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What Are NFTs and Should You Invest In Them?

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Should you invest in NFTs?

I started off trading Bitcoin with other users on sites like LocalBitcoins, and I remember wondering how much value Bitcoin would gain if it ever grew past the niche currency it was back then.

Since then, the price of Bitcoin and other cryptocurrencies has risen exponentially, creating many happy investors.

The blockchain, the tech used to create and manage some cryptocurrencies, continues to create new investment opportunities.

You can now own art, movies, music, and many other collectibles on the blockchain that powers cryptos like Etherum. Artists have already made millions of dollars selling their items via NFTs.

‘Everydays – The First 5000 Days’ (a massive art collection) is currently the most expensive NFT ever sold going for $69 million in 2020.

This article will explore the hype surrounding NFTs and why an ever-increasing number of people are choosing to invest in them.

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What are NFTs?

NFTs are one of the innovative investment opportunities that have emerged thanks to cryptos and it has already created many millionaires. NFTs stands for non-fungible tokens.

These are authenticated, unique digital files that hold collectibles or artwork. They have the potential to retain value significantly better than conventional art since their authenticity can easily be confirmed and they can’t be easily duplicated.

The first NFTs called Colored Coins were developed in 2012, and they were used to store assets like tokens, collectibles, or coupons. Colored Coins ran off Bitcoin’s blockchain, which isn’t designed to host the contracts these tokens required.

Colored Coins ended up being a bust, but they paved the way for the improved NFTs that would be developed several years later.

As Bitcoins main competitor, Ethereum, increased in value, NFTs moved to its improved network that made it easier to incorporate smart contracts. Internet memes emerged as the most popular type of NFTs at the start, and NFTs are now being used to store pretty much any digital good you can think of.

NFTs have even made it possible to monetize things that were previously impossible to give value like memes. For example, the famous ‘Disaster Girl’ meme just sold as an NFT for 180 Ethereum (ETH).

The then four-year-old viral sensation took a picture in front of a house set ablaze by local firefighters who were educating residents about house fires with a mischievous smirk on her face.

The picture went viral, but the star, Zoe Roth, and her father who took the picture never got anything from it besides internet fame. Thanks to NFTs, the original picture has been digitally stamped with a smart contract to verify its authenticity, and Ms. Roth will also get a 10% cut of all future sales of the picture.

NFTs have many legitimate uses and that’s just scratching the surface. Professional athletes are already joining in on the action with digital player cards, while artists sell rights to their music via NFTs.

Even filmmakers are jumping into the world of NFTs by giving investors an opportunity to help fund and reap the profits of projects.

NFTs might end up shaking up many industries similarly to the way cryptocurrencies are changing the way we think about money. There’s already strong hype surrounding NFTs with some going for millions of dollars.

NFTs are primarily based on the Ethereum blockchain with the first set called ‘CryptoPunks’ created in 2017. Since then, companies like SuperRare have emerged and made it possible for anyone to get in on the action of creating, buying, and selling NFTs.

An ethereum wallet is all you need to get started.

To trade and invest in NFTs all you need is an Ethereum wallet!

What is Fungibility?

A fungible resource can be easily swapped for other currencies, goods, or services. That makes the U.S. dollar the most fungible asset in the world since it is used for most global transactions. On the other end, a non-fungible resource does not have a clearly defined value.

For example, a sweater your grandmother made for you decades ago might only be worth a few bucks if you tried to sell it to a random person, but you would probably be willing to shell out a hundred dollars as a reward to have it returned to you if it ever got lost due to the sentimental value.

Artwork is another example of a non-fungible asset since it does not have a clear value. One person might think a piece of art is worth millions of dollars, while another thinks it isn’t worth much.

The price of art comes down to what serious buyers think it’s worth, but its value typically grows over time due to factors like inflation, the perceived value of the artwork increasing, or a change in the artist’s status.

The same forces that determine how much a piece of conventional art is worth are now driving the prices of digital art via NFTs. The blockchain makes the sales of these works more transparent, and it makes it virtually impossible to duplicate or fake any piece of art since its origin can be easily verified.

