While the cryptocurrency market remains synonymous with assets such as Bitcoin, the blockchain technology that underpins it boasts an incredibly large and diverse range of potential applications. Learn more about Cryptocurrency and NFT at Greenery Financial.
Blockchain has even begun to revolutionise the relationship between physical and digital assets, by underpinning ‘non-fungible tokens’ (NFTs) across a number of different marketplaces.
But what exactly are NFTs, and how can you look to leverage them to your financial advantage?
What is an NFT and How Do They Work?
In economics, a ‘fungible’ asset is something with clearly-defined units that are easily interchangeable, with fiat currency offering a relevant case in point.
For example, you can seamlessly exchange a £10 note for two £5 notes and retain the same value, and this type of asset is fundamental to a functional global economy.
However, a non-fungible asset describes something that boasts unique properties which mean that it cannot be exchanged with anything else. Common economic examples include a particular house or unique paintings like the Mona Lisa, which represent one-of-a-kind items that cannot be adequately replicated.
In the case of NFTs, this is best described as a unit of data stored on a digital blockchain ledger, which certifies an asset as unique and non-interchangeable. This has begun to bridge the gap between physical and virtual assets, while enabling valuable items to be ‘tokenised’ and sold for a considerable sum of money.
As with crypto assets, the record of ownership stored on the blockchain is completely immutable, thanks largely to the fact that the ledger is maintained by thousands of computers globally.
In some cases, NFTs can also incorporate smart contracts, which afford the original artist or owner a cut of future token sale proceeds.
Trading and Monetising NFTs – The Key Considerations
Let’s start with a basic assertion; NFTs are completely unique and therefore cannot be traded or exchanged like-for-like in the same way as Bitcoin tokens.
As we’ve already touched upon, however, such assets can be bought and sold in the marketplace, with the novel and immutable nature of NFTs potentially increasing their bottom line value.
This has been borne out by a number of transactions, including the sale of a digitised version of an original Banksy piece which was sold via an NFT. Incredibly, the original artwork (Morons) was procured by Injective Protocol for $95,000, before being burnt and destroyed in a livestream video and resold as a digital token.
This high-profile and unique asset was subsequently snapped up for an astonishing $380,000, with this delivering a three-fold profit on the buyer’s original spend.
Clearly, it’s possible to create and sell NFTs for a significant profit in some instances, especially when the token represents a digitised version of a unique and scarce asset.
However, it’s unclear whether NFTs will retain their current value as the market becomes more saturated and less novel, while they’re not assets that can guarantee returns for traders in the current market.