What Are NFTs – And Are They Worth Buying?
Unless you’ve been living under a rock for the past few years, you will likely have heard the term ‘NFT’ thrown about a bit – especially if you keep up to date on the latest investing and trading news.
NFTs have made big news in recent years, and their market has grown exponentially. In fact, in 2021, the NFT market was worth around $41 billion – it’s little wonder why so many people are trading in these digital works.
With accusations of NFT trading being nothing short of a ‘craze’, it’s worth looking a little closer at how they work – and whether or not they will still be worth buying and selling for years to come.
What are NFTs, Exactly?
NFTs are non-fungible tokens – watered down, they are unique digital works of art. Non-fungible in this scenario means that NFTs are – by design – irreplaceable. Much like physical art, a master copy of an NFT is wholly unique.
The digital asset market has exploded as a result of the dawn of NFTs, with such trading being relatively unheard of ahead of their debut online in 2014. As digital assets, NFTs can only ever be traded via internet connection.
Although NFTs arrive in the form of music, videos, games and more, the dominant market continues to be digital art. Some digital artists make fortunes selling their work as NFTs, with some pieces going for millions of pounds. However, as with all trading, there are always risks involved.
Why Do People Buy NFTS?
The counter-argument against NFT trading is fairly obvious, but not completely justified. Many argue that – if NFT artwork is registered in a digital format and sold online – what is stopping anyone from just copying it and distributing it for free?
In buying an NFT, the recipient will receive a certificate of authenticity, a unique identifying code, proving that they own the original piece – and not just a copy or screenshot.
Think of this scenario much like buying a print of a famous Da Vinci piece. You can position it wherever you wish and admire it just as much as the real article – but, the original piece is much more valuable, and for an investment in art to be worthwhile, you need proof of authenticity. So, as is the case with artwork in the real world, proving that you have an original NFT makes all of the difference for your asset portfolio.
How do NFTs work?
Essentially, NFTs are built on blockchain technology. Blockchains are completely public and widely distributed ledgers – where cryptocurrencies such as Bitcoin and Ethereum are widely exchanged, too. In fact, most NFTs actually reside on the same blockchain as Ethereum, linking this crypto and the emergence of digital art together.
Much the same as physical art trading, there can only be one true owner of an NFT, and by using blockchain, it is easy to keep track of who actually owns a given piece. Ledger editing is a one-way process, therefore beating back allegations of fraud and counterfeiting. It’s this technology that has helped cryptocurrency to grow popular overall, too.
NFTs have, thus far, proven to be a highly lucrative way for artists to sell their pieces. Instead of having to negotiate with art dealers, galleries, or auctions, artists can show their work online, send it straight to the buyer and be paid instantly for the privilege.
Online trading on blockchain has removed the red tape that arrives with asset investment offline. While it may appear counterintuitive to some to ‘buy’ a digital image you can easily screenshot, you’re actually paying for the certificate of authenticity – which ensures you’re the owner of an original piece.
Buying NFTs is a surprisingly simple process – typically, all you need is a digital wallet – a program through which you can store your cryptocurrency and your NFTs. Digital wallets are based entirely online and are accessible through unique keys – which you can either keep track of, or entrust to a third party provider.
NFTs are widely available for purchase through providers such as OpenSea, Foundation and Rarible. However, you’ll find NFT providers and digital artists sharing their original works through social media, too. Some NFTs have even inspired movements such as the Bored Ape Club – you may recognise some of these pieces from social media already!
Is It Worth Buying NFTS?
While NFTs remain popular with a niche market, and while there are proven benefits to trading online over offline, there are still some risks worth keeping in mind.
While NFTs and blockchain trading are, by their nature, resilient against fraud, there is still an opportunity for scamming and counterfeiting. Given the ongoing meme that NFTs are merely expensive screenshots, it pays to know who you’re buying from – and that they can be trusted to provide authentic certifications.
The NFT bubble is also under regular scrutiny. While it’s unlikely that NFTs and blockchain technology will fade from popularity any time soon, the ‘mania’ surrounding the former (which grew to a head in 2021) has already died down. Therefore, it’s worth considering your options carefully. In some cases, NFT creators can vastly overprice their works – it’s worth researching the wider market to ensure you know what you’re getting into.
Buying NFTs as a newbie may mean starting out small – and to consult the opinion of a financial or investments advisor who can help you find a safe path to stick to.
If you are planning on buying NFTs to resell them, extra caution is advised. Be sure to invest in pieces that have provable return potential – much like you’d exercise when buying and selling art for profit, or flipping properties.
NFT profits, of course, are also subject to taxation – meaning you must report any sales that push your yearly income beyond your annual tax allowance to HM Revenue and Customs.
NFTs are, for many people, convenient, fun, and even lucrative. But, as with all investment opportunities, keep your eyes on your capital – and be sure to research your market thoroughly. Unfortunately, there’s never any guarantee of conversion – seeking advice from a financial advisor may be your next best move.
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