Are NFTs The New Crypto? A Guide To Understanding Non-Fungible Tokens




Jack Dorsey, CEO of Twitter, sold his first tweet for $2.9 million, a Beeple work of art sold for more than $69 million at a Christie’s auction, and Zoë Roth, who many know as “Disaster Girl,” paid off her student debt with a $500,000 photo — all via NFTs.

But for many, "NFT" is a bizarre acronym from a sub-reality without meaning, and many investors remain unsure of what an NFT is, let alone the value of NFTs as an investment opportunity. As chief investment officer of a financial technology firm interested in the next generation of sector investing, a futures trader and someone who often studies how technology will change the way we live and work, the nonfungible token world has piqued my interest and research efforts. This article attempts to clear up some of the most common FAQs I've seen come up about NFTs.

    What is an NFT?

NFT stands for "non-fungible token." An NFT is basically data that is stored or accounted for in a digital ledger, and that data represents something specific. An NFT can, for example, represent a piece of art, a music album or other types of digital files.

That clears it up, right? Not really.

When you buy an NFT, you are essentially buying a digital recording of ownership of a token, which can then be transferred to a digital wallet. The recording (or ledger) where that token is certified as proof of ownership is called a blockchain. This is similar technology to where Bitcoin, Ethereum, Litecoin and other cryptocurrencies trade (or rather where their ownership is recorded). (Full disclosure: Author personally invests in Bitcoin, Ethereum and Litecoin.)

But with an NFT, that aforementioned token represents something else. In the case of Beeple’s artwork, for instance, it is a token that represents an original graphic painting by Mike Winkelmann, an artist. The buyer essentially purchased a token that gave them the rights to own the original artwork. However, the actual copyright remains with the original artist or owner. Some might ask, "Why would anyone buy it?" To me, the motive seems to be to either own the original artwork or to flip it when it gets some attention and resell it for a higher value.

A common misconception is that NFTs are a type of cryptocurrency. The similarities between crypto and NFTs are that they both have a stored digital record on a blockchain. The similarities end there. With NFTs, each token has a unique value and cannot be exchanged for another of equal value. With cryptocurrency, the value and transparency are more obvious; you can exchange one Bitcoin for another, for example. Like is like, and every token of equal value can be exchanged for another.

    Why are NFTs popular?

There are many use cases for NFTs. First, selling an NFT can offer significant benefits to the artist. For example, in March, the band Kings of Leon sold unreleased music via an NFT. The benefit to the band is if Kings of Leon sells an NFT to one owner and limits the digital reproduction, they can receive royalties and control the distribution of their product. The NBA is also investing in projects to sell NFTs and will be selling clips in NFT form. You might not get rights to the IP to resell, but you do get the unique bragging rights of owning that clip. You can then trade it and financialize it — like a new way to trade sports cards.

    Are NFTs a new fad that will soon fade?

To me, the answer is no. They’ve been around since the mid-2010s, according to the New York Times, but their popularity seems to have surged recently.

So what is propelling the latest rise in popularity? I believe one reason is the coronavirus. Covid-19 drove a boom, with the NFT market reaching a valuation of more than $250 million in 2020, according to the NFT Report 2020 (via the Times). I believe part of the boom also came around the growth of crypto. For example, Ethereum surged over the past year. It can be used to purchase NFTs in part or full in some cases, and as the value of the assets in Ethereum grew, so did the buying power of the underlying owner.

Time will tell, but with investments and use cases in the space booming and buyers clamoring for access, I believe we can expect to see NFT growth in the coming years. The main reason why NFTs are likely to stick around and grow in popularity centers around the idea of uniqueness — having access to something that no one, in theory, could ever have access to without the owner's active decision to replicate. Whereas paintings, baseball cards and other such works can be easily copied, NFTs provide true sole ownership, which is appealing to many. Also, as blockchain use becomes a more popular way to have proof of ownership, NFTs are likely to keep coming. Finally, anything that looks, smells or feels like part of the crypto or digital revolution has taken our society by storm.

NFTs are, in a sense, just another asset class supporting the currency asset and blockchain exchange growth. For those investors looking for exposure to the asset class, I believe that many opportunities will come our way, whether through managed funds or individual NFTs themselves. While these opportunities are exciting, investors should keep in mind there is a risk of picking the right NFT, ensuring the transaction is secure and understanding the underlying value of the asset itself. Do your homework before buying an NFT, and if you aren't sure which one to buy or invest in, hang on for a while as the space matures. I expect to see managed funds available to the investor, which could help manage some of the diversity and risk issues.


Read the full article at www.forbes.com

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