NFTs as investment opportunities

29 December 2021
NFTs as an investment opportunity

What’s an NFT

A non-fungible token (NFT) is a unique code that represents a digital item. It could be, for example, digital art such as an image, or a piece of music. Non fungible means non-replaceable, unique, as opposed to fungible tokens or money, where 1 dollar is always equivalent to (and replaceable by) any other 1 dollar.

The authenticity, uniqueness, and ownership of NFTs is stored cryptographically-secured on a blockchain (Ethereum and Solana being the most popular ones). One token is not interchangeable for another, and a token cannot be further divided (in most cases). 

An NFT is a certificate (digitally and cryptographically stored and secured), and presents the same features of  a certificate written and signed in paper. It just happens to be more easily traded and secured as those mechanisms are embedded in the blockchain infrastructure. But, the same way it happens in the real world with a paper certificate, the link between the asset and the certificate is a social agreement and only backed by the reputation of the issuer and the willingness of markets to recognize such  value.
Therefore if you believe that certificates of authenticity or scarcity in the physical world have value, you probably believe the same about their digital equivalent: NFTs.

NFTs can also be associated with a physical item but that link is not cryptographically provable and relies on social protocols or trusted parties, e.g. a sports company associating an NFT with a specific pair of sneakers. NFTs are especially popular with fans of crypto who are also into collectibles.

NFTs can also carry smart contracts and future rights, e.g. the legal right to the IP, or the right to receive a percentage of the transaction value  in any subsequent sale.

In any case, the value of the NFT is not securely linked to the utility value of the digital or physical item whose ownership represents. In the same way that any digital image can be copied and reused regardless of the ownership of the NFT, an original or indistinguishable copy of a Picasso is equally enjoyable as a piece of decoration regardless of its ownership.

Why invest in NFTs

NFTs have a myriad of interesting applications such as domain names, identity holders, etc. but they have attracted the most attention as investment opportunities.

There are two main reasons why someone would consider purchasing and investing in NFTs

Financial returns

There has been substantial flipping and speculation activity recently, but no one knows how long this will last and, more importantly, which NFTs or NFT collections will keep attracting demand. Even the most famous early NFT collections, CryptoPunks, seem to have lost trading value compared to the even more famous, Bored Apes.

Other benefits

With so many NFTs being minted, the probability that you’ll choose the right one is low. So the non-financial benefits of NFT ownership become much more important. NFTs are currently being used as proof of membership to a group or club and can carry off-blockchain benefits, that can be valuable to some: access to events, IP rights, merchandising royalties, etc. And sometimes the value of an asset is just the bragging rights from having spent a small fortune in owning it.

How to choose an NFT

1) Track record: a CryptoPunk or a Bored Ape, two of the most famous NFT collections, is more likely to attract demand than a completely new NFT unrelated to a known collection.

2) Team: An NFT that rides on the brand equity of its backers, like a celebrity, famous brand, or well-known technical team will attract higher demand.

3) Technological infrastructure: which blockchain will they be minted on? Ethereum is currently the gold standard but it’s very expensive to trade in. More cost efficient blockchains, like Solana, might not be as secure and there is no guarantee that any particular blockchain will be around in the future. And what if someone mints NFTs on the same asset in several different blockchains? Is that allowed? Technically it is, so it all relies on the acceptance of others;, exactly like physical certificates.

Whatever you invest in, remember to save the keys securely and track the value of your investments. You can check the value of your NFT in platforms like OpenSea or crypto exchanges like Binance or Coinbase, and track the value of your NFT collections in Exirio.

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