What Exactly is an NFT?

April 28, 2021
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This is a term we hear more and more each day in the financial world. “Nonfungible tokens” (more commonly known as NFTs) are all the rage among high-end collectors. An NFT is a new form of investment tied in directly with the cryptocurrency trend. At this point, it’s no longer fair to call crypto a “trend.” It is an important financial concept that today’s investors should take the time to understand.

We’ll get more into the basics of cryptocurrency in next week’s Illumination Wealth Blog article. Today, we want to focus on NFTs. So, what exactly is a nonfungible token and why are people investing in them?

The Rapid Growth of the NFT Market

The idea of an NFT started as an Internet hobby to sell unique digital assets to collectors. These investments have become more and more mainstream with each passing day. “Nonfungible” means that the asset is one-of-a-kind and cannot be exchanged for another item of equal value. Dollar bills and bars of gold are fungible. They are tangible assets that can be traded directly for something with the same value. You can exchange a $20 bill for two fives and a ten. A nonfungible token doesn’t exactly work that way.

The “token” refers to a unit of currency on the blockchain. Blockchain is how cryptocurrency like Bitcoin or Ethereum is bought and sold within the crypto market. An NFT is a unique digital asset that can be purchased through a cryptocurrency transaction. The owner then owns the right to that digital creation. It’s like getting a completely one-of-a-kind coin or baseball card, except it’s totally digital.

Valuable NFT Investments

Some NFTs are drawing big money. Sports collectibles and digital artists’ creations are pulling in hundreds of thousands of dollars in cryptocurrency. Christie’s recently auctioned off a piece of digital artwork by Beeple that sold for over $3 million in Ether. It was the first time the auction house ever accepted cryptocurrency for such a large NFT transaction. Bands like Kings of Leon are releasing albums as NFTs. Athletes are converting their salaries into crypto. The ways of buying, selling, holding and trading cryptocurrency and assets like NFT are only expanding and evolving.

A lot of people simply don’t get the appeal of NFTs because of the digital nature. Instead of getting a baseball card that you can hold in your hands or display on your shelf, you are getting something that exists only on a digital level. However, you are actually buying more of a unique bar code that provides absolute proof that this nonfungible token is 100% certified and all yours. Certificates of authenticity (COAs) for sport memorabilia or comic books are easy to fake, along with many of the collectible items themselves. Someone could forge a Michael Jordan signature on a fake Bulls jersey. No one can fake the authentic source code of an NFT.

Now, just because the code being purchased is unique does not mean that it can’t be copied and pasted all over the Internet. Nothing may truly be one-of-a-kind and not all NFTs sold are original. However, the NFT purists will say that owning a special piece of code in a blockchain is extremely valuable and worth the risks. So far, that has proven to be true with the value of these NFTs going up rapidly. More digital artists and collectibles companies like Topps are getting on board to develop and sell their own nonfungible tokens for ridiculous amounts of cryptocurrency—which has also appreciated incredibly since Bitcoin led the charge with this new financial concept.

How Do I Buy an NFT?

To buy and sell NFTs, you first must purchase cryptocurrency that you can exchange for these nonfungible investments. There are more and more cryptos popping up every day. It’s important to do your research and understand this market before diving in head-first. You want to talk with a financial advisor or investment specialist who has a strong understanding of cryptocurrency, NFTs and other digital assets.

The market is changing and evolving. Cryptocurrencies and NFTs are here to stay. Are you ready to make your moves in the crypto market? Contact Illumination Wealth to learn more and to refine your wealth management plan for a brighter future ahead.