Intro to Investing: Non-Fungible Token (NFTs)

Non-fungible tokens are unique tokens that represent physical assets.

Non-fungibles are typically tracked by each token's NFT ID, also known as the crypto-ID. This ID can store information about the token's properties and metadata.

NFTs can be associated with easily-reproducible items such as photos, videos, audio, and other types of digital files as unique items.

Explanation: To understand what non-fungible tokens are, we first need to understand what the term fungible means. Fungible, according to economists, means "the property of a good or a commodity whose individual units are essentially interchangeable". In simple terms, it means that the items are replaceable with another similar property of equal value.

Non-fungible is the opposite. It simply means the items are non-replaceable.

For example, if you bought an iPhone from the store, you can easily replace or buy another iPhone for around the same price. There is no difference in which model of that iPhone you have on hand. This makes it fungible or replaceable.

However, as you start to use that iPhone and bring it along with you to an event and build special memories, it slowly becomes more and more valuable to YOU. It starts having "sentimental" value, and now you are attached to it. It's unique to you and has a different value. It is now non-fungible. (At least to you)

Naturally, no one is going to value your phone the same way you do. Instead, in the NFT world, we need to assign a digital value to each item listed on the platform. To do that, a series of codes on the blockchain verifies you are the owner of that item. So, while anyone can "copy and paste" an image of your item, the blockchain network ensures you are the sole "true owner."

From there, it's all about Demand versus Supply.

Things to Note: Since there's only ONE supply, its value potentially could become limitless. The "tricky" part is to increase that demand so the price would rise to the level you want it to.

Suppose you're buying an NFT for investing purposes. In that case, the goal is to buy an item with the potential to grow massively in value.

Risks Considerations: While it sounds like an easy way to make millions, they do not come without risks. To begin with, NFTs can be created out of anything. This means there are plenty of "bad" tokens.

It takes a certain level of knowledge and understanding to find something worth investing in.

The market is also highly illiquid as they're only traded in Ethereum.

This means there is only one digital currency that facilitates the buying and selling of NFTs. And as mentioned previously, cryptocurrencies are volatile, which means the value of an asset fluctuates wildly daily.

Finally, while we say the buyer "owns" the item in simple terms, it's more of a record of ownership on the blockchain. Should the original producer of the NFT decide to stop hosting the file, the token would point to a file that no longer exists.

Just imagine you had a Word document that contains the code of your item stored on your laptop. Everyone can assess this code while your laptop remains connected to the internet. But should you disconnect the wifi or switch off that laptop and never turn it on again, there's no way to ever access that Word document again.

Likewise, the original producer could do something similar. Naturally, there are remedies such as using a decentralised storage service, but the risk exists.

No doubt, many artists and investors are making their millions from NFTs. Still, many more have lost a significant amount because they didn't know what they were investing in.

It takes a tremendous amount of work to study and understand the market, grasp the latest trends and contact directly with a token creator. Unfortunately, not many people have that level of knowledge, expertise or experience.