Investing in NFTs

Thanks to the increasing popularity of NFTs, you now have several options when it comes to investing in NFTs. The first step is choosing a marketplace. Sites like Opensea, SuperRare, and Nifty Getaway are some of the most popular.

NFTs are typically Ethereum-based tokens so you’ll need to purchase some Ethereum on an exchange or an ATM. You’ll then need to send your ETH to the wallet for the NFT marketplace you choose.

Investing in NFTs is easy once you have some ETH in your marketplace account. Many of these marketplaces list their offerings in auction format, forcing users to submit bids on items they want to purchase.

Other exchanges might use an exchange format for NFTs that have multiple prints.

Some NFTs sold on these marketplaces resell for up to 10 times the amount the original buyer paid for it immediately after the sale.

Some of the popular websites users can start their search for NFTs they can resell for profits include:

  • Opensea: This NFT marketplace runs on the Ethereum network and it hosts a wide variety of digital items like artwork and gaming-related items. You’ll need an ETH wallet like Metamask to make purchases on the marketplace
  • SuperRare: Suparare works as a social network site for NFTs. All items listed on the ETH marketplace are unique. Users can sell their original works on the site and buy original pieces they like
  • Nifty Gateway: Owned by Gemini cryptocurrency exchange, Nifty Gateway works with artists to release artwork on their marketplace. The marketplace also allows users to resell artwork they own. The marketplace runs off the Ethereum network
  • NBA Top Shot: This NFT marketplace lists NBA-related digital collectibles. These digital player cards are the modern equivalent of traditional trading cards, and they are significantly more versatile than paper player cards could ever be. For example, the top-selling card so far on this marketplace has been a LeBron James Dunk card that features a clip of the superstar dunking

Creating an NFT

Investing isn’t the only way for you to make money off the increasing popularity of NFTs. You can also create digital items that you sell on NFT marketplaces.

It is a simple process that only requires opening an account with sites like SuperRare and Opensea. You do not need to be a programming wizard or any experience with the blockchain to make NFTs.

Of course, just because anyone can make an NFT doesn’t mean others will be willing to pay anything significant for it or anything at all. The NFTs that do well typically have some historical significance or value due to the artist’s reputation.

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Pros and Cons of Investing in NFTs

NFTs bring many opportunities that once didn’t exist, but investing in them also comes with some risk. Here are some of the main advantages and disadvantages of investing in NFTs:

Pros

  • Decentralized marketplace: One of the things cryptocurrency investors love so much about this new form of digital currency is its decentralized nature and that holds for NFTs as well. That means there is no central body regulating what is available, so artists can reach a larger market than art advisors and dealers. The market gets to determine what each piece of art is worth not some cliquish ‘art experts’
  • Authenticity and security: The blockchain is a safe network with no central figure so it cannot be manipulated to suit anyone’s purposes. Artwork and other collectibles sold as NFTs are virtually impossible to fake or alter. A blockchain collects information in blocks and adds them to existing blocks on the network, forming a chain. All transactions on the network can easily be verified using the linked blocks
  • Smart contracts protect artists: The Ethereum blockchain uses smart contracts which are a set of commands that are automatically executed without human intervention when specific requirements have been met. This makes it easier for NFT artists to get royalties from their sold works since it can be written into the smart contract when the NFT is made. Anyone one resells the NFT and the smart contract automatically sends a percentage of price to the wallet designated for royalties in the smart contract. This contract can never be altered once created
  • Easy entry: Just as is the case with cryptocurrencies, NFTs can be purchased for as little as a few dollars, giving those who don’t meet the minimum capital requirements for conventional opportunities like hedge funds which require as much as $100,000 an opportunity to invest with any amount they have. Being able to invest as little as I could afford to invest was one of the main reasons why cryptocurrencies are one of my favorite things to invest in. There’s something satisfying about being able to invest a few hundred bucks into something that could potentially grow into thousands, if not millions. A few hundred dollars invested in Bitcoin when its price was still $17 would be worth a fortune now. NFTs have the same potential to grow significantly in value over time, given the huge popularity they have gained over the past couple of years.

