Non-fungible tokens (NFTs) are in their biggest spotlight ever at the moment. With all the attention and curiosity they’re arousing, we’ll take a look into the benefits and potential drawbacks of NFT investing.
What are NFTs?
Non-fungible tokens are unique digital assets, or collectibles, which are created using blockchain. NFTs, also known as Nifties, represent real-world objects like art, music, in-game items and videos. They are bought and sold online, mostly with cryptocurrency, and they are generally encoded with the same underlying software as many cryptos. NFTs are usually bought with cryptocurrency Ether or in dollars and the blockchain keeps a record of transactions. While anyone can view the NFTs, the buyer has the status of being the official owner.
Pros of Non-Fungible Tokens
• NFTs Foster Marketplace Efficiency
The most obvious benefit of NFTs is their potential to make markets more efficient. The conversion of a physical asset into a digital one can streamline processes, eliminate intermediaries, enhance supply chains and bolster security. Also, NFTs have applications beyond marketplaces. Eventually, they could evolve as an effective way to manage and control sensitive data and records for individuals and organizations.
NFTs can’t be changed or replaced in any way if their authenticity is verified on the blockchain. The intrinsic value of authenticity becomes an actual, extrinsic value, as well.
• Smart Contracts
Smart contracts — the heart and soul of blockchain technology — make automatic executions after certain events possible. For example, if the NFT owner resells it for a profit later and the artist attached a royalty “rider” to the contract, the artist gets compensated immediately.
• The Blockchain Technology behind NFTs Is Very Safe
NFTs are created using blockchain technology, which is a system of recording information in a way that is impossible to hack, alter or delete. Essentially, a blockchain is a digital ledger of transactions that is duplicated and distributed across an entire peer-to-peer network of participants.
Cons of Non-Fungible Tokens
• NFTs Do Not Generate Income
Unlike dividend-paying stocks, interest-bearing bonds and rent-generating real estate, NFTs do not offer their owners any income potential. Like antiques and other collectibles, the returns associated with NFT investments are based entirely on price appreciation, which is not something you should count on.
• NFTs Can Be Stolen
NFTs have been the target of a few security breaches, especially from hackers who don’t believe they’re “real” investments. Many exchanges have outdated or inefficient security protocols in place.
• NFTs Are Illiquid and Volatile
Given its relatively immature state, the market for NFTs is not very liquid. NFTs are not widely understood and the number of potential buyers and sellers is small. This means NFTs can be very difficult to trade, especially during periods of distress. It also means NFT prices can be highly volatile.
• Ownership Doesn’t Equal Control
Just because someone owns an original NFT doesn’t mean they can control its distribution or duplication across platforms. Ownership just means they hold the authentic “original” — they can’t stop “prints” from being made.
The market for NFTs is huge and is only getting bigger. However, even though the possibilities of NFTs may seem endless, just like every new investment/asset class, you should invest with caution because of the very risky and speculative nature of new, undefined markets.
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