What are NFTs, and how to invest in them?

Think of it this way: anyone can buy a Monet print, but only one person can own the original. And that makes it valuable. It’s the same with all things digital.
The artist known as Beeple made $69m at Christie’s when he sold a piece of digital art as an NFT. Image: Supplied

Non-fungible tokens (NFTs) are the latest craze in the crypto and digital asset world. There’s nothing like an explosion of digital artwork on the blockchain news to leave you thinking: “Um … what’s going on here?”

So let’s start with the basics.

NFT stands for ‘non-fungible token’. The name is the most intimidating and confusing thing about NFTs, and so a little explanation is needed.

‘Fungibility’ is a simple concept that basically refers to items that you use every day. You can think of these items as being physical money or even bitcoin. For example, since bitcoin is fungible (or identical to) you can trade one for another bitcoin, and you’ll have exactly the same thing.

‘Non-fungible’ (the opposite of fungible) means that it’s unique and can’t be replaced with something else. A one-of-a-kind trading card is non-fungible, as is the Mona Lisa painting. If you traded either the card or the painting you’d receive something completely different in return.

Though there are some convincing copies out there, there is only one original Mona Lisa painting by Leonardo da Vinci.

Now, NFTs are ‘one of a kind’ assets in the digital world that can be bought and sold like any other piece of property, but they have no tangible form of their own.

The digital tokens can be thought of as certificates of ownership for virtual or physical assets.

Twitter founder Jack Dorsey recently sold his first tweet for $2.9 million.

Why anyone would pay that amount of money for a tweet anyone can look at for free inevitably invites ridicule, but it happened and Dorsey plans to convert the proceeds to bitcoin and donate it to the Give Directly to Africa Fund.

Non-fungible tokens like Jack Dorsey’s first tweet are now being applied to digital art, music, GIFs and virtually anything you can see on the internet.

How do NFTs work?

Traditional works of art such as paintings are valuable because they are one of a kind. But digital files can be easily and endlessly duplicated.

With NFTs, artwork can be ‘tokenised’ to create a digital certificate of ownership that can be bought and sold.

As with cryptocurrency, a record of who owns what is stored on a shared ledger known as the blockchain. The records cannot be forged because the ledger is maintained by thousands of computers around the world.

NFTs can also contain smart contracts that may give the artist, for example, a cut of any future sale of the token.

At a very high level, most NFTs are part of the Ethereum blockchain. Ethereum has a native cryptocurrency token called ether (ETH) which powers the Ethereum blockchain network which also supports these NFTs. This is a differentiating feature to the likes of bitcoin or Litecoin which offer blockchains that are nearly solely used for transferring value. It is worth noting that other blockchains that are similar to Ethereum and have smart contract functionality – like Cardano, Polkadot, EOS and Tron – can implement their own versions of NFTs.

What’s going on in the real world?

NBA Top Shots is an NFT success story and emerged from a licensing agreement the NBA and its players’ union made with Dapper Labs in 2019.

Top Shots produces short highlight reels of NBA players (such as LeBron James and Steph Curry) and turns them into digital assets (NFTs) that collectors can buy and sell.

These digital assets are sold in ‘packs’ (similar to baseball trading card packs), where one pack contains a certain number of ‘moments’ (digital highlights), and ranges in price from $9 to $99.

There are various classes of packs – with more expensive packs containing highlights from more popular players, or moments more memorable (a playoff highlight, for example). Each pack is verifiably limited since its ownership is recorded on the blockchain, which results in a demand for the limited supply of these digital assets. Since the first pack ‘dropped’ in 2020 each pack has sold out. In fact, according to CNBC, the Top Shot product has generated over $230 million in gross sales, an astounding figure given the product that is being sold.

What makes NFTs valuable?

You can copy a digital file as many times as you want, including the art that’s included with an NFT.

But NFTs are designed to give you something that can’t be copied: ownership of the work (though the artist can still retain the copyright and reproduction rights, just like with physical artwork).

To put it in terms of physical art collecting: anyone can buy a Monet print. But only one person can own the original.

Mark Winkelman, the artist known as Beeple, made $69 million at Christie’s when he sold a piece of digital art as an NFT. This makes him among the top three most valuable living artists, according to the auction house.

Beeple’s collage

So what makes NFTs so exciting?

NFTs have the potential to provide ownership for users that will authenticate their ownership rights.

This would allow digital assets to be transferred globally far more easily than any set of collectibles that have come before.

Another point is that NFTs provide authenticity, giving buyers confidence when they buy their assets.

The use cases for NFTs are only just beginning to be explored. For example, someone may choose to purchase online news articles as NFTs, and while this may seem like a gross indulgence of the super-rich, there are more practical uses that are on their way.

Until now, the crypto market has been laser focused on fungible digital assets like bitcoin and Ethereum.

NFTs have changed that by providing a marketplace for assets such as digital art, game items, concert tickets, real estate, and more.

