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by: Jonathan Hung

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Tags: blockchain

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Categories: Investing

Are NFTs Just a Fad or Here to Stay?

One of the latest trends in the blockchain space are NFTs, or non-fungible tokens. In the world of blockchain and cryptocurrency, there are new commodities popping up every day leaving people wondering what they should and shouldn’t invest in. But what is a non-fungible token, why are they such a hot commodity, and how do they fit into the grand scheme of blockchain?

 

Table of Contents

Non-Fungible Tokens Explained

How Are They Different from Fungible Tokens?

Who is Buying and Selling NFTs (and why)?

Who Can Sell an NFT?

How Do People Buy NFTs?

What Are the Risks to NFTs?

Environmental Impact

Security Risks

Regulation

Are NFTs Just a Fad?

Identity Management

New Forms of Investment — Digital and Physical

Market Efficiency

Should I Buy NFTs?

Conclusion

 

Non-Fungible Tokens Explained

Non-fungible tokens, or NFTs, are certificates of ownership for a digital asset. They are contracts that are put into the open-source code of anything digital, like jpegs, gifs, videos, social media posts, or even articles — anything that can be digitally published — in an effort to secure the digital item. Once the digital item is secured, it is permanently published into a token, with a unique code on a blockchain ledger. Most NFTs are currently part of the Ethereum blockchain, but there are currently two additional dominant blockchains where NFTs are built, called Dapper Lab’s Flow and Polkadot and many other companies are looking into the possibility. At this point, the NFT can be bought and sold by the public. NFT creators can code in restrictions on how the asset can be used once it is purchased, for example, restricting its usage on TV. NFTs are essentially a digital signature that makes that digital asset unique from any other asset out there.

How Are They Different from Fungible Tokens?

Fungible tokens are the more well-known types of currency, whether that means actual currency like the dollar or Euro, or cryptocurrencies like Bitcoin and Ethereum. In a fungible token, each one has an equal value — i.e. one bitcoin is equal to one different bitcoin, or $1 is equal to $1. This is different from a non-fungible token because an NFT is a single unique asset and is therefore non-fungible or not able to be replaced by another token. This uniqueness makes the price of NFTs unpredictable. The value of an NFT is based on how much people are willing to pay for it. The more exclusive or special the item is, the higher the value. NFTs are truly challenging ownership in different ways as people rethink what it means to truly own something. If you don’t physically own it, and you don’t have a trademark or copyright on it, do you truly own it? This will be an interesting question that we will continue to have to define as NFTs gain popularity.

 

Who is Buying and Selling NFTs (and why)?

You may have heard recently in the news about an NFT created by digital artist Beeple that sold for $69.3 million. But why are people paying big bucks for digital assets? NFTs are a draw to people for many reasons. They can be a financial investment similar to fine artwork, a collectible item like baseball cards, or an affinity item like sneakers. It’s in people’s nature to collect things and especially scarce objects.

On the selling side, NFTs are another medium for artists to create and share their work. Every day there are new stories about GIFs and memes being sold as NFTs, but the creation of NFTs span games, art, sports, writing — just about every creative genre.

One interesting use case of NFTs is that they are being sold within video games. Before, any “purchase” that was made within a video game was just for use inside the game and belonged to the game company. NFTs means that the purchaser owns the asset within the game, and it can be bought and sold with changing values.

Even brands are testing out NFTs – Taco Bell recently sold their NFTacoBell collection — taco-inspired GIFs and images that quickly sold out at their original $1 price and are reselling on the secondary market for more than $3000.

Watch my latest video on a similar topic:

Who Can Sell an NFT?

Anyone can technically sell an NFT by creating the digital asset, minting the NFT on a blockchain, and putting it up for sale on an NFT marketplace. The creator can even put limitations and stipulations on the piece, for example, restricting it from being used on TV or including a cut to the original artist every time the NFT is sold. There are some upfront fees for selling NFTs, including a gas fee that covers the price of the energy it takes to complete the transaction, as well as a fee for selling and buying the NFT.

NFTs are a new and exciting investment that may be interesting to test out if you are willing to take the risk.

How Do People Buy NFTs?

NFTs are sold on a special marketplace that is specific to selling NFTs. The marketplaces are like eBay, where people can either bid or buy assets. To purchase NFTs, you’ll have to set up a wallet on the site and fill the wallet with whatever cryptocurrency that marketplace trades on. To create higher demand for certain NFTs, these marketplaces will hold “drops” where they set a specific time the assets will be available to create more interest.

 

Here are some of the top marketplaces for buying and selling NFTs:

What Are the Risks to NFTs?

There are a few downsides that have cropped up in relation to Non-Fungible Tokens that can get in the way of their popularity as this area of blockchain grows.

Environmental Impact

Non-Fungible Tokens (and cryptocurrency in general) have experienced a lot of pushback because of the large environmental impact that it has that makes it unsustainable. This is because most major cryptocurrencies are built on a system called “proof of work”. Proof of work is an algorithm that was intentionally created to be inefficient to make the blockchain more secure. It acts as a security system for cryptocurrency to oversee transactions on the system and to keep records. This works by having users (or miners as they are called) add blocks of verified transactions to a decentralized ledger (the blockchain) by solving complex puzzles. The idea is that most people wouldn’t go through all that effort just to mess up the ledger. Because of this process, Ethereum uses as much electricity as some countries. This process has created a lot of contention in the industry, even forcing one online art marketplace, Art Station, to cancel plans to launch a platform for NFTs.

