It can be challenging to comprehend the financial world, especially when you take into account the wide range of asset classes, fund structures, and tax-advantaged vehicles available on the market. The complexity increases exponentially when previously unimaginable circumstances, such as a global epidemic and negative interest rates, are taken into account.
It goes further than that. Technologies that are becoming more widely used, such as Robo-advisors, peer-to-peer lending platforms, mobile payment apps, and blockchain-based databases, are altering the way we do business, manage finances, and make investments.
This article discusses databases that use blockchain technology. We are particularly interested in non-fungible tokens. You’re likely scratching your head right now. What really is a non-fungible token, exactly?
Comparing Fungible and Non-Fungible assets
Starting with the word “fungible,” shall we? A fungible asset is one that can easily be traded for another item of the same kind and value. A US $1 bill is fungible as an example. You can exchange one for another and get the exact same value. With a cryptocurrency like Bitcoin, you can accomplish the same. The value of one Bitcoin is the same as the value of another.
On the other hand, a non-fungible asset is unique. It is one-of-a-kind, unchallengeable, and irreplaceable. Diamonds and unique pieces of art are two examples. These items are all special in their own way and cannot be accurately duplicated. As an illustration, each diamond has a unique cut, colour, size, and grade. No two diamonds are exactly alike, just like a person’s fingerprint.
You could counter that no asset is actually fungible at this point. After all, a few distinct dollar bills are bound to have physical flaws that may be seen, such as frayed corners, ink stains, or different series dates. This is accurate, and it emphasizes how crucial it is to consider an asset’s utility value rather than its technical attributes when determining whether it is fungible or not.
Non-Fungible Tokens: What Are They?
This brings us to this article’s focus: non-fungible tokens (NFTs). NFTs are digital representations of assets produced and stored using blockchain technology. Each NFT is uniquely identified by a code, allowing for both differentiation from other NFTs and replication prevention. Each NFT can be coupled with another NFT to create a third, entirely different NFT because each NFT is extensible.
Sports collectibles and digital art are major drivers of growth in the market, but any static image, video clip, sound, or text can be digitalized and potentially made money from.
For anything that can be converted into a digital format, NFTs can be made. Sports collectibles and digital art are major drivers of growth in the market, but any static image, video clip, sound, or text can be digitalized and potentially made money from. In fact, Twitter’s creator Jack Dorsey recently uploaded a copy of his very first tweet. One of Dorsey’s simple “just setting up my twttr” messages sold for close to $3 million.
Although the tweet example may seem unimportant, NFTs have important commercial ramifications. They have been utilized to simplify intricate real estate and private equity deals, and they are revolutionizing how buyers and sellers engage across different segments of the art market. We address these concepts in more detail below, as well as the pros and cons of NFTs.
Non-Fungible Tokens: Pros
1. NFTs Improve Market Efficiency
NFTs have the ability to increase market efficiency, which is their most evident advantage. The transformation of a physical asset into a digital one can improve security, streamline operations, get rid of intermediaries, and streamline supply chains.
In some areas of the art world, a prime example is currently developing. The use of expensive agents and time-consuming transactions is no longer necessary because of NFTs, which enable artists to interact directly with their audiences. Additionally, digitizing artwork is improving authentication procedures, expediting transactions, and lowering expenses.
NFTs have uses outside of markets though. They might eventually develop into a useful method for managing and keeping records of sensitive information for both individuals and companies.
Think about the fact that we still have traditional passports that must be presented at each entry and exit point. We might substantially simplify the process of organizing travel and identifying people by making them into unique NFTs. The time and financial savings might add up to a lot.
2. They May Be Used to Fractionalize Physical Asset Ownership
Today, it is challenging to fractionally own some things, such as real estate, expensive art, and jewellery. A structure can be divided up between numerous owners far more easily in a digital form than in a physical one. The same is true for an expensive piece of jewellery or a special bottle of wine.