These new tokens allow digital artists to monetise their work by providing proof of ownership, regardless of how many people download and use the images.

How to invest in NFTs?

The problem with NFTs is that they are not like publicly traded liquid tokens that you can just buy and sell. NFTs are extremely diverse, have different value drivers, and are thinly traded. Someone who is new to the market can’t simply jump in and start buying stuff.

“Investing in NFTs is like investing in small businesses or playing the lottery – the chances of success are low but the payout is high if a winner is picked,” says Sean Sanders, CEO and founder of crypto platform Revix, which is backed by JSE-listed Sabvest.

Investing in the blockchain infrastructure that supports the NFT industry (selling the spades in a goldrush approach) seems like a more sensible approach.

A direct way to get exposure to the underlying decentralised blockchain technology is to invest in Ethereum or the Smart Contract Bundle; both are available on Revix’s digital platform.

Revix customers can get started investing with as little as R500. The fintech charges no sign-up, monthly account, or subscription fees, but rather a simple 1% transaction fee for both buys and sells.

Ethereum

Source: Revix

Most NFTs are created and recorded on the Ethereum blockchain, which provides a detailed record of the NFT’s chain of ownership and custody. Blockchains like Ethereum are essentially massive spreadsheets that have proven tamper-resistant and hack-proof.

As NFTs are bought and sold in this fast-evolving marketplace, the prices of rare collectibles will likely increase, and the blockchain will keep an accurate record of the transaction trail.

“There’s been a lot of discussion around decentralised finance, or DeFi, and how this is changing the world of finance by making it possible for people to invest, lend, borrow and earn interest outside of the banking system,” says Sanders. “The recent emergence of NFTs is another instance of these new technologies being applied in creative ways to provide a new marketplace for artists, real estate owners and owners of collectibles, to name a few.”

It may be difficult for most people to understand how a tweet from Jack Dorsey can sell for millions of dollars, and few people would be in the market for this kind of thing. What is more certain is that this new emerging market relies on blockchain technology, Ethereum in particular, but other cryptocurrencies will likely benefit from this new technology, such as Cardano and Polkadot.

Source: Revix

In much the same way that Android and iOS operating systems work with mobile applications, smart contract cryptocurrencies enable developers to deploy NFTs and build applications on top of the blockchain. These applications allow users to trade goods, cryptos, to lend, borrow and perform innumerable financial transactions – all without an intermediary, such as a stock exchange or a bank.

The jury is still out as to who will win the race to dominate the DeFi space, though Ethereum currently has a solid head start. Nipping at Ethereum’s heels are Cardano and Polkadot, which also accommodate smart contracts.

The Revix Smart Contract Bundle comprises five cryptocurrencies: Ethereum, Cardano, NEM, EOS and Polkadot.

Revix spreads your investment equally over these five cryptocurrencies, and its algorithms automatically rebalance the portfolio each month to ensure each cryptocurrency achieves a 20% weighting in the portfolio.

The Revix Smart Contract Bundle has appreciated by an astonishing 200% since January 1 this year.

Sanders concludes: “Whether this is a fad or a long-term trend remains to be seen – but those who are willing to learn, engage, and become early adopters may be able to take advantage of some massive gains over the months and years ahead.”

Other ways to intelligently invest in cryptocurrencies

Revix offers another two crypto bundles focused on specific investment themes.

Source: Revix

Revix’s Payment Bundle provides exposure to the largest five payment-focused cryptocurrencies looking to compete with government-issued fiat currencies to make digital payments cheaper, faster and more global. These cryptos include Bitcoin (BTC), Ripple (XRP), Litecoin (LTC), Bitcoin Cash (BCH) and Stellar (XLM).

A third bundle offered by Revix is the Top 10 Bundle, which spreads your investment over the top 10 largest cryptocurrencies as measured by market cap. As with all other bundles, the portfolio is rebalanced each month to make sure that each crypto is given a weighting of exactly 10%.

You can also buy and sell USDC (a ‘stablecoin’ fully-backed by the US dollar) and a physical gold-backed token called PAX gold, which provides legal ownership of an ounce of gold through Revix’s online platform.

Brought to you by Revix.

For more information, visit Revix.

This article is intended for informational purposes only. The views expressed are not and should not be construed as investment advice or recommendations. This article is not an offer, nor the solicitation of an offer, to buy or sell any of the assets or securities mentioned herein. You should not invest more than you can afford to lose, and before investing please take into consideration your level of experience and investment objectives, and seek independent financial advice if necessary.

AUTHOR PROFILE

COMMENTS   1

You must be signed in to comment.

SIGN IN SIGN UP

End of comments.

LATEST CURRENCIES  

USD / ZAR
GBP / ZAR
EUR / ZAR
INSIDER SUBSCRIPTIONS APP VIDEOS RADIO / LISTEN LIVE SHOP OFFERS WEBINARS NEWSLETTERS TRENDING PORTFOLIO TOOL CPD HUB

Follow us:

Search Articles: Advanced Search
Click a Company: