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The ABCs of NFTs – What Are Non-Fungible Tokens?

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NFTs – if you’ve spent any time at all on the internet over the last few months, chances are you’ve seen these three letters crop up again and again. But what does “NFT” stand for, and what are they? Most importantly, are NFTs a smart investment? Let’s take a closer look.

What Are NFTs?

If you said that NFTs were cryptocurrency, you’d be mistaken. While NFTs rely on blockchain technology and are often bought and sold using cryptocurrency, they are fundamentally different from the cryptocurrency itself. However, if you said that NFTs were digital artwork, you would also be mistaken. While artwork (and even music and videos) can be assets for NFTs, it should be noted that the artwork itself is not the NFT. So, what is an NFT?

“NFT” stands for non-fungible token, and it is essentially a digital certificate verifying the validity and ownership of a digital asset. When someone creates an NFT for a digital asset, only one copy of that NFT exists (even if multiple copies of the asset exist). The value of the NFT comes from its scarcity and validity, and is, in some part, subjective to the perception of its owner and others.

Let’s consider an example. Say that an artist makes a gif file of a dancing cat. They then create an NFT for that file, which someone buys. The buyer is now the owner of the dancing cat gif NFT, and may have certain rights based off the fact that he is the owner. If he later decides to sell the NFT, the sale would be recorded by blockchain technology when the transaction occurs. This process is comparable to “real world” art – an artist might make a painting, then sell the painting and a certificate validating the sale. There may be other copies of the dancing cat gif, and other copies of the painting, but there’s only one certificate with the record of creation and transfer. With NFTs, the art and the certificate are both digital.

NFTs are “non-fungible,” which means that each one is uniquely different. Cryptocurrency, as well as real-world U. S. dollars, are fungible, which means that the value stays the same even if the currency is changed (i.e., one dollar is worth as much as a different dollar, one bitcoin is the same as a different bitcoin). Much like physical artwork, the value of a NFT can be affected by how much the owner enjoys the piece.

Some Examples of NFTs

NFTs are already really trendy, with some selling for millions of dollars. An NFT of the first-ever tweet by Twitter CEO Jack Dorsey was minted and sold for almost $3 million. Other NFTs can include digital artwork that people can then use for avatars, video backgrounds, and more; music and audio files; video game characters, weapons, outfits, items, and more; digital collectables; and just about anything else that can be found online. Some NFTs also include “perks” – an NFT could be created for a real-world piece of art, and the NFT could include ownership of the physical artwork. Sometimes NFTs could include access or tickets to sports games, conferences, concerts, and more. NFTs may also give the owner unique content from the creator. Each one is different, which allows buyers to browse and purchase NFTs that they will uniquely enjoy.

How Can you Buy and Sell NFTs?

Now that we’ve gone over the basics of NFTs, what if you want to get involved? Who can create them, and how can they be bought or sold?

First, NFTs are created through a process called “minting.” By minting a representation of a digital asset on a blockchain network, the creator of the NFT produces an unalterable record of that NFT. This record can then be bought, sold, traded, or kept.

Typically, to create or buy NFTs, you first need to have some cryptocurrency. There are many online marketplaces where you can start your NFT collection, including OpenSea and NiftyGateway. These marketplaces also typically allow you to sell and trade your NFTs. You may also want a digital wallet in which you can store any cryptocurrency or NFTs. These can also be found online.

Be Wary of Scams

As with all financial investing, you need to be wary of scammers and fraudsters. Because NFTs are still relatively new and not completely understood by many, it can be easy to fall victim to a scam. Research reputable platforms for NFT buying and storage, and make sure any accounts that you purchase from have a verifiable record. Avoid going to external sites, and pay special attention to any red flags, such as an account trying to get your information outside of the recommended platform. You can also find a financial advisor that specializes in NFTs and enlist their help when finding NFTs to purchase.

Should I Invest in NFTs?

If only we could have imagined the growth of Bitcoin and invested when one Bitcoin was less than $1,000. Hindsight is 20/20, right? With the emergence of NFTs, you may be wondering if you should get on this trend, in case this takes off as well. But are NFTs a smart investment?

In a way, you should view investing in NFTs the same as how you would invest in art. Every NFT is different, and so each NFT’s value is going to rise in a different way. Some probably will increase in value, others may stay the same, and it’s likely that certain NFTs may drop dramatically in price. You can potentially predict an NFT’s value based on the popularity and scarcity of the NFT, but in the end, NFTs should only make up a small percentage of your portfolio. If you’re okay with taking risks, you may want to invest more, but if you’re risk-averse, there are safer investments that you can pursue.

If you’re going to invest in an NFT, it’s generally recommended to purchase one that you enjoy – maybe you want to support the creator, or maybe it has some meaning that touches you in a special way. This way, even if the NFT doesn’t rise in value, you will still have a piece of digital content that you like.

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