A non-fungible token (NFT) can command a very high price. NFTs are digital tokens based on blockchain technology. Their main characteristic is that they cannot be replicated. So, why are some people willing to pay such a big amount for a digital asset? Before discussing the topic in detail, it will be quite useful to define what fungibility is.
The concept of fungibility applies to all types of assets. In general, fungibility is the characteristic that makes an asset interchangeable with another asset of the same kind. This characteristic makes some specific assets have the same value.
Thus, a fungible asset can be interchanged for another of a similar kind. If you have a one-dollar bill, you can interchange it for another one-dollar bill. The value will remain the same. Likewise, if you borrow 5 dollars from a friend, you don’t necessarily have to give back the same note. Two 5-dollar banknotes have the same value. Thus, fiat money is a fungible asset.
Fungibility makes trading simpler. This concept applies to cryptocurrencies also. For instance, a Bitcoin has the same value as any other Bitcoin. Fungibility also allows for divisibility. For instance, a Bitcoin is equivalent to 100 million Satoshis. Each Satoshi can be exchanged with another Satoshi. Or 100 million Satoshis can be exchanged for 1 Bitcoin. All these exchanges can be done on special trading and exchange platforms such as LetsExchange.io.
What Are NFTs?
Now, we can give a better definition of what an NFT is. An NFT is a digital file. Blockchain technology is used to verify its identity and ownership. This is the same technology used to verify transactions with cryptocurrencies. This technology uses cryptography to protect the involved data. This is the reason many NFTs are referred to as crypto-collectibles, crypto-art, and other terms.
Non-fungible tokens have some particular characteristics:
- Rarity. Scarcity is what gives NFTs value. Although an unlimited number of NFTs can be created by developers, they usually keep the number of NFTs low. Scarcity increases rarity, which increases the value at the same time.
- Indivisibility. Unlike fungible assets, NFTs cannot be divided into smaller units. For example, think of a piece of art. You either buy it entirely or you simply won’t get it. You cannot buy a piece of a painting masterpiece. That’s the same with NFTs.
- Uniqueness. Each NFT is unique and has a digital “certificate of authenticity.”
Thus, you can see now more clearly the difference between an NFT and other types of digital assets such as a cryptocurrency. Let’s consider Bitcoin, for example. The amount of Bitcoin is limited, yet it is fungible. NFTs are unlimited, but a particular NFT is unique and cannot be interchanged for another NFT. This is quite analogous to a piece of art.
Although the concepts of crypto-art and crypto-collectibles sound more like a joke to some people, they’re a reality. This market is booming. Last month, a digital collage of NBA top shots was sold for $69.3 million. This collage named “Everydays: The First 5000 Days” is the creation of the digital artist known as Beeple. The prestigious British auction house Christie’s completed the sale.And many more examples abound. Individual digital NBA cards can be sold for over $200,000.
Why Do NFTs Command Such High Values?
The value of an NFT comes from its collectible nature. To create an NFT, one has to upload a file to an auction market. Such a file can contain digital artwork, for example. A crypto platform, usually Ethereum, turns the digital artwork into a token. Once “tokenized,” the digital artwork can be stored on a blockchain. This process can be seen as the digitalization of the art trade.
But, what exactly do you get when you purchase an NFT? The answer is not straightforward. Many crypto enthusiasts have different opinions. Some think you get some type of Internet trophy. Others think you get the feeling of having something unique, a collectible item. Each person has their own opinion. In reality, when you buy an NFT, you get proof that the particular version of a digital file belongs exclusively to you. This can be seen as a certificate of authenticity. You may be buying art, but a different format of art.
It is important to notice that by buying an NFT, you won’t necessarily own the copyright of the item. Also, it doesn’t mean that other versions of that item are inexistent. But that’s not where the value of an NFT resides. Anyone can indeed download an image from the net and keep it on their hard disk. But like with any other pieces of art and collectibles, owning the original makes a difference. You can buy a picture of the Mona Lisa, for example. But owning the original is something quite special. Even though there may not be much visual difference between the original and a copy.
How Can You Buy an NFT?
Now that it is clear why NFTs can be so valuable, you may be interested in purchasing one. Well, the first thing to do is buy a cryptocurrency. The most common cryptocurrency is Bitcoin, but you can also buy Ethereum or any other. However, these two are the most widely accepted cryptocurrencies for payment.
Once you have some cryptocurrency in your digital wallet, you can go to an NFT marketplace. Rarible and OpenSea are two of the best-known NFT marketplaces. But there are others. On the marketplace, you can bid on an NFT of your liking. When the auction ends, if your bid was the highest, you’ll get the ownership rights.
What’s the Future of NFTs?
Blockchain technology has allowed for the development of digital assets. Cryptocurrencies, which use blockchain to verify transactions, are changing the way we exchange value. But cryptocurrencies are fungible. Blockchain technology has also allowed for the creation of NFTs. Will they continue their development in the future? It is difficult to say. Right now, NFTs are quite popular among young technology enthusiasts. Whether this generation will keep the enthusiasm in the future is uncertain. As with some examples in history (the Tulip mania, the dotcom bubble, etc.), the frenzy made fade away.
Thus, you should be cautious if you decide to buy NFTs. If the enthusiasm vanishes suddenly, you may end up with heavy losses. However, enthusiasts argue that scarcity will keep the value of NFTs in the future.
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