An Introduction To Non-Fungible Tokens (NFTs)

The world of non-fungible tokens is thriving, and this playbook is for those who want to thrive with it. The playbook provides an introduction to NFTs, along with everything you need to know about buying or selling them.

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Love the GIF that everyone’s been sharing? Or that scene from a movie? A particular video game outfit?

Well, guess what? You can legally be the owner of it all!

Making it to the headlines again, someone has purchased a piece of digital art for a million dollars, and we have no idea why. NFTs have taken over the gaming and content creation world. Whatever this is – a passing fad or a great new opportunity for artists, millions of dollars are being spent on this.

We can sit and debate on how good or bad they are, but meanwhile, they’re selling like cakes online. If you’re someone who’s looking for answers beyond just “why,” this comprehensive guide will help you gain a deeper understanding of the subject.

Let’s first start with introductions.

What is NFT?

Non-fungible Tokens.

Yeah, that doesn’t simplify the concept at all, so let’s break the term down:

Fungible vs Non-fungible:

Fungible assets are those that hold the same value upon exchanging or substituting them. For example, you would be willing to trade a Rs. 2000 note with four Rs. Five hundred notes since the value in both cases remains the same. More fungible assets include common shares, gold, and bitcoin.

On the other hand, non-fungible assets are those that hold unique attributes and hence cannot be substituted or exchanged with other assets. A trademark, a house, and a crypto kitty are some examples of non-fungible assets – they can be tangible or intangible and physical or digital.

Tokens:

Tokens validate your ownership of any non-fungible asset you buy. A token’s value depends solely on the value of the asset you purchase. These tokens exist and are distributed in a secured digital database called the blockchain.

So, NFTs or Non-fungible tokens are digital assets that cannot be substituted, exchanged or subdivided. NFTs exist in the digital database, blockchain, that certify their ownership and authenticity. So, behind every cute GIF you share or a digital artwork you admire, there’s a notary potential hiding behind it.

How do NFTs work?

Think of blockchain as doing what accounting does for business. It keeps track of all transactions related to business to determine where money is coming from and where it is going. Without a blockchain, you can’t prove ownership, and hence, there wouldn’t be any NFTs. The difference is that transactions on the blockchain are replicated in millions of computers, making forgery impossible.

Although many blockchains support NFTs, they are generally held on the Ethereum blockchain. Just like bitcoin, ethereum is a cryptocurrency that also stores extra information allowing it to support NFT.

Now, if you’re a beginner in the NFT world, getting started with investing can seem a little challenging, but it doesn’t have to be. Let’s discuss.

How to invest in NFTs?

Step 1: Make an NFT marketplace account:

The procedure of selling and buying NFTs requires a marketplace. There are many marketplaces where you can browse various available NFTs and invest in the one you prefer. Some of the most popular NFT marketplaces include:

Here’s how you can make an account on Rarible.

  • For your first step, go to the website rarible.com and click on “create.”
  • For your next step, choose between Ethereum, Flow, and Tezos. For this guide, we have chosen the Ethereum option. You can then click on “Sign in.”
  • Once you click on a suitable plan, you will get a pop-up asking you to install metamask. Then, you’ll be directed to another page that will allow you to install MetaMask from Chrome. You will then be redirected to a page where you can add to chrome.
  • You can now set up your MetaMask wallet. Press on “Create a wallet” and then create a password.

Your account is now ready!

Step 2: Fund your account

Since most NFTs are Ethereum-based tokens, most NFT marketplaces only take Eth tokens as payment. Suppose you already have a cryptocurrency exchange account. In that case, you can use it to buy Ethereum and send it to your MetaMask wallet. If you don’t, you’ll have to create an account.

  • After you open and set up your metamask account, you can add funds. This is what your page should look like once you’re done with the process.
  • Next, click on “Buy” and link your account with any of the options given.
  • You will then be directed to the next page. Here, you will first have to change USD to INR (or to the currency you use) by clicking on the small arrow next to USD. Then choose your payment method.

That’s it – you can now add funds to your account!

Step 3: Start investing!

Once you’ve fueled your account and chosen a marketplace, all you have to do is find an artwork you absolutely adore! You can bid on the collectable you like in most marketplaces and participate in an auction.

TIP: BUY ONLY WHAT YOU CAN AFFORD TO LOSE!

For first time buyers, it’s important to play it safe. You can start off by investing only a part of your portfolio for the NFT and then move on to bigger investments. Always research what you’re getting into, and measure your risks at all stages.

How are NFTs created?

We spoke about how you can invest in NFTs. The procedure of creating an NFT is very simple. Simply create an account with a marketplace like OpenSea that allows users to create NFTs. You don’t need to know how to create an ERC-721 (NFT) token or even have any prior blockchain experience.

Although anyone can make an NFT, that does not guarantee they can be sold for profit. Thousands of NFTs manufactured by random persons never sell or sell for a pittance. NFTs are frequently valued because of the artist’s reputation or the media’s historical relevance. The media must be significant in order for an NFT to be valuable.

If you’re at crossroads and cannot decide if you must invest in NFTs, the first thing you should do is weigh the pros and cons and see which side is heavier.

Pros of NFT

Creates Value

When you invest in NFT, you put money into a tokenized asset. When you control the digital artwork, you remove the possibility of duplication and maintain the collectable’s integrity. As a result, establishing that a piece of art is scarce adds value to it.

Growth Potential

Creators and artists can gain ownership and credit for their work by investing in NFT stocks. This will allow authors to experiment with new ideas and create new content. In some ways, it’s a huge boost for people to continue to grow and generate value, even in the virtual world.

