NFTs are non-fungible tokens. In economic terms, a non-fungible asset is something of value that cannot be interchanged. NFTs are becoming valuable and the demand is steadily increasing. Let’s find out why they are so valuable.
NFTs are valuable because they verify the authenticity of a non-fungible asset. This makes these assets unique and one of a kind. Picasso’s paintings are non-fungible. While anyone can make copies of his paintings, the original painting remains irreplaceable and unique. NFTs make digital content irreplaceable, hence valuable.
To understand the value of NFTs further it is necessary to understand ‘fungibility’ better.
‘Fungible’ is the term used when you are able to exchange an asset that you own with another asset of equal value. Currency is an example of a fungible asset. For example, imagine you have $20 and you get two 10 dollar bills in exchange for the $20. You still have the same value but you have exchanged your asset and received a new asset.
Bitcoin is another example of a fungible asset. You can exchange Bitcoins for getting valuable goods are products and services. The difference between NFTs and Bitcoin is the non-fungibility of the NFT. NFTs are unique and non-fungible.
Ok, let’s go back to the example of the artwork by Picasso. Since Picassos’s artwork is unique and irreplaceable its value depends on multiple factors. Usually, the value for non-fungible assets will depend on the utility, ownership history, future value, and liquidity premium.
A painting or artwork is in fact, just the arrangement of colors in a specific manner. But the feelings it evokes and the impact it creates are central to the valuation of that piece of art. Recently a digital-only artwork by Beeple was sold for $69 million. What does the buyer get? Nothing tangible — only a virtual picture. But there was a value to these pixels as much as $69 million.
What makes NFT art valuable?
There are a few different key aspects when it comes to determining what makes an NFT valuable. So, how do you know if a non-fungible token holds value?
Here are some factors to consider when determining the value of a non-fungible token (NFT):
- Underlying value (the value behind the creator.)
- Potential value (future value, up and coming artists and creators, celebrities.)
- Perception of the buyer (what is the NFT worth to you?)
- Similar market value (what are other pieces from the same creator selling for?)
So continuing with the contrast with cryptocurrencies which are fungible – Fungible tokens are divisible into smaller units. Some examples are Bitcoin and Ethereum. For example, you can split up Bitcoins into Satoshis and Ethereum can be broken down into base units known as Wei.
NFTs cannot be broken down like Bitcoins into smaller units. There is a unique piece of data that is usually rare and limited in number. Couldn’t any artwork be copied and shared endlessly? Of course, it can be, but the aspect of NFT is that it can be made into a token which means that it has a digital certificate of ownership that can be bought and sold along with the artwork.
What this does is create the authenticity and credibility of the source of that work or the type of NFT that you are buying. The authentic Picasso will be valuable even if multiple fake copies of it are made and sold and hung in houses or offices. The original will still have value if its authenticity can be proven.
How NFTs are created
Technically, anyone can create an NFT. Artists, gamers, brands, and musicians all have an opportunity to create NFTs and offer them for sale. They have to create any work and then turn them into NFTs on the blockchain. This process of conversion is called minting.
Once this is done they can put it up for sale on the marketplace of their choice and attach a commission (royalty) so that every time somebody purchases it, they receive a payment. Please do remember that the fees for these transactions can be quite high due to the known gas fees on the Ethereum blockchain.
Each time a transaction happens, the price for energy (gas) taken to complete the transaction is charged to you, along with another fee for the selling and buying. These charges can be extremely high and fluctuate based on the site that you use.
If you want to create an NFT you will have to go on to some of the platforms where NFTs are created and traded. There are many platforms such as Rarible, Ethereum, and SuperRare. These platforms allow you to create NFTs using blockchain technology that cannot be altered. This means that the ownership of the NFT cannot be undone by anybody nor can anyone recreate your creation.
Now all NFTs can be viewed by anyone once it is uploaded on the platform and anyone can sell it or buy it without permission from anybody else. Just like virtual collectibles. The owners of the collectibles can buy and sell it as they wish.
What are the different types of NFTs with value?
There are multiple types of non-fungible tokens which hold a certain level of value, but what exactly are the different types of NFTs with value?
Multiple types of NFTs are authenticating certificates for any digital content such as music, artwork, collectibles, characters, and objects within a video game, etc. All of these can be made into NFTs and ownership can be claimed and verified on them.
Buying and trading NFTs
Usually, the most popular marketplaces to buy NFTs are OpenSea, Rarible, MarkersPlace, SuperRare Etc. You have to also get some cryptocurrency to start with. There are many options such as Bitcoin, Ethereum, Ripple the list goes on.
If you want to deal in Ethereum you can use Metamask. Metamask is a crypto wallet that will allow you to buy and store Ethereum cryptocurrency.
You can install Metamask from their site and then buy some Ethereum by using a credit card or bank transfer. Now you will have funds in your Metamask wallet and be ready for buying. Then you can go to the marketplaces such as Nifty gateway, Super rare, NBA top shot, etc., and start buying or trading NFTs.
Are NFTs worth the investment?
With NFTs sudden take off, there are many fish biting at the bait making the space crowded with both trash and treasure. So, are non-fungible tokens worth the investment?
NFTs are worth the investment as long as the token you purchase has underlying value. The underlying value represents the value of the company or person behind the minting of the NFT. Underlying value also depends on both tangible and intangible assets associated with the NFT.
For example, Twitter founder Jack Dorsey has put up the first tweet on auction. The bidding has reached $2 million online. Artwork by other artists has sold for as much as $50 million and above.
This is proof that there is big money in the NFT space. But ultimately the worth of an NFT is what the market demands that piece. Just like how the artwork has been valued and sold in the real world for ages based on the value assigned by the market, NFTs will also follow suit.
If you’re looking to invest in non-fungible tokens, make sure you read this first: Investing In Non-Fungible Tokens (NFTs): Everything You Need To Know
What is the future of NFTs?
It is fairly evident that blockchain technology is changing the future of trade. This will include Bitcoins as well as digital assets such as NFTs. We have just gotten started in crypto art and if top players in art and fashion start participating in this space then it will most definitely explode.
Even companies and brands are jumping onto this new opportunity. Recently, Taco Bell came out with animated gifs and it was sold out half an hour after the launch. Pringles followed close behind and the NBA is certainly killing it using the marketplace NBA top shot where digital collectibles are being traded.
The possibilities of selling virtual jewelry, accessories, and virtual clothing using NFT markets and social media are huge. We have just scratched the surface of this trend. The opportunities that are yet to come are going to be limited only by creativity.
Get an in-depth look into the future of NFTs: Why NFTs Are The Future.
Issues and Challenges
While there is a lot of money to be made in the NFT market there are challenges and issues to be sorted out. One of the major controversies surrounding NFTs is their contribution to the carbon footprint which is creating huge concerns.
A single gif can lead to the consumption of a huge amount of energy and we’re talking about thousands and millions of gifs that will be bought and sold in the market places. The repercussions of these on the environment are simply too horrible to be imagined.
Currently, NFTs are in their infancy stage and not a lot of regulations or rules exist around them. It remains to be seen how governments and regulatory agencies will react to this and the laws they bring about.