From mainstream media coverage to a parody skit on Saturday Night Live, non-fungible tokens (NFTs) are starting to become a household name. But the concept can be confusing and leave investors wondering whether this is a fad, a hobby, or a bona fide investment. While you may be able to address this question with a trusted financial professional, below we’re offering a quick introduction to NFTs and the potential risks and rewards involved with owning them.

What Are NFTs?

NFTs are digital files attached to blockchain codes. If you know anything about digital currencies, you’re probably aware that these blockchain codes are what identifies a digital “coin” and make it tradeable to those who accept that sort of payment. 

In this case, the code identifies the digital file as a unique item. This may be any sort of digital file from an image or a cartoon to a music or video file.

Fungible vs. Non-Fungible

If you trade one digital currency “coin” with another, they have the same value (despite having different blockchain codes). The same goes for regular currency. A dollar bill is worth the same as another dollar bill. That’s “fungible”.

A “non-fungible” item would be a unique or rare item, which may have a different value. The difference would be akin to an original Picasso and a painting you bought at a thrift store; one is worth more than the other, and they both have values, but one painting does not have the same monetary value as the other painting where the art market is concerned. That’s a “non-fungible” value.

What If I Just Copy an Image an NFT Is Based On?

Since digital items can be easily copied, doesn’t that affect the value of the NFT? Again, consider the difference in value between an original Picasso painting and a reprint or replica. In real-world terms, it’s the blockchain code itself that offers the NFT its scarcity. While an original Picasso painting and a reprint may look the same, we know that one is worth far more than the other.

Where Are NFTs Created?

The NFT is often created at one of a handful of marketplaces that trade in these items. Many artists, from painters and musicians to comic book illustrators, have used these marketplaces to supplement their income.

For instance, Star Trek actor William Shatner made a series of trading card-style NFTs, including one of his dental x-rays. Depending on the marketplace, these artists can benefit from not only the initial sale but, unlike many other creative works, they can earn residuals from the NFT’s resale down the line.

What Are the Financial Risks Involved in NFTs?

Like all collectibles, there is a risk. While the blockchain code might assure you that you are buying an “original” NFT, there’s nothing to indicate that the token in question will gain or maintain any value. There’s also a possibility that this phase could pass, causing today’s NFTs to have a disappointing value, if any, in the future.

There are also many important legal, even philosophical, questions as yet unanswered by the NFT market, things that may be addressed over time.

Like any collectible, non-fungible item, there is a risk of using NFTs as an investment tool. While it’s a fascinating topic, there’s no way to know if these latest blockchain-coded offerings will have any staying power. Despite a slowly growing acceptance of digital currencies, it’s important to remember that they, too, are not considered mainstream yet.

NFTs are relatively new items and the marketplace is always evolving. NFTs may be adversely affected by a number of factors, including liquidity and regulatory developments. While NFTs could be fun to read about or even collect, it’s recommended that you speak to your financial professional before pursuing them as any type of investment opportunity.

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