It isn’t easy to grasp the complexities of investment, especially considering the many asset classes, tax-advantaged funds, and vehicles that are available. Add the complexity of scenarios previously thought to be impossible, such as a global pandemic or negative interest rates, and you will quickly see the complexity of it all.
The advancements in technology don’t stop there. Increasingly pervasive technologies, such as mobile payment applications, peer-to peer lending platforms, robo-advisors, and blockchain-based databases are revolutionizing the ways we conduct business, manage financial transactions, and invest.
Blockchain-based databases comprise the main topic of this piece. Specifically, I’m focusing on tokens that are not fungible. In this moment, you’re probably wondering. What is a non-fungible currency?
Fungible vs. Non-Fungible Assets
Let’s start with the word “fungible”. A fungible asset is one that is able to trade for another that is similar in type and worth. For instance the U.S. dollar bill is in fungibility. You can trade one for another and receive exactly the same value. With cryptocurrency such as Bitcoin it is possible to do the exact same thing. A single Bitcoin is worth the exact same amount as another.
In contrast, a non-fungible asset is one-of-a-kind. It is exclusive unchangeable, irreplaceable and not exchangeable. Examples include diamonds and original art works. Each of these items is unique and cannot be replicated. For instance, every diamond is unique in its cut, color, size and grade. There are no two diamonds that are identical, much like fingerprints.
It is possible to argue that no asset is truly transferable. Some dollar bills exhibit physical variations including damaged corners or ink stains, and may also have distinct dates for the series. This is a fact and underscores the importance of focusing on the utility of assets, not technical characteristics when categorizing them as fungible/non-fungible.
What are Non-Fungible Tokens?
This brings us to the subject of this article, tokens that are non-fungible (NFTs). NFTs are digital representations that represent assets created by blockchain technology. Each NFT is unique in its identification code, which differentiates it from other NFTs and prevents replication. Each NFT can also be combined with another NFT to create the third distinct NFT.
Did you know?
The majority of NFTs are part of the Ethereum blockchain, which runs the cryptocurrency named Ethereum. NFTs are distinct from cryptocurrency because their identification codes contain additional details, such as metadata on the digital asset.
Anything that is able to be converted to digital format could be used to make NFTs. A large portion of the activity in this field is due to the storage and selling of digital art and sports memorabilia, but any static image audio clip, video clip or text can be digitalized and, in the future, monetized. Jack Dorsey (the founder of Twitter) recently digitalized his first tweet. A small token of Dorsey’s message “just creating my twttr,” sold for nearly $3 million.
Although the tweet may sound trivial, NFTs have serious business implications. NFTs have been used to make it easier for complex private equity and real estate transactions and are changing the way buyers and vendors interact in the art market. We’ll look at these concepts in greater detail, and will analyze the advantages and disadvantages associated with NFTs.
Pros and Cons of Non-Fungible Tokens
NFTs Foster Marketplace Efficiency
The most obvious benefit of NFTs is their ability to make markets more efficient. The conversion of physical assets to digital assets can simplify processes eliminating intermediaries, boost supply chains and increase security.
An excellent example is taking place throughout the art world. Thanks to NFTs artists are now connected directly to their audience, removing the need for expensive agents and the hassle of transactions. Furthermore, the digitization of artworks is improving the authentication process, simplifying transactions and cutting costs.
NFTs aren’t just useful in the market however, they also have many other uses. In the future, they may emerge as a method of effective manage and control sensitive information and records of individuals as well as organisations.
Take a look at our physical passports, which must be issued at each entrance or exit point. In converting them to distinct NFTs, we could greatly simplify the management of travel as well as identify individual. The savings can be huge in terms of time and money.
They are a great way to divide the ownership of physical assets
It’s difficult to divide ownership of valuable assets like artwork or jewelry. It’s much simpler to split an electronic version of a house among multiple owners than an actual one. The same is true for precious jewellery and rare cases of wine.
By digitizing the market for specific assets can be greatly increased, resulting in greater liquidity and more expensive prices. It improves the structure of financial portfolios which allows for more diversification as well as precise positioning.
The Blockchain Technology behind NFTs is extremely secure
NFTs are developed using blockchain technology, which is a system that records data in a manner that is impossible to hack, alter or erase. Blockchains are essentially an electronic ledger which records transactions and then distributed to all participants in a peer-to-peer network.
All NFTs that are kept on the blockchain possess distinct evidence of authenticity and chain-of ownership This, theoretically, prevents them from being subject to theft and mishandling. Once data is added to the chain, it can’t be deleted or changed. This ensures that each NFT’s authenticity and its scarcity is maintained, which helps to create a level of trust we’re not used to seeing in many markets.
NFTs Are a great way to add diversification for an investment portfolio
They aren’t like the traditional investments like bonds and stocks. As discussed above, they possess distinct characteristics and provide advantages we’re only beginning to comprehend and realize. However, there are risks related to ownership.
We’ll touch on the risk in the following section. At present, it’s important to know that the NFT risk profile is different from that of other asset classes. It is possible to improve the effectiveness of your investment portfolio by incorporating NFTs. This means you’ll get more of a balance of return and risk.
The negatives of tokens that are not fungible
NFTs are Volatile and Illiquid
The market for NFTs that is fairly new, isn’t terribly accessible. NFTs are not widely understood and the potential buyers and sellers is low. This implies that NFTs can be extremely difficult to trade, especially during times of crisis. This also means NFT prices can be highly fluctuating.
NFTs Don’t Generate Income
As opposed to dividend-paying stocks and interest-bearing bonds and rent-generating real estate, NFTs cannot provide their owners with an income opportunity. Like antiques and other collectibles the gains associated with NFT investments are entirely based on the appreciation of their prices that isn’t something you can count on.
NFTs may be used to perpetuate fraud
While the integrity of blockchains is unquestionable, fraud could be perpetuated through NFTs. In actual fact, a variety of artists have recently been notified that their work was being sold as NFTs on online marketplaces – without their knowledge.
This is clearly against the purpose of utilizing NFTs to aid in the sale of art. An NFT authenticates a physical piece of art with a unique token. This guarantees that the owner of the token also owns the original work.
If someone creates an electronic copy of the work and attaches an identifier, it could pose a serious issue. After that, they place it on a virtual marketplace. There is no link to the original piece. The token is linked to a fraudulent reproduction.
NFTs can harm the natural environment
It consumes a lot of computing energy to create blockchain records. And there’s an increasing debate about the long-term damage that the process has on the environment. There are estimates that suggest that the rate of carbon emissions resulting from mining NFTs and cryptocurrency may surpass that of entire city London in the next couple of years. NFTs are changing global markets, which reduces the need for travel and maximizes office space utilization. The blockchain community believes that it will help offset any pollution.
The Future of NFT Investment
NFTs are an intriguing invention, and their uses cases are gaining the spotlight. The NFTs’ price-tag-grabbing headlines are creating a fire. However, prudent investors should take a cautious approach when considering purchasing these investments since NFTs are highly illiquid and volatile.
It’s not a good idea to purchase them in expectation of achieving the triple or quadruple-digit return on your investment. NFTs’ true value is in their capacity to revolutionize markets and enhance the management and control of sensitive data. Here, the sky is the limit.
Nevertheless, if you want to participate in the blockchain movement and see NFT ownership as your option then go for it. Be responsible. Don’t put a lot of cash into NFTs and strive to create low-cost positions. There is a chance that you will find yourself in a difficult spot financially and emotionally.
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