The relatively new and trending market for NFTs, or non-fungible tokens, has captured the imagination of the financial trading community in 2021. These digital collectibles are selling at a high premium, but this begs the question: are NFTs a growth market with long-term potential, or an over-hyped disaster in the making?
Before we attempt to answer that question, let’s drill down on the basics of NFTs. First of all, as the name implies, they’re non-fungible, meaning that NFTs are unique entities which can’t easily be replaced or exchanged for other NFTs. In that respect, they are different from certain well-known cryptocurrency tokens, such as Bitcoin or Ethereum.
We might compare NFTs to collectibles that exist in the physical world, such as baseball cards. Typically, you wouldn’t be able to just exchange any collectible baseball card for another one, like you would be able to do with Bitcoins.
What’s Great About NFTs
However, this is not to say that there isn’t a cryptocurrency connection here. In fact, NFTs are typically on the Ethereum blockchain and can be purchased or sold on any Ethereum-based NFT market.
Moreover, each NFT will have its own unique identifier, and the owner of the NFT should easily be identifiable through the blockchain, which is a digital ledger of transactions. Clearly, the world of NFTs is intertwined with the culture of the blockchain – and it leverages some of the blockchain’s advantages, including the transparency of its transactions.
Because NFT purchases and sales are tracked on the blockchain, you can easily prove your ownership of an NFT. With that level of transparency, it would be difficult for anyone to manipulate the NFT market.
Thus, non-fungible tokens represent indisputable ownership of a broad range of items, which are often but not necessarily digital in nature. These items can include a unique piece of digital artwork, a tweet, a domain name, or a collectible digital card (think of it as a Pokémon card that might exist in the cloud).
These NFTs can fetch a hefty price. Believe it or not, Twitter CEO Jack Dorsey sold his first published tweet (which said, “just setting up my twttr,”) as an NFT for a whopping $2.9 million.
In addition, a LeBron James highlight video sold for $200,000, while a Zion Williamson video was purchased for slightly less than that.
Noting The Risks
Clearly, there’s money to be made in the NFT market. What could possibly go wrong?
As soon as you hear that question, it’s probably time to start considering the risks involved with any investment.
It might seem like ancient history, but it really wasn’t very long ago (2008-2009, to be precise) that the housing market turned into a frenzied bidding war, eventually leading to a collapse and an evaporation of wealth.
Some believe that this might happen again soon, as the housing market is quite elevated at the moment. Another analogy is the dot-com bubble that devolved into the dot-com bust of 2000. During that year, hyped-up Internet companies like Pets.com took off like a rocket but then plummeted.
The world of collectables is particularly prone to fleeting fashions and trends. What the public likes today, it might completely forget in the near future.
A startling example of this would be the fervor over the Beanie Babies series of plush toys in the 1990s. At one point, some frenzied collectors were willing to shell out up to $5,000 for stuffed toys that originally sold for just $5.
Could NFTs end up as the Beanie Babies of the 2020s? Informed investors must be aware that what’s hot now might be not-so-hot in a matter of months or even weeks.
The Bottom Line
In the final analysis, it’s perfectly fine to get caught up in the NFT craze and enjoy the ride. It’s entirely possible that some NFTs might offer substantial returns to early investors.
Just be aware of the risks involved in pursuing any trend, NFTs or otherwise. By tempering enthusiasm with caution, investors can capture the opportunity without unduly endangering their portfolios.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell digital assets.