly popular in the digital art world. Visual artists create digital art pieces as NFTs that are then sold off to collectors in very much the same way as they are in physical art galleries around the world. 

Because blockchain technology can always verify the correct holder of a particular NFT and that NFT cannot be replicated, anyone buying a piece of digital art is effectively speculating on its becoming more valuable over time - once again, just as they might for a physical painting or sculpture. 

To further emphasise this point, by the end of 2021 some $40.9bn had been spent on Ethereum smart contracts, usually associated with NFTS. That same year, the global art market was worth $50.1 billion. And remember - the NFT figure is just for Ethereum-based contracts, so the total figure would be higher if taking Cardano, Solana and BSC into consideration. 

NFTs And Gaming

Digital art has so far been one of the success stories of the NFT trend. However, they are also proving popular in another area - video gaming. When we consider that the global gaming market is worth some $173.7 billion, this area should be of particular interest to investors. 

Anyone who has played games like Fortnite or World of Warcraft will know that these games offer collectables and in-game purchases. By using NFTs, games can offer one-of-a-kind items that users actually own and exchange.

One project doing just that is Decentraland - a virtual world that allows users to buy parcels of ‘land’ as NFTs. These can then be developed upon, with users building everything from art galleries to video arcades on them - all of which involve more NFTs. The platform is already proving popular and the largest land sale so far was worth $2.4 million.

Other projects, such as Cryptokittes and Axie Infinity, allow users to train and breed their own in-game characters, which are tradeable as NFTs. Again, these have proven extremely popular and Axie Infinity alone has a userbase of over 2.3 million. 

NFTs And Sport

We’ve already mentioned the LeBron James basketball video and sport is one sector that also appears to have embraced NFTs. In fact, the NBA specifically appears to be at the forefront of things. 

NBA Top Shot is a licensed NFT marketplace that offers sporting memorabilia and collectables. Having the support of such a big organisation has already done a great deal to promote NFTs to mainstream audiences and the NBA Top Shot platform has announced several other high-profile partnerships. 

Another sports-based platform is Chiliz. This is a blockchain that offers sports fans the chance to support their favourite teams by purchasing the CHZ NFT tokens for which they can unlock rewards. The platform has already secured a deal with  The International Tennis Federation (ITF) and the Davis Cup Kosmos organisers to create the DAVIS fan token, which will also serve to promote NFTs to mainstream audiences. 

Sports memorabilia has long been highly collectable and capable of appreciating significantly over time, so it stands to reason that, in the digital age, NFTs are perfectly placed to represent the baseball cards and autographs of future stars. 

Buying And Selling NFTs As Investments

So now we’ve taken a look at the fundamentals of NFTs and their cultural appeal, but what about NFTs as an investment opportunity?

As with any other asset, digital or otherwise, NFTs can be bought and sold on the open market. And, just as with traditional assets, they have the potential to appreciate or depreciate over time, depending on the type of NFT and the likelihood of it becoming highly sought after. 

Some financial experts have advised investors to look upon NFTs as a commodity asset, similar to oil, gold or art. Gold, for example, does not necessarily increase and decrease in value at a rate in correlation with global equity markets. In other words, they shouldn’t expect NFT values to move in the same way as cryptocurrency tokens do. 

There’s no doubt that NFTs can present a legitimate investment opportunity, but it should be remembered that it is very much early days. The sale of digital art and video clips may be a current trend, but it will be the real estate, equity and commodity NFTs of the future that will provide real opportunities. 

Check Out: What Are The Best NFTs To Buy?

Should You Buy NFTs?

NFTs have a lot of potential and previous auctions have shown us that they can be extremely valuable - but are they a good investment? There has been a great deal of hype surrounding NFT over the last 12 months and a certain degree of FOMO could be said to have fuelled this hype. 

As with any asset, whether you should invest or not will depend on your goals and appetite for risk. If you have an eye for art collecting, then you may be able to transfer your skills to the digital realm. 

However, as things stand currently, it’s worth remembering that most NFTs have no intrinsic value. This has, of course, been a long-held criticism of cryptocurrency in general, but the question must be asked as to why someone would pay for a tweet or video clip that millions of people already have access to.

Effectively, NFTs - and therefore ownership - of something like a piece of digital art is bought for prestige. The tokens are only worth what the NFT buying community, which is still fairly small in the grand scheme of things, is willing to pay for them. And the public’s appetite for NFTs could change, dramatically and without warning. 

Of course, the cryptocurrency community has been behind some incredible price rises over the years, as anyone who has observed the trajectories of Dogecoin and Shiba Inu will know. But it’s important for investors to realise that NFTs are high-risk investments and should probably form a relatively small part of a diversified investment portfolio. 

How To Buy NFTs

If you have decided NFTs are something you’d like to invest in, then there are a few things you’ll need before you can hit the markets. Firstly, you’ll need a wallet that can store the tokens – much in the same way you would if you were buying regular cryptocurrency. 

It’s also advisable to hold an amount of cryptocurrency, such as Ether, as many NFT marketplaces only accept payment in digital currency. To buy tokens, you’ll need to go through a reliable broker or exchange, such as eToro

Once you’ve got your wallet set up, then you can start perusing the various NFT marketplaces. The following are the most established marketplaces for buying and selling NFTs. there are a few options, but two prominent marketplaces are OpenSea - currently the biggest worldwide - and Foundation.

Conclusion

So that about wraps up our overview of NFTs for investors. At their core, these tokens offer a digital representation of a real-world asset - something that can be bought and sold with verifiable proof of origin and ownership. It shouldn’t be too difficult to imagine the far-reaching possibilities of such a technology.

We have mentioned a few auctions that saw NFTs change hands for significant amounts of money. We have also looked at several popular blockchain gaming platforms that use NFTs as part of their rewards system. These cases alone demonstrate that these tokens can indeed accrue significant value.

From an investment point of view, NFTs are still very high risk. At the moment there appears to be significant hype around the market and there’s no way of knowing if NFTs will remain highly sought after once the trend has passed.

Non-fungible tokens are still an emerging technology and we probably haven’t even begun to discover their full potential. From this perspective, NFTs in general are likely to become a mainstay investment asset at some point in the future. Whether that point has arrived remains to be seen.

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What are NFTs? A Guide for Investors - FAQs

What is an NFT?

NFT stands for Non-fungible token. Whereas one Bitcoin or Ether token is the same as any other, one NFT is unique and not interchangeable with another. As such, they can be used to represent ownership of an asset, such as a piece of digital art. It is also possible to buy, sell or exchange NFTs on the open market. 

Can anyone buy NFTs?

A key tenet of decentralised technologies is that they are available to all. Anyone can buy an NFT in theory, they just need access to a smart device, an internet connection and the means to pay for an NFT. 

Are NFTs a good investment?

People have already been paying significant amounts for NFTs - Jack Dorsey’s first-ever tweet, for example, sold for $2.9 million. However, they are still a relatively new phenomenon and carry a great deal of risk. Investors looking to buy NFTs should ensure they are aware of exactly what they are buying, as well as the risks involved. 

How do I buy an NFT?

If you want to buy NFTs, you’ll need a wallet in which they can be stored. You’ll also more than likely need cryptocurrency to buy NFTs. You can acquire tokens like Ether or Binance via brokers such as eToro. Once you’ve got your wallet and cryptocurrency, then you can see what’s available on the various NFT marketplaces. 

Are NFTs a cryptocurrency?

NFTs share many characteristics with regular cryptocurrency - they are both blockchain-based and have similar coding. However, their function is entirely different and whereas one cryptocurrency token, like Bitcoin,  is the same as any other, each NFT is usually one-of-a-kind.