Digitalization can significantly increase the market for some assets, which will increase their liquidity and drive up their prices
Digitalization can significantly increase the market for some assets, which will increase their liquidity and drive up their prices. It can improve the way financial portfolios are built for each individual, enabling more diversity and more accurate position sizing.
3. NFTs Have Very Safe Blockchain Technology
NFTs are built with blockchain technology, which is a mechanism for storing data in a way that is impossible to hack, alter, or destroy. A blockchain is essentially a digital ledger of transactions that is replicated and dispersed over an entire peer-to-peer network of users.
It is theoretically impossible for any NFTs stored on the blockchain to be mishandled or stolen because each one has a unique chain of ownership and record of authenticity. Once information is included in the chain, it cannot be removed or changed. Since each NFT’s rarity and authenticity are maintained in this way, it fosters a degree of confidence we’re not used to seeing in many markets.
4. A Portfolio of Investments can Benefit from Diversification with NFTs.
Traditional investments like stocks and bonds are not the same as NFTs. They have unique characteristics and provide advantages that we are just now starting to understand and recognize, as was already said. Owning a business, however, carries certain risks.
In the part that follows, we’ll discuss the hazards. Just be aware for the time being that the risk profile of NFTs differs from other asset classes. NFTs could thereby increase the effectiveness of a portfolio of investments. In plain English, this implies striking a better balance between risk and return.
Non-Fungible Tokens: Cons
1. The Volatility and Illiquidity of NFTs
The NFT market is not highly liquid due to its still-emerging status. NFTs are poorly understood, and there aren’t many buyers or sellers who could be interested in them. This means that trading NFTs can be extremely challenging, particularly when things are bad. It also implies that NFT prices could be quite unstable.
2. NFTs Don’t Produce Income
NFTs do not offer their owners any potential income, in contrast to dividend-paying equities, interest-bearing bonds, and rental-generating real estate. The gains connected with NFT investments, like those of antiques and other collectibles, are entirely dependent on price growth, which is not something you should anticipate.
The gains connected with NFT investments, like those of antiques and other collectibles, are entirely dependent on price growth, which is not something you should anticipate.
3. NFTs Could Be Used To Pursue Fraud
While a blockchain’s integrity cannot be questioned, NFTs can be utilized to continue the fraud. In reality, a number of artists have recently claimed that they were unaware that their work was being sold as NFTs on online marketplaces.
This clearly goes against the goal of using NFTs to facilitate the selling of art. The significance of an NFT is that it provides a unique token for the purpose of authenticating a physical work of art, guaranteeing to the owner of the token that they also own the original piece of artwork.
A significant issue occurs if someone converts the original work into an electronic image, adds a token to it, and offers it for sale on an online marketplace. No reference to the original work is included in this. The token is connected to a false replica.
4. Environmental Damage from NFTs
Blockchain records need a substantial amount of computational power to produce, and there is rising discussion over the long-term environmental damage the process may be creating. According to some estimations, if things continue as they are, in the upcoming years, carbon emissions from mining cryptocurrencies and NFTs would surpass those related to the entire city of London. Because NFTs are transforming global markets and lowering the need for travel and office space use, blockchain proponents claim that there is already a compensating decrease in pollution.
5. The Potential for NFT Investment
The number of applications for NFTs is growing, and they are a fascinating new invention. The fire is being fueled by certain NFTs’ eye-catching price tags. NFTs are extremely illiquid and volatile, so cautious investors should proceed with extreme caution when considering purchasing these assets.
The true significance of NFTs rests in their ability to change how markets operate and improve how we manage and regulate private information.
It’s not recommended to purchase them in the anticipation of receiving triple- or quadruple-digit price returns. The true significance of NFTs rests in their ability to change how markets operate and improve how we manage and regulate private information. The potential here is endless.
However, go ahead if you want to join the blockchain movement and believe that owning NFTs is the best method to do it. However, kindly act responsibly. Try to build low-cost positions and don’t invest a lot of money in NFTs. Otherwise, you can end up in a difficult situation that is both financially and emotionally taxing.