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What are NFT's and should we be investing in them?

·5-min read
3D Token with words NFT and Non-Fungible Token against digital background
NFT's are the latest investment to utilise blockchain technology (Source: Getty)

Most of us have heard of Crypto currencies such as BitCoin, and some of us may even have invested in them over the last few years.

Yet the new kid on the block (chain) are NFT’s, or Non-Fungible Tokens to give them their full title.

Many investors are still in the dark about this latest investment trend, which regularly gets airtime on social media platforms such as TikTok (where the cool kids hang out).

So, what exactly are NFT’s, and should we be investing in them?

A unique digital asset

Yahoo Finance Australia enlisted the help of Sarah Lee of crypto and blockchain careers site Crypto Crew to demystify the jargon and point us in the right direction.

“An NFT is a unique digital asset that is stored on a blockchain to prove ownership. It cannot be replaced in its original form; hence it is a ‘non-fungible’ asset,” Lee explained.

The ‘non-fungible’ element is key to the concept of NFT’s (hence the name), as if you trade one token for another, the one you receive will be different to the one you sold.

This is in contrast to a ‘fungible asset’ such as BitCoin, which is fungible since you can trade one Bitcoin for another. You will end up with Bitcoin in both cases.

The phrase NFT is a catch-all for a whole range of digital assets, just like the term cryptocurrency is used to encompass a host of different digital currencies such as BitCoin and Ethereum.

“There are many kinds of NFTs – Digital Art, Collectibles, Event Tickets, Gaming and Virtual Fashion to name a few, “adds Lee.

Each type of NFT may hold additional ‘utilities’ that make them valuable, with these utilities ranging from gaining access to exclusive events, to redeeming real world items.

“For example, Adidas’ recent ‘Into the Metaverse’ project allowed NFT holders to redeem exclusive clothing apparel!” Lee said.

 Ethereum coin lying on top of similar golden coins to illustrate cryptocurrencies
Ethereum is one of the cryptocurrencies that NFT's are often priced in. (Source: Getty)

The cryptocurrencies used to purchase NFT's

So how would investors go about purchasing an NFT?

The first thing to point out is that, up until very recently, NFT's could only be purchased using cryptocurrency from your crypto wallet, which is still primarily the case.

"Most NFT offerings tend to price in either Ethereum or Solana," Lee said, highlighting the two cryptocurrencies that investors will likely need to hold to make an NFT investment.

The market for these products is very decentralised, just like the blockchain concept itself, so ordinary stockbrokers are unlikely to be able to help investors enter the market.

Instead, there are a number of online marketplace where NFT investments can be bought and sold, with the most well-known secondary market being Opensea.

If you are wanting to invest in a new offering, or 'minting', then Ms. Lee suggests that "Twitter and Discord are the social media platforms where most 'mintings' are advertised, often using the hashtag #NFT."

So, should I invest?

As with any investment, you should do your own research before committing funds, and in an embryonic and volatile market such as NFT's, this is particularly important.

"The first thing I always do before investing in an NFT is to research the team behind the project - mainly the founder - and find out if they have a previous track record in running or participating in successful businesses," Lee suggests.

This info should available on the project's website or Discord server, and if it isn't that could be a red flag.

The other thing to bear in mind when investing in this market is that it is relatively unregulated, although this is starting to change as authorities get better at understanding the potential pitfalls of such a decentralised model.

In March this year, US President Biden issued an executive order instructing Federal Agencies in the States to co-ordinate their efforts on this, although no official regulation has yet been put in place. Australia, it seems, is watching and waiting on what happens in the US before committing to its own regulatory policy on NFT's.

As a result, the market is still a risky place for investors, but the returns can be spectacular, which is typical of early stage trading markets.

As Lee points out, "the potential risk when investing in an NFT is losing money of course, so only invest in what you can afford to lose."

It's not uncommon in this market, for investors to lose their NFT's due to scams or cyber attacks, with others having lost out due to the project they invested in not making progress as expected (known as a 'rugpull').

That said, the market is now said to be worth US$27 billion (A$36.19 billion), so it's clear that NFT's are no longer a niche product, with knowledge of the concept filtering into the mainstream.

The message for investors who don't want to miss out on the next big thing - do you research and expect a few hiccups on the way, as it could be a wild ride.

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