NFTs? What are they? A Guide for NFT Investors

NFTs are spreading as a class of blockchain assets beyond art into retail and possibly real estate. Here's everything you need to know about it:

‍

NFTs, or non-fungible tokens, are a popular topic in the cryptocurrency community, and not just because of their prominent role in digital art. NFT inventions are being experimented with by major brands such as Nike Inc. (ticker: NKE), Louis Vuitton, and Coca-Cola Co. (KO).

The NFT market had a breakout year in 2021, and demand in this digital asset class is still high. As of May 1, 2022, collectors had delivered over $37 billion worth of assets to NFT marketplaces, easily surpassing the total of $40 billion sent in 2021, according to Chainalysis data.

You've certainly heard about NFTs from art that sold for a lot of money at auctions, but because of the "smart contract" technology they're based on, its utility extends far beyond valuable art.

The NFT marketplace is still relatively young, and transaction volume has slowed in recent weeks, but investors, institutions, companies, and celebrities are nonetheless interested in learning more about digital tokens and smart contracts. Here's what more you need to know about NFTs and how to manage them if you want a piece of the token pie:

• What are NFTs, and how do they work?
• NFTs and art.
• Buying and selling NFTs as investments.

What Are NFTs, and How Do They Work?

NFTs are tokens that aren't fungible. Fungibility refers to the interchangeability of assets of the same type. Bitcoins, for example, are fungible, meaning that consumers can exchange one Bitcoin for another and get the identical asset.

Each token is unique and cannot be duplicated since NFTs are non-fungible. NFTs are represented as unique information on a blockchain as a result of this distinguishing feature, ensuring the integrity of digital ownership. Because its existence is time-stamped on the blockchain, this record of original ownership cannot be modified.

A real or digital asset is represented by each NFT. This can be anything from intellectual property to a title of ownership to an asset, aside from art.

According to Nick Donaraski, CEO of blockchain technology company ORE System, "NFTs are chunks of information on a blockchain that are expressed in an interactive way with visual representation." If you buy an NFT early, your ownership rights are limited and only available through you. This scarcity, according to Donaraski, is what causes the NFT's value to rise over time.

Smart contracts are at the heart of NFTs. Smart contracts, in particular, are the function that controls the transferability of NFTs. Donaraski explains, "If you think of blockchain as a computer network, the smart contract is the computer that runs the website."

NFTs and Art

In the domain of digital art, NFTs are particularly well-known. NFTs are created by artists and can be traded on platforms like OpenSea. NFTs have been expanding their reach beyond the art world, into gaming, retail, real estate, sports, and other industries. As the value of NFTs grows, so should their adoption and appeal.

Due to their certified ownership that cannot be reproduced or manipulated, NFTs are unique. When you have a limited supply of anything, it becomes more precious. The NFT market is speculative, with people buying NFTs in the hopes that they will be more valuable to someone else in the future. As a result, people are collecting art NFTs in the hopes that they may increase in value in the future.

Buying and Selling NFTs as Investments

NFTs follow the traditional investment approach of buying cheap and selling high. Market participants can buy NFTs early and sell them later for a profit if the token's popularity grows. However, according to Daniel Strachman, managing partner of A&C Advisors, "NFTs should be regarded of as an investment that might go to zero and is pure speculation."

"You can buy NFTs that you can flip straight away and others that you can hold," Strachman explains.

NFTs are not like stocks or bonds in that you have a quantified concept of the investment's intrinsic worth in addition to its market value. Their market worth is solely determined by how much the crypto community is prepared to pay for them.

Investors must assess the appropriate level of exposure to NFTs after learning that they are risk assets. "You'd put a specific amount of money into your risk capital bucket, and that's what you'd be willing to risk going to zero or 100," he explains. Another way to look about NFT exposure, according to Strachman, is that if investors hold cryptocurrencies, NFTs might be a subset of that exposure.

NFTs, like silver, gold, and art, are commodity-like assets, according to Strachman. "When individuals buy art as an investment, it's an illiquid portion of their portfolio," he says. "Some would term that a commodity allocation," Strachman says. Another commodity-like feature of NFTs is that they are "totally uncorrelated" to any other market.

According to experts, the type of NFTs you should choose depends on your long-term investment goals. "Just like any other investment, you have to discover NFTs that correspond with your portfolio growth goal," Donaraski explains.

Depending on their uses, some NFTs can provide investors with more growth potential, according to Donaraski. NFTs with real-world application, like as real estate contracts, will eventually gain in value.

If investors understand what an NFT is used for, it can be a viable investment. "It's a better bet for the long-term survival of what an NFT is to make sure you have something that has usefulness," Donaraski says. "The life span of that utility is the life span of the use case."

Takeaway

Research is the most critical thing that investors can do before entering the NFT market. They should tackle this work in the same way they would stock or bond research. According to Strachman, market players typically follow a craze, which benefits those who sell assets but harms those who buy them. Investors should be aware of the risks they are taking in order to make smarter selections.