Unlimited Options

The possibilities in the digital world are truly endless. There are numerous NFT stocks to choose from. Let’s look at examples of items that have been sold for astronomical sums of money. The former CEO of Twitter, Jack Dorsey, sold his first tweet, “just putting up my twttr,” for $ 2.9 million. A cat animated GIF brought in $ 5,00,000! Isn’t it an amazing planet to live in?

The Creator Economy

A couple of years ago, “the creator economy” didn’t exist – nobody even thought that one could make money from creating content. Till now, creators who posted regular content on social media received exposure while the social media platforms received income. However, NFTs have driven the change to bring monetary benefits to creators.

The ownership of content is embedded into the content only with the help of NFTs. As a result, when the creators sell their work, the money goes straight to them. Because the NFT metadata includes the inventor’s address, royalties for each resale of the token can be sent to the original creator. By putting up smart contracts while constructing NFTs, the developer could collect royalties if the NFT is sold to a new owner.

With all the glory, there also comes some drawbacks with NFTs.

Cons of NFT

Lack of physical feel

The motives for owning physical art and digital art are frequently different. Physical art cannot be digitized. Seeing a one-of-a-kind painting with your own eyes is an attraction that these tokens cannot match.

Duplication

NFTs can be confusing – even for experts. When you buy one of these non-fungibles, you aren’t necessarily buying the art’s copyright.

People can still locate copies of the work for which you hold the token on the Internet, and there’s nothing stopping them from copying and pasting these files into social media, effectively showing off and sharing something for which you may have paid millions of dollars.

All you truly get when you purchase these assets is a record stating that you hold the token that underpins the original asset. “What is the value in owning an asset you can’t actually control?” is the fundamental question here.

Uncertain profits

Due to the unregulated nature of this sector, there is no guarantee of consistent profit with NFTs. Another issue with NFTs is that no one knows how valuable they are. If the enthusiasm fades for whatever reason, investors could lose a lot of money. For many buyers, the technical processes involved in trading the tokens might be intimidating and confusing.

Environmental hazard

The more we show off about the technological advancement involved in NFTs, the more harm it causes to the environment. Any record added to the Ethereum blockchain necessitates a considerable amount of computing, which consumes a significant amount of energy.

As a result, broad trading in NFTs and other blockchain-based assets isn’t always a green process. Indeed, according to a recent Cambridge University study, almost everything related to the blockchain is highly unsustainable from an environmental aspect due to the quantity of energy consumed.

NFTs in India

According to the Economic Times, nearly 6,00,000 people in India have tweeted about NFT in just one year. Investing in NFT stocks is becoming increasingly popular in India. The year 2021 proved to be a successful one for the NFT world. India saw many celebrities test the waters and enter the NFT market.

Amitabh Bachchan, Kamal Hassan, Yuvraj Singh, Rohit Sharma, Salman Khan and well-known fashion designer Manish Malhotra are some of the many celebrities who released their famous tokens for sale. The response from Indians who purchased these NFTs was an expected, pleasant and welcoming surprise for the Indian NFT market.

Some more examples demonstrating India’s strong interest in NFT funding:

This is only the tip of the iceberg: NFTs have exploded in popularity in India!

The legal status of NFTs in India:

In India, there is currently no legislation governing NFTs. India’s finance minister, Nirmala Sitharaman, has stated that no one is prohibited from utilizing cryptocurrencies or investing in NFT stocks. It’s still unknown what will happen to NFT’s legal position in the future.

This makes investing in NFTs easy but risky. The lack of rules governing its functioning and lack of liquidity makes NFTs a complicated and worrisome matter.

What is the future of NFTs?

Well, that’s a good question. A question there is no certain answer for. We’re seeing the craze for digitized art may be little more than a fad as people flock to this new, mysterious collection opportunity. NFTs should be viewed as very speculative bets when it comes to investing.

When the blockchain’s gleaming newness wears off, it will be less appealing to the general public to participate. At this time, some collectors may likely look at their collection and wonder, “Why did I ever buy this?”

However, let’s think about it another way.

NFTs can be used to tokenize any real-world asset in the future, making asset ownership transparent and incorruptible. For real estate deeds, intellectual property rights, and corporate ownership, non-fungible tokens could be immensely valuable. While the future of NFTs is unknown, it is evident that this technology can revolutionize the internet’s whole environment –– we are still in the early stages of development.

Things to keep in mind before investing:

Now, should you buy NFTs?

If you’ve made it this far, you obviously are interested in NFTs. I’m sure you’re wondering if you should invest in NFTs or not.

Well, that depends. The decision to invest in NFTs is essentially a personal one. If you have some extra cash, it’s something to think about, especially if the artwork has sentimental value for you.

However, keep in mind that the value of an NFT is solely determined by what someone else is prepared to pay for it. As a result, rather than fundamental, technical, or economic indicators, which traditionally impact stock prices and, at the very least, constitute the basis for investor demand, demand will drive the price.

All of this means that you may be able to resell an NFT for less than you bought for it. If no one wants it, you might not be able to resell it at all. That said, use NFTs like you would any other investment: do your homework, understand the risks (including the possibility of losing all of your money), and proceed with caution if you decide to invest.

Conclusion

NFTs are a great, or rather an interesting, platform. They provide a mechanism for you to hold something other than a coin on the blockchain. It reeks of innovation, and people are attracted to innovations and developments.

However, they should be considered highly speculative and exceedingly dangerous as an investment. There’s real value in the blockchain and what it can accomplish for humanity in the future. Still, it’s not in the ability to sell consumers relatively unstable “ownership” of digital assets.

If you wish to participate in the blockchain and perceive these tokens as a way to do so, go ahead and do so. But do so with caution. Buy low-cost NFTs with the idea that you’ll enjoy getting involved, not that you’ll make a fortune, because the market’s floor could come crashing down at any time.

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