5 Things to Keep in Mind Before Investing in NFTs
Undoubtedly, 2021 was the year of NFTs, considering the massive impact these unique digital assets had on both the cryptocurrency and the general economic scene. In this context, several individuals may want to take part in this revolution but do not have a clue where to start.
In this article, you will discover five important facts to keep in mind before investing in NFTs.
NFTs Are Not Fungible Assets
Like most concepts, fungibility is best explained with an example – fiat money, such as the US Dollar, is a good example of something fungible. If someone has a five-dollar banknote, he/she can replace the banknote with someone else’s five-dollar banknote without affecting either party.
On the other hand, one’s favorite limited edition baseball card is a good example of something that is not fungible. Each card is treated as a collectible and has individual properties. A card with one player does not usually have the same value as a card with another player.
On top of that, even when considering two exact same cards, other factors can make a difference (e.g., year of production, how the card is preserved, etc.). An extreme example of something that is not fungible is a piece of art. A painting, for example, is usually created as only one original copy.
NFTs are Unique, Indivisible Units of Value
Each NFT has different properties that are usually stored in the token’s metadata. Consequently, they are inherently scarce, as there is a limited number of NFTs of a certain kind (many NFTs have only one copy).
The number of tokens can be verified in the blockchain, which ensures its provability. Mostly, NFTs are indivisible, as it is not possible to split one NFT into two smaller denominations. Therefore, it’s impossible to own a portion of an NFT like normal cryptocurrencies, and hence, it’s not available for different types of trading like options trading at Bitlevex.
NFTs Permit Fractional Ownership
Although it is impossible to split a single NFT into smaller units, NFT creators can create “shares” of their tokens and allow fans/investors to own a part of an NFT without having to buy the whole piece.
In fact, the fractional ownership of NFTs opens the doors for minters and collectors who want to leverage gains with NFTs under their possession. In this sense, it is crucial to observe that these NFTs are not divided and distributed to different owners. Instead, the shares of an NFT are represented by different tokens while the original NFT remains untouched.
Ultimately, fractioning NFTs may be an excellent solution to popularize the concept and attract more buyers into the scene.
NFTs Require Different Token Standards for Minting
Although NFTs can be implemented on any blockchain that supports smart contract programming, the best-known examples of NFT standards are the ERC-721 tokens and the ERC-1155 tokens – both on Ethereum.
When talking about NFTs, the ERC-721 standard is the most common standard for creating non-fungible crypto assets. This standard permits users to create contracts used to create distinguishable tokens with different properties.
A good example is CryptoKitties, which was the first NFT-based project created by Dapper Labs. Within this game, users are allowed to collect, breed, and sell virtual kittens.
The ERC-1155 standard is a next-level standard for the creation of NFTs. Such contracts permit users to mint both fungible and non-fungible tokens. Created by Enjin, a blockchain-based gaming company, this standard permits people to decide how much NFTs they will mint and
NFTs Have a Wide Array of Use Cases
Besides the one and only CryptoKitties (maybe the world’s most revolutionary NFT-based platform), several other games are leveraging the power of NFTs. For example, some names include Gods Unchained, Axie Infinity, Sorare, and Decentraland.
In this sense, the last is an interesting example where users can buy parcels of digital land that can be later sold or used as an advertising space within the game. Other meaningful use cases include marketplaces for NFT-art, such as Rarible, SuperRare, and OpenSea (a marketplace aggregator).
Besides, NFTs permit users to tokenize different assets, such as unique digital artwork, unique clothing in a limited-run fashion line, in-game items, essays, domain names, digital documents (e.g., deed to a property), or a ticket that gives one access to an event or a coupon.
Are NFTs the Future of Crypto? – Final Thoughts
NFT is the acronym for Non-fungible tokens, that is, tokens that cannot be exchanged for another one with equivalent value, being something unique. Ultimately, an NFT is like a code used for file authentication.
These tokens guarantee that a specific asset (e.g., digital art) is original. But unlike Bitcoin, these digital tokens are non-negotiable, which is why they became known as “crypto-collectibles.”
Under this logic, NFTs emerged as a way to transform common things in the internet world into original and priced properties, which is revolutionizing the way people understand concepts like value, scarcity, and digital ownership.
