NFTs are currently taking the digital art and collectables world by storm. Just as everyone worldwide believed Bitcoin was the digital answer to currency, NFTs are now pitched as the digital answer to collectibles. As a result, digital artists are seeing their lives changing thanks to the massive sales to a new crypto audience.
But despite the fact that NFTs are hugely popular, the topic goes much deeper than just newspaper headlines. Understanding NFT meaning finance, specifically what is an NFT in finance is the first step to take if you want to dig a bit deeper. Let’s dive in and see what all the fuss is about!
NFT Meaning Finance
NFTs are an acronym for non-fungible tokens, which are generally created using the same type of programming used for cryptocurrencies. They cannot be exchanged or traded equivalently like their cryptocurrencies counterpart. Physical currency and cryptocurrency however, are fungible, which means that they can be traded or exchanged for one another. The similarity is that these cryptographic assets are all based on blockchain technology.
You may have already heard of NBA Top Shot, a digital collectible basketball card game. The cards work just like physical trading cards do, but their authenticity is guaranteed through blockchain technology. Some cards are rarer than others, and each has a different value.
How Do NFTs Work?
Now that you've taken your initial steps in understanding what an NFT is, you should continue on and learn about how do NFTs work. We’ve already identified that in order to be able to prove ownership of somETHing digital, there needs to be some form of a transparent, immutable ledger that maintains a constant record of all NFTs, who owns them and where the files that they point to are kept.
This is where blockchain technology comes in. By leveraging the publicly distributed, immutable nature of blockchains, all NFTs can be stored in a transparent way, allowing anyone to check the authenticity of any NFT at any time. Its unique data makes it easy to verify and validate their ownership, and the transfer of tokens between owners.
Each time an NFT is transferred or created, the action is permanently recorded on the blockchain and timestamped, meaning it’s possible to trace any single NFT right back to its genesis – somETHing that’s pretty handy if you want to make sure your cartoon ape or virtual kitty is genuine or not. And because they hold a value primarily set by the market and demand, they can be bought and sold just like other physical types of art.
What Are NFTs Used For?
People interested in Crypto-trading and people who like to collect artwork often use NFTs. Apart from that, it has some other uses as well such as:
Digital Content - The most significant use of NFTs today is in digital content. Content creators see their profits enhanced by NFTs, as they power a creator economy where creators have the ownership of their content over the platforms they use to publicize their content.
Gaming Items - NFTs have garnered considerable interest from game developers as these fungible crypto assets can provide a lot of benefits to the players. Normally in an online game, you can buy items for your character, but that’s as far as it goes. With NFTs, you can go so far as to recoup your investment by selling the in-game items once you’re finished with them.
Investment and Collaterals - Both NFT and DeFi (Decentralized Finance) share the same infrastructure. DeFi applications let you borrow money by using collateral. NFT and DeFi both work togETHer to explore using NFTs as collateral instead.
Domain Names - NFTs provide your domain with an easier-to-remember name. This works like a website domain name, making its IP address more memorable and valuable, usually based on length and relevance.
Even celebrities like Snoop Dogg, Shawn Mendes, and Jack Dorsey are taking an interest in the NFT by releasing unique memories and artwork and selling them as securitized NFTs.
How Is The Value Of An NFT Determined?
Determining how much an NFT is worth depends on its underlying representation. When it comes to crypto art, it’s quite similar to any other forms of art. We think about who created it, the artistic value of the piece, and how in-demand it might be from other collectors.
If an NFT is part of a limited collection, specific numbers are often more valuable than others. We usually see a token ID of #1 being more desirable than other numbers like #49 or #137. Value and rarity depend on a combination of factors, like the ones mentioned above. A good reference is to take a look at NBA Top Shot NFTs and how their ranking affects the price.
For game-based NFTs, there may be financial benefits from specific NFT items or creatures. If they provide you with an extra $100 in staking rewards, then it’s going to be worth at least $100 without taking into account its artistic value.
Are NFTs A Good Investment?
NFTs represent a developing investment trend that appears to have staying power, at least for the short term. The upside potential can be huge for investors who are able to create NFTs and sell them at high prices or those who are able to buy NFTs for a bargain, then flip them for profit. But like any other trendy investments, NFTs do have their associated risks to be aware of.
First, cryptocurrency and its relatives, including NFTs, can attract more volatility than somETHing like stocks or real estate. So investing in NFTs tends to carry a higher degree of risk than other more traditional investments. If you’re generally more risk-averse, the potential to net higher returns may not be enough to lure you into NFTs as an investment tool.
Next, there’s liquidity risk. If you have an NFT that’s in-demand then it may be relatively easy to find a buyer for it and convert your digital assets to cash. Otherwise, you may be stuck with an investment that’s doing very little for you while keeping your cash tied up. So if you’re interested in NFTs, it’s good to consider how much of your portfolio you want to allocate to them.
SomETHing else to keep in mind is the potential for fraud. Cryptocurrency is largely unregulated and there’s plenty of room for fake NFTs to flood the market. It’s quite easy for an inexperienced investor to fall for a scam if they aren’t able to distinguish what’s fraudulent from what’s not. And even advanced investors may not recognize an NFT scam if it’s extremely sophisticated. The end result is that you could lose money.
Closing Thoughts
When it comes to NFTs, new use cases and developments are constantly coming out. It’s easy to forget that the technology is as recent as 2017 and still in its infancy. Before you start investing money into these tokens, make sure you understand precisely what you’re getting into. You should very minimally understand NFT meaning finance and how they work.
It’s easy to just think of NFTs as art, but there are many places to find them, use cases to look at, and even misconceptions to clear up. Having finished this article is without a doubt a good way to get started!
