The conversation around the sale of NFTs has been increasing for more than a year now. Recent high profile sales of the digital tokens have spurred conversation. They also beg the question: How stable is this market and what real opportunities exist in investing in NFTs?
NFTs – Understanding the Basics
To start, let’s look at what an NFT is, exactly. To understand an NFT, you need to have a basic understanding of how a cryptocurrency exchange works. A cryptocurrency exchange, sometimes referred to as a digital currency exchange, is a platform that serves as a hub for the trade of cryptocurrencies such as bitcoin.
The cryptocurrency exchange with the second highest market capitalization right now is Ethereum. Its central currency is known as the Ether. In addition to this native currency, Ethereum also allows for creation of NFTs, or non-fungible tokens.
An NFT is a unit of data that Ethereum stores in its blockchain ledger. This process certifies that the NFT is a non-interchangeable digital asset. In other words, a single NFT is entirely unique and cannot be swapped out for a copy.
Ownership of NFTs
Imagine you have a digital image. You can easily copy that digital image, download it to your computer, share it online, etc. That copy, however, would not be the original NFT, which is logged at Ethereum. In theory, it would have less value than the ‘original.’ This is similar in concept to a print copy of, say, the Mona Lisa, as opposed to the original canvas hanging in the Louvre. Owners of NFT are provided with a proof of ownership (something that functions separately from a copyright); however, anyone can gain access to a copy of the original file.
NFTs can represent any array of things, including digital art, items within games, and even land and avatars built in blockchain-based virtual worlds. And yes, these items can become incredibly valuable. Perhaps the most famous story about an NFT sale was Christie’s auction of an NFT created by the artist Beeple, which went for $69.3 million.
NFT as a Viable Investment Opportunity
The potential is there for huge returns with NFTs, there’s no question. As an investment, however, NFTs do come with some concerns:
Verification of Authenticity – The very thing that makes an NFT an NFT is also the very thing that can make it a risk investment. Any internet user can create an NFT out of any idea. Deciphering which are the good tokens and which are the bad can be complex. From another perspective, however, it is no different than investing in the fine arts market. One person’s Picasso may be another’s hack. Then again, taste and trend change over time, and yesterday’s hack can become today’s Van Gogh. With a bit of exposure to the NFT space and some market awareness, an informed investor can find good opportunities.
High Volatility – NFTs are volatile, which makes them great opportunities but also dangerous. There are currently no mechanisms for pricing assets in the NFT market. Prices are fluctuating dramatically, and this won’t stop for some time.
Environmental Impact – Some investors are questioning the NFT market for its impact on the environment. It is increasingly apparent that mining for bitcoin takes an enormous amount of energy, making it a huge factor that impacts climate change and the health of the environment. According to some estimates, mining for bitcoin alone takes up as much energy as a country the size of Argentina. “Green” investors might hesitate, therefore, to enter into this space.
Whatever reservations investors may have, NFTs are here to stay. They will continue to transform the crypto space for some time, providing an interesting mix of investment opportunities.