NFTs, or non-fungible tokens, are a hot new buzzword in the already jargon-packed crypto world.
What are they, why are people investing in NFT art, and what do you need to know about them as an investor? Let’s take a deep dive into the world of NFTs. We will explore their investment potential, creation process, and how to buy NFTs in the UK.
What are non-fungible tokens?
Let’s start with the basics. In economic parlance, fungible assets are those where units of the asset can be interchanged easily. Something like money. Two £5 notes, five £2 coins, and a £10 note can all be interchanged easily. A painting like Van Gogh’s Daisies, however, cannot be interchanged with anything else the same as it. It’s non-fungible- it’s unique in some way that’s incomparable with anything else. It’s one of a kind.
When you take this concept into the digital world, you get the NFT, or non-fungible token. They can be sold and bought on the market just like any other asset, but have no tangible form. It’s all digital. The tokens themselves are a ‘certificate of ownership’ for the asset, be it wholly virtual or physical as well.
NFTs are among the interesting applications of the decentralised finance which have the potential to change the way things work in many sectors. Anything that can be made digitally could be an NFT. The biggest current hype, however, is NFT art. Those who believe in the NFT system see it as the online, digital evolution of fine art collecting.
How do NFTs work?
Most non-fungible tokens you will find are part of the Ethereum blockchain. Aside from its role as a cryptocurrency, the Ethereum blockchain also can store the information for the NFTs as smart contracts. These are simple programs, stored on the blockchain, that trigger when specific parameters are met. It’s the basis of blockchain security, and how cryptocurrencies seek to bypass traditional middlemen and intermediaries while remaining secure. NFTs, despite this link, don’t work the same as the crypto coins. Many other cryptocurrency platforms besides Ethereum have launched NFT marketplaces as the NFT hype train has accelerated. NFT marketplaces are blockchain based digital platforms that allow anyone to create, buy and sell NFTs.
Some of the NFT marketplaces are:
A big issue with digital art has always been the ease of replication. By ‘tokenising’ them through the NFT system, you create a viable ‘certificate of ownership’ for the piece. Even though anyone can view the item online, only one person has the ownership- and ‘bragging rights’ – of the piece, proven through the NFT system. For some, those bragging rights themselves are the real prize. If you’re still confused, think of it like physical art. Anyone can view a picture of the Mona Lisa, or buy a reproduction print. But only one entity has ownership of the original painting.
An art piece, called ‘the first 5000 days’, by digital artist Beeple sell for $69.3 million at a Christie’s auction, making it the highest payment for an NFT on record.
Based on blockchain
These NFTs exist on the blockchain. Picture that as a ‘public ledger’ recording transactions. Through this process, you can create an NFT for anything, from art and videos to real-life collectibles, music, and even designer sneakers.
Non-fungible tokens can only have one owner at a time, and their unique data construction and the smart contract system mean you can easily verify who that is. They can also be transferred easily without the need for intermediaries- the defining feature of blockchain and crypto both.
It’s a unique chance for artists to monetize their wares without galleries or auction houses siphoning off profits. Especially in the digital arena, which has not been taken seriously by the sometimes snobby art world. They keep more of the profits, and can even code ‘royalties’ into the NFT, allowing them to get a percentage of the sale any time the NFT changes hands.
We’ve even seen celebrities jump on the trend, using NFTs to auction a variety of unique memories, moments, clips, memorabilia, and artwork through the non-fungible token vehicle. While attention-grabbing headlines of millions of dollar sales might be how most people encounter NFTs, they’re a valid vehicle for smaller sales, too.
What is minting NFTs?
Minting is a process by which new tokens are created and distributed. Blockchains allow users to mint new tokens via a process called “token creation” or “coin creation”. The process of minting involves the use of a special issuance smart contract.
The term minting was originally used to describe the process of creating physical coins for circulation. These days, it is used to describe the creation of any cryptocurrency asset that is built on top of a blockchain.
How to buy NFTs in the UK?
If you want to buy NFTs, you’ll need a digital wallet that’s enabled for buying cryptocurrency as well as an account on a NFT marketplace.
You’ll also need the cryptocurrency itself. Different NFT marketplaces use different cryptocurrencies.
Ether is a good place to start buying NFTs in the UK. But it depends on the NFTs that interest you. Paypal and Robinhood both allow for crypto purchases via credit card, which can then be moved to your wallet. Do remember that most exchanges will charge fees on top of the value you receive.
From there, it’s a matter of browsing the NFT sites that appeal to you. Open Sea, Rarible, and the super-exclusive Foundation are all well-known options. The system is not unexploitable- there have already been some run-ins where impersonators have listed art without creator permission- and the vehicle itself does not have a lot of buyer protection, either.
As always, you will need to do your research properly about the asset you are interested in, before purchasing.
Are NFTs a good investment?
This is a big, ‘it depends.’ The future for NFTs is uncertain, and some even believe we’re in a bubble right now. There’s no history to judge investment performance off of, either. It’s a very type of financial instrument. Jumping in at the start of a trend, however, can be a powerful way to come out on top.
So it’s a personal decision. If the piece has meaning for you, or you have some cash to spare, you may want to add some small investment pieces to your portfolio. But always keep in mind that the only value the NFT has is what someone will pay you for it. It will always be driven by demand only, not economic or technical indicators. You may never be able to resell the piece at all, or will have to accept less than you paid for it. They are also subject to certain capital gains tax transactions and will be classed as ‘collectibles’ for tax purposes.
If you decide to buy NFTs in the UK, you need to do your evaluation of the specific asset, As with any investment. Keep an eye on the risk/reward balance, and proceed with caution. With that in mind, NFTs offer an interesting new way to invest in the future.