What is an NFT and Can I Get Rich Using Them
Fungible vs. Non-Fungible NFTs
What is all this fungible and non-fungible stuff and why do I care?
Understanding NFTs is no different than understanding the difference between a $ – Dollar and a work of ART
Let me explain:
Non-digital assets are a physical object that represents or holds some value. In some cases, the physical object represents an agreed unit of value, most notably the dollar. For example, every dollar bill is equal based on a governed value which in turn allows it to flow from user to user in exchange for goods or services.
Yet other types of objects do not have a defined unit of value. For these types of objects value is determined by demand. For example, two Babe Ruth baseball cards can have two different values even though they are the same card. As a result, these types of objects do not flow freely from user to user. For these objects, a secondary market is required to exchange them or create value.
If you understand the difference between the dollar and something like a baseball card, you now know the difference between fungible and non-fungible tokens.
In the digital world, you don’t have a physical object. The object is simply data where some value has been created or defined.
Fungible tokens are simply items that have an agreed unit of value (a currency). Non-fungible tokens are simply unique pieces of digital goods that do not have a fixed unit of value. The price of a Non-fungible token is determined by the market demand for that object.
Why is this important to understand? Simply put, Non-Fungible tokens are only as valuable as the market sees them. Furthermore, the same Non-Fungible token can have different values. No different than your baseball card collection.
What does an NFT Represent
Ok, so I understand the technical differences between Fungible and Non-Fungible, but what does an NFT represent. More importantly, why would I buy one?
To answer this question we can draw parallels to the physical world. For a physical object, the “original” creation is defined by some set of characteristics that proves authenticity. Similarly, an NFT is nothing more than a stamp of authenticity of a unique piece of digital code.
NFT = Authenticity of unique code
Often people will say something like an Art Painting gives you a physical object to touch, feel, or present whereas an NFT is a digital picture that you could just have easily got by screen capture or an image download. Well that is half true.
Copies exist in both the digital and physical world. For example, go to any poster or art reproduction site and you can get a reproduced painting from most famous art works. The original, however, is the only one that has a demand driven value.
Sure, all the subtle differences can not be exactly reproduced for paintings like the Mona Lisa, but if someone did take the time to make an exact replication down to every detail including the frame, material, type of paint, etc. The original would still be priceless while the reproduction would be just expensive.
Point is, people place value on knowing something comes directly from the original creator. In the case of NFTs, the original creator is always known.
No matter how many copies or digital reproductions from other people there is only some finite number that is attached to the original creator through the block chain.
NFT = Record of origin
NFTs allow for authenticity and origin, how does that create NFT value?
Once you can create a way to authenticate and define the origin of something, it by default creates value.
The great thing about NFTs is that they have allowed many individuals and artists to create value from their digital creation.
Before NFTs, this was not really possible. The most you could ever expect from your digital creation is from the first price you sold it for or from recurring fees by selling it on a platforms like Shutterstock. Often, digital creations were more of a stepping stone to getting jobs or commissions.
A New Market For Digital Art Creators
With NFTs, the creator has the ability to distribute limited edition work and earn commissions every time it is sold. NFTs assign originality and scarcity to the digital work. This in turn creates value which can fall and rise just like normal art.
How Does an NFT Preserve Originality
How does an NFT prove Originality and what about duplicate digital works?
Since value is being created by scarcity, it is important that the owner of that work can prove they have an original. Unlike in the physical world where it can often be hard to prove originals and determine quality, the digital world is extremely simple.
What makes an NFT is the process of minting the work on a non-centralized block chain. A block chain is basically a public record of a transaction. While the complete process and why it works is a bit complicated, the basic concept is that each original piece is assigned to an address in the public record. When you buy the digital work, the public record updates you as the owner of the attached work and along with all its properties.
Here is a site that lets you search public block chain records.
Once you have that ownership, you can trade or sell it in a marketplace. What you are buying and selling is the digital work, but more importantly it is the public record of originality that you are using to create value.
This image is an example of an NFT being bought and sold.
Can you get rich with NFTs
So how do I get rich with NFTs?
Well, in all honesty, most people will not get rich. As the market is flooded with new NFTs, the ones that stand out and hold value will become harder and harder to find. Even if you do find the right NFTs, often you will not be the only buyer and the cost to purchase will be very high.
Don’t be discouraged, there are still opportunities to find the next million dollar NFT. Here are some tips on getting better results for your search.
Finding that next high value NFT is comprised of Luck + Opportunity + Research. For example, a small group of people participated in the launch of the NBA Top Shop. If you were lucky enough to participate, you might have received NFT cards that are now worth tens of thousands of dollars.
If you got in early on Crypto Punks, you may have some that are now worth over $100K.
The ones that got in on these opportunities had a lot of luck, figured out how to open the opportunity, and did the research to believe the opportunity might succeed.
This is no different than many investment opportunities today. Choose the right penny stock and you might make 1,000%, Speculate in the right housing market and you might easily double your money, buy the right crypto currency and make 100 times your money, pick the right NFT and you might hit the lottery.
You might think there is no way to improve you luck. This might be true for something like a random $100 bill falling into your hand, but for controlled events we can strategically do things to increase our chances luck will strike.
For example, you have to be lucky to win the lottery. However, if you don’t enter you won’t ever win. Purchasing that ticket opens up that opportunity (although in this case a very low opportunity).
How does this work in the NFT world?
Participating in drops, interacting with experts, joining early releases, or understanding how something is controlled are all ways to help your chances.
Ideally, you want to maximize your chances that when some “lucky” event happens, you are directly in front of its path.
Opportunity and Research
Opportunity and Research go hand in hand. Research is needed to understand what you are investing in. With the proper research, opportunities will be found.
When researching, there are some common traits to help you narrow your search:
The more people know about someone or something the more potential value will be created.
There are really two sides of popularity in the high value NFT market.
If you can find the opportunities to either get low edition works from well known people or get in early on developing trends, you increase the chances your NFT will hold or increase in value.
Youtube tells you all you need to know
Some of the most expensive collections follow some of the most searched videos on youtube. Odds are, if you can make a following from youtube about cute cats, then you can create a following for a NFT collection of cats. Look for trends.
Roadmaps and hype matter (sometimes)
What is the creator going to do with future collections? Do the owners of current edition get any benefits? How many releases are they going to do? What is rare, what is common? And many other questions.
Understanding what the roadmap can give you an idea of what to expect in the future.
Plain old luck
Sometimes being at the right place and the right time is what it takes. Look for the opportunities that increase you luck. Limited drops, rewards, etc.
With the right research and opportunity, there are still great NFT values out there that may reward in the future. As the market increases It is becoming increasingly more difficult to find those rare opportunities, so remember to buy the things you believe in, ask the right questions, and most importantly, never buy more than you can afford to lose.