NFT: A Comprehensive Guide to This Concept and How It Works

NFT: A Comprehensive Guide to This Concept and How It Works

You might have heard the term “NFT” enter the public’s consciousness recently. Maybe you heard that some celebrity paid $2 million to get one or that a particular NFT gained or lost value very quickly. Like cryptocurrency, some people feel they can get rich with NFTs, and maybe you know about them in that context.

What is in NFT, though, and should you consider getting some as investments? You must separate value from hype with NFTs, and we’ll do that now. We’ll explain how they work and explore whether you should get some right now if you have money and you’re looking into investment options.

What Exactly is an NFT?

An NFT means a non-fungible token. They are unique digital identifiers. If you own one, it exists as part of a blockchain. You can’t subdivide it, substitute it, or copy it. It’s unique. When you have one, that certifies ownership and authenticity.

This concept might still confuse you, though. NFTs are digital tokens, meaning you can’t hold one in your hand. They’re almost like little art projects that have an assigned value because they’re so unique. Like anything that’s one-of-a-kind, they’re collectible. That’s what makes them appealing in some circles.

You can collect them like you would paintings or sculptures. There’s an inherent difference, though. Paintings or sculptures exist in real life, while NFTs exist in the digital world.

Are NFTs Cryptocurrency?

Crypto and NFTs both use blockchain technology. Because of that, they’re similar in certain ways, though they’re not identical.

Blockchain technology tracks something like a cryptocurrency or an NFT. Because of this, nobody can steal them. It’s theoretically possible, but the blockchain makes tracking the crypto or NFT very simple. That means hackers can’t easily break the blockchain and take your valuables like they might with financial banking transactions.

Though NFTs are not crypto, you can track both through the blockchain because they’re both digital tokens. People create NFTs with the same tech they use for cryptocurrency creation. However, you can’t trade or exchange them equally like you would with other crypto assets, such as Ethereum, Bitcoin, or the other popular crypto forms that exist today.

Why Do NFT Values Fluctuate So Wildly?

NFTs have value because they’re unique. Some NFT creators also take the opportunity to make each NFT visually attractive by making it into a drawing. That’s why, when you see some NFT visual representations online, you might have one that looks like a monkey, an octopus, a unicorn, or just about anything else.

Crypto has a visual representation, but it is the same for every coin belonging to the same currency.  Meanwhile, every NFT looks unique when you see its visual representation on a computer screen. They look almost like digital trading cards, or Pogs, back when those became popular back in the 90s.

If you look at NFTs how you’d look at other collectibles, you can start to understand why their value fluctuates so much. Theoretically, an NFT gains or loses value depending on how much someone wants it. If you buy an NFT for $300,000, for instance, and then the market stops dictating that it’s worth that much, then you lose money in your investment.

That’s the same with virtually any collectible, though. They only retain value if people want them. If the market collectively decides that NFTs aren’t worth that much, then you can’t sell them at a profit. It’s the same with Pogs, Beanie Babies, baseball cards, sports memorabilia, or anything else anyone might collect.

The market dictates an NFT’s value. That’s why you’ll see wild fluctuation with these tokens sometimes.

What Causes a Market Decline?

Mostly, celebrities or people with abundant money buy NFTs. People with very little money don’t buy collectibles because they can’t afford them. They need their money for necessities like rent and bills.

Those with disposable income buy NFTs, and also those who want investments that might appreciate in value. Either way, an NFT might lose value if the individual who made that particular one makes too many others resembling it.

This ties into the NFT-as-art concept. If you look at an NFT like a painting, and the creator makes too many that look too similar, these NFTs don’t retain their uniqueness. That might cause a value plunge if you own one.

The market might also decline because, collectively, too many people may feel that NFTs don’t have much inherent value. If too many people think they’re a frivolous item that has no practical purpose, then it makes sense that their perceived value will plummet.

That’s what we’ve seen over the past couple of years. Some people still own many NFTs, but they can only profit from them if they sell them and can find a buyer that agrees they’re valuable. It’s the same concept as paper money. If no one agrees that it has any value, then it’s only worthless paper.

Of course, you can hold paper money in your hand, just like you could a gold nugget, a diamond, or anything else that humanity deems valuable. You can’t do that with an NFT, though.

You can own one in the sense that you have exclusive rights, but the token remains digital. You can look at it on a computer screen, and you can admire it. Still, some people won’t feel like it has as much appeal because it will always remain a concept in the digital world and not something in the real world with weight and substance.

Should You Get Some NFTs?

NFTs remain so fascinating because some people insist that they have value, while others completely decline the concept. If you purchase one and then find someone who will buy it from you for more money, then you’ve made a profit. Can you find a buyer, though?

A market does exist, but it’s far from stable. Whether NFTs will remain a fad or become a more substantive transactional currency remains unclear.  

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