Security Risks

There are some content security risks that make NFTs risky. The first is copyright. It can be possible for someone to create an NFT for a digital asset they didn’t create. When an NFT is created, the NFT is given a signature that authenticates it, making it verifiable, but there is no entity responsible for verifying the initial ownership.

The other security issue is that there is no permanent storage solution for NFTs. There is currently no blockchain wallet to store NFT purchases, it has to be stored on a server. This means that there is no blockchain to protect it and user error could mean the asset could be deleted at some point.

Regulation

As with the rest of the blockchain world, Non-Fungible Tokens are so new that they’re a bit like the Wild West — there’s no regulation so you’re trusting that the NFT you are purchasing is unique. When a new industry is growing, that’s when regulators might step in to change the game and have an effect on the market. Similarly, there are many other reasons the market could change its demand, changing the valuation of any NFT purchase at any time.

Are NFTs Just a Fad?

The market cap of NFTs grew tenfold from 2019 to 2020, reaching $338.04 million, and it has only grown higher in 2021 so far. The growth does beg the question — is it a fad or are Non-Fungible Tokens here to stay for the long run? Of course, we just don’t know where the market will take us, but it’s possible that there are clues in how some of the biggest companies and industries are jumping on the bandwagon. Formula 1 racing has seen some initial hype around NFTs by developing games around NFTs where participants can build collections.

Non-Fungible Tokens are so new that they’re a bit like the Wild West

DC Comics has also begun exploring their NFT options, looking for freelancers to create NFTs around their characters. As both corporate entities and individuals see the value in NFTs, the demand will continue to grow and will keep them relevant in the long run. The blockchains will also likely need to develop a more efficient process around the creation of NFTs to keep the environmental impact to a minimum.

More importantly, we will need to create additional use cases and truly focus on the benefits that NFTs can provide. Here are some of the biggest benefits that may prove to show the value of Non-Fungible Tokens in the near future:

Identity Management

Non-Fungible Tokens have an interesting use case in regards to identity management. There’s an opportunity to streamline processes like carrying passports or digital identities being verified.

New Forms of Investment — Digital and Physical

The possibilities of NFTs don’t just lie in the digital world — there are opportunities in the physical world as well. By creating digital signatures for physical things, it allows the division of those physical assets into fractions. One use case is real estate — the possibility of faster real estate purchases and sharing real estate opportunities can allow more people to invest. Similarly, NFTs can allow arrangements like artwork can have multiple owners, increasing its worth and revenue from a sale.

Market Efficiency

One of the best benefits of Non-Fungible Tokens is that it allows creators to connect directly with their audiences. For artists, that means no need for agents or physical galleries. In the real estate world, it allows for smaller investments into big projects. NFTs can simplify some traditionally complicated processes.

Should I Buy NFTs?

Everything about NFTs is relatively new, and there is a chance that it is just a bubble that will lose demands once the initial intrigue passes. At the same time, there are many different opportunities that can take advantage of NFTs if used properly. As a new market, there will likely be extreme swings in interest, price, and value of NFTs until the market can level itself out. All that being said, it’s definitely a risk to invest in NFTs. With digital art, its worth depends on how much someone is willing to pay for it, there are no guidelines or regulations currently on the buying and selling of these tokens, and you don’t even know if you’ll be able to sell it at all.

If you are willing to take the risk and invest in NFTs, it would be smart to set a limit from the beginning of how much you’re willing to lose — you shouldn’t depend on this as a “get rich quick” scheme. There are definitely safer investments out there, but NFTs are a new and exciting investment that may be interesting to test out if you are willing to take the risk.

A safer way to jump on the NFT bandwagon is to look for the companies that are using the technology and invest in them instead of going in headfirst and buying digital assets. There are a lot of opportunities to look at as this new market continues to grow.

Conclusion

Whether or not NFTs are here to stay, they are surely having a moment and many people are trying to make real money off of a digital asset. It’s a new frontier, and big risks could truly pay off — if done right. Whether you are thinking about being an early investor in NFTs or are wondering whether to dip your toe in, make sure to keep an eye out on this new technology — it will surely be interesting to watch how it grows and how companies will use it to their advantage. Staying up to date on the latest will allow both buyers and sellers to better understand the technology, how it works, and how creators can use it to make NFTs sustainable and stable well into the future.

 

Jonathan hung, Angel InvestorAbout the Author

Jonathan Hung is one of the most active angel investors in Southern California, his mission is to drive value creation within each portfolio company. In support of this mission, he serves as Co-Managing Partner at – Unicorn Venture Partners.

Jonathan and his team target investments in US companies that have global market potential with a focus on long-term growth expansion to East Asian markets.

Jonathan developed his investing prowess as a Managing Member for his family office fund, J Heart Ventures, which made investments in start-up companies such as Gyft, ChowNow, Miso Robotics, Clover Health, Bitmain, to name a few startups he funded.

Jonathan has various degrees from the University of Southern California, London School of Economics, Massachusetts Institute of Technology, and The Wharton School at the University of Pennsylvania.