Understanding NFTs: What to Know Before You Buy

An NFT essentially allows its buyer to say they own the original copy of a digital file, in the same way you might own the original copy of a piece of physical art.

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by Ansis Salzirnis  I  November 2021  I  8 min read

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If you thought exploring the thousands of available cryptocurrencies was difficult, NFTs will blow your mind. These one-of-a-kind digital assets are worth millions of dollars and provide buyers with ownership of digital content such as photographs, movies, and music.NFTs, or nonfungible tokens, have fetched exorbitant prices in several circumstances. In March 2021, a piece by artist Beeple sold for $69 million. Other artists have made hundreds of thousands of dollars selling sports shots, online gaming stuff, and even pixelated portraits of punk rockers.Why would somebody invest their money on something that only exists online? As interest in NFTs grows, it's important to understand how they function, what gives them value, and key risk concerns to consider if you're thinking about purchasing one.

How do NFTs work?

An NFT essentially allows its buyer to claim ownership of the original copy of a digital file in the same way that you might claim ownership of the original copy of a physical piece of art or the master file of a music recording.To understand how NFTs work, you must first understand what it means for something to be "fungible." If an asset is fungible, it can be exchanged for another item in the same category without losing value. For example, if you exchange one dollar bill for another, you still have a dollar.Understanding NFTs also necessitates a basic understanding of blockchain technology.While blockchain networks can support both NFTs and cryptocurrencies, the primary distinction is that cryptocurrencies are fungible. One Bitcoin is fundamentally identical to another. Because NFTs are nonfungible, they are all unique.

What is an example of an NFT?

Ownership can convey different rights depending on the specifics of an NFT. In some cases, an owner might be able to control how a file is used, and under what circumstances it can be reproduced. But the exclusivity conveyed by NFT ownership can often seem theoretical.

What are NFTs used for?

NFTs can theoretically be attached to pretty much any intellectual property, but activity so far has focused on a few sectors.Art and music: The most highly publicized examples of NFTs have been in visual art, especially videos and still images that have sold for millions of dollars.Some owners, for instance, use their NFTs as social media profile pictures, place them in online galleries or even use them as video conferencing backgrounds.

Collectibles: NFT technology has also proved a fit for digital versions of other collectibles, such as trading cards. Sports leagues including the NFL, MLB and NBA have all created digital collections memorializing things such as notable statistics and outstanding plays.Gaming and virtual reality: NFTs can be attached to some unique video game items such as weapons, outfits or special characters — many of which have long been sold and traded in in-game marketplaces.
NFTs could potentially make the sales of such items easier to execute, and less dependent on central authorities such as the makers of games.Longer-term, NFTs could play a role in the creation of a realm of virtual spaces known colloquially as the metaverse. Some forecasters project that people in coming years will spend more time immersed in virtual reality spaces they’ve created. And in these spaces, exclusive NFTs could take on a new level of status.

What gives NFTs value?

For the most part, the value of NFTs is determined simply by what the market will bear. If you buy one as an investment, you’re essentially betting that someone will eventually be willing to buy it from you for more than what you paid.Getting started with investing is easy. If you learn about the basic types of investments and find the right advisor, you can begin making more informed financial choices for the future.

Getting started with investing is easy. If you learn about the basic types of investments and find the right advisor, you can begin making more informed financial choices for the future.

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