What are NFTs? An Investor’s Guide – US News & World Report Money | Candle Made Easy

Non-fungible tokens, or NFTs, are a hot topic in the cryptocurrency world, and not just because of their high-profile role in digital art. Big brands like Nike Inc. (Ticker: NKE), Louis Vuitton and Coca-Cola Co. (KO) are trying their hand at NFT creations.

The NFT market had a breakthrough year in 2021 and interest in this digital asset class has continued to grow. According to data from Chainalysis, collectors have sent over $37 billion worth of assets to NFT marketplaces by May 1 in 2022, putting them in a position to easily surpass the $40 billion sent in 2021 .

You probably learned about the concept of NFTs from artworks that fetched lots of money at auction, but because of the “smart contract” technology on which they are based, the usefulness of NFTs goes beyond collectible art.

The NFT marketplace is still relatively new and transaction activity has declined in recent weeks, but investors, institutions, corporations and celebrities continue to explore this world of digital tokens and smart contracts. For investors wanting a piece of the token pie, here’s what else you need to know about NFTs and how to manage them:

  • What are NFTs and how do they work?
  • NFTs and art.
  • Buying and selling NFTs as an investment.

What are NFTs and how do they work?

NFTs are non-fungible tokens. Fungibility refers to assets of the same type that can be traded interchangeably. Bitcoins, for example, are fungible because users can trade one bitcoin for another and it will be the exact same asset.

Because NFTs are non-fungible, each token is unique and cannot be replicated. Because of this special property, NFTs are represented as unique pieces of information on a blockchain, ensuring the integrity of the digital property. This record of original ownership cannot be altered as its existence is timestamped on the blockchain.

Each NFT represents either a physical or digital asset. Aside from art, this can be anything from intellectual rights to a title to an asset.

“NFTs are information on a blockchain presented in an interactive format with visual representation,” said Nick Donaraski, CEO of blockchain technology company ORE System. As for ownership, if you buy an NFT early this asset is limited and only available through you. This scarcity, Donaraski says, allows the value of NFT to grow over time.

NFTs are powered by smart contracts. In particular, smart contracts are the function that manages the portability of NFTs. “If you think of blockchain as a network of computers, the smart contract is the computer running the website,” says Donaraski.

NFTs and Art

NFTs are best known in the context of digital art. Artists create NFTs that can still be traded on a marketplace like OpenSea. Building on their spread in the art world, NFTs are expanding into gaming, retail, real estate, sports and more. As the utility of NFTs expands, their acceptance and popularity should follow.

NFTs are unique because of their verified ownership, which cannot be replicated or tampered with. When an item is finite, it becomes more valuable. The NFT market is speculative as people buy NFTs believing they will be more valuable to someone else down the road. People collect art NFTs because they think they will be valuable in the future.

Buying and selling NFTs as an investment

The traditional principle of investing also applies to NFTs: buy low and sell high. Market participants can buy and reverse NFTs early and sell them at a profit when interest in the token grows. “However, NFTs should be viewed as an investment that could approach zero and is purely speculative,” said Daniel Strachman, managing partner of A&C Advisors.

“There are NFTs that you can buy, where you can flip immediately, and others that you can hold,” says Strachman.

NFTs are not like a stock or bond where you have a quantifiable idea of ​​the asset’s intrinsic value alongside its market value. They have a market value solely dependent on what the crypto community is willing to pay for them.

Knowing that NFTs are risk assets, investors need to determine the right level of exposure to them. “You would have a certain amount of money that you would put in your venture capital bucket and that would be what you would be willing to go to zero or 100,” he says. Another way to think about exposure to NFTs, according to Strachman, is if investors have exposure to cryptocurrencies, NFTs could be a subset of that exposure.

Strachman says investors can think of NFTs as commodity-like assets, similar to silver, gold and art. “When people buy art as an investment, it’s an illiquid part of their portfolio,” he says. “Some would call that part of a commodity allocation.” A commodity-like aspect of NFTs, Strachman says, is that they are “completely uncorrelated” to any other market.

Experts say your individual long-term investment goals should determine the type of NFTs you want to look at. “You need to find NFTs that fit your portfolio growth (strategy), just like any other investment,” says Donaraski.

Some NFTs can offer investors greater growth opportunities depending on the application, Donaraski says. NFTs with real benefits, such as real estate contracts, will ultimately have greater value going forward.

An NFT can be a legitimate investment if investors understand what the NFT is being used for. “Making sure you have something useful is a better choice for the long-term life of what an NFT is,” Donaraski says. “The lifetime of the use case…is the lifetime of this utility.”

Bring away

The most important thing investors can do before entering the NFT market is research. You should approach this task the same way you would research a stock or bond. Market participants too often follow a frenzy, says Strachman, which is good for those selling the assets but bad for those buying them. To make better decisions, investors need to understand what they’re getting themselves into.

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