Cons

  • More complicated than traditional mediums: Change can be painful, and some artists have a difficult time understanding how NFTs work. That can lead to unforeseen hiccups that compromise sales. For example, the band ‘Kings of Leon’ released their new album as an NFT that sold for $50. They didn’t factor in gas fees (variable cost for transactions on the ethereum network) into their prices, so the fees ended up adding an extra $70 to the price which significantly impacted their sales
  • Works can be sold without consent: While NFTs mark original pieces of work with unique tokens, art thieves can take a piece of art they don’t have the copyright for and list it as an NFT
  • The expertise of a tech lawyer might be needed: Many of the artists who are diving into NFTs use the standard Ethereum ERC-721 contract which does not have a component for royalties. Artists who want to earn royalties for every resale of their work might need to hire a tech lawyer who understands how to set up smart contracts

NFTs require a digital contract that cannot be changed

Opportunities

NFTs have been around since 2016, but they recently started taking off in 2019, triplingin value by the end of the year. While cryptocurrencies have started to emerge as mainstream currencies, NFTs are where cryptocurrencies were in 2015, when most people had no clue what they were.

There is a lot of potential to grow, and it might even turn out to be a better investment opportunity than investing in cryptocurrencies directly.

Since my experience with cryptocurrencies started with peer-to-peer trades and eventually moved into exchanges, I was originally skeptical about NFTs, but the facts eventually turned me around.

There are simply no words to express the potential these digital tokens have. They can change the way media all over the world works, and they give regular people a way to invest in things they never thought possible like movies and video games.

Filmmaker Trevor Hawkins’ film “Lotawana” will be the first sold via NFTs. He plans to sell a thousand tokens at $1,000 as ownership shares and $100 tokens to watch the film’s premiere. He gets paid for his efforts, and shareowners get to enjoy part of any profits made through the movie.

This is just the beginning, others will find other more creative ways to fund their projects, creating investment opportunities no one saw coming.

Experience with the crypto market, stocks, or charts won’t help you much when it comes to dealing with NFTs since there is typically one version of the resource being sold.

Investing in an NFT comes down to how much you think its value will grow and if you would get some enjoyment from it if you ended up getting stuck with it.

Getting Started

Most NFTs are powered by the Ethereum blockchain so you’ll need to purchase some if you plan to invest in NFTs. You can browse offerings on sites like SuperRare, Rarible, and Cyberpunks.

These sites typically list the current price of their offerings as well as their price history. That can help you to identify potentially profitable NFTs.

I recommend browsing a few of these sites before committing to any particular type of NFT.

Bottom Line

NFTs have the potential to become a major part of our lives in the future as they can transform the way we go about creating, selling, and investing in things that can be digitized like movies, video games, and art.

These digital tokens give creators a new modern way to raise money for projects, which, in turn, allows investors to directly invest in projects they find interesting.

It provides the type of platform artists only dreamed of a decade ago, one that allows them to circumvent traditional cliquish art brokers and dealers.

Thanks to NFTs, artists can now list their offerings on a decentralized exchange where they are protected by smart contracts and the authenticity of their works can be protected and verified.

We are just scratching the surface as far as NFTs are concerned. With so many ways it can be used, it comes down to the creativity of individual content creators who are already figuring out a myriad of ways to fund and make profits off their projects using NFTs.

If cryptocurrencies represent the Wild West, NFTs represent Alaska – the last frontier. There are countless opportunities for profits but there are also many unknowns. If you’re artistically inclined, consider selling your works with NFTs to retain more control than you would ever have with conventional mediums.

Bitcoin changed the way we think about money and NFTs have the potential to change the way we view art and media.

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Written by Ade Akin

Ade is a writer who owns a few affiliate and informational websites. He has been trading and investing in cryptocurrencies since they days only weirdos knew what they were.

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