The mistake everyone makes about NFTs

Excitement about NFTs is reaching a fever pitch, despite the contradictions. 

Non-fungible tokens (NFTs) have taken the world by storm in 2021, but many investors are struggling to wrap their heads around the most important detail.

Even if NFTs are traded via the blockchain, they aren’t stored on it.

A collision of high finance and high-tech, NFTs leverage the unique properties of the blockchain to bring scarcity to the world of digital art. A work that has been “minted” on the blockchain is one of a kind, even if it can’t exist beyond the limits of its respective decentralised network.

Regardless of whether you’re looking to condemn or collect them, it’s important to understand the specific nature of the relationship between NFTs, the blockchain and the degree to which either is decentralised.

When you buy or mint an NFT on the ethereum or Solana blockchain, the token that you’re buying is closer to a hyperlink than a standalone asset or file.

If we’re talking about crypto-art or an NFT attached to a piece of music, you’re buying the rights to own a one-of-a-kind token that points to an asset and says that you are the owner. To varying extents, you’re buying a certificate that says you own a thing rather than the thing itself.

Even if the NFT is stored and secured via a decentralised network, the actual asset itself is likely not. This means that if the company you bought the NFT through eventually collapses or stops paying its hosting fees for whatever reason, you’re essentially buying a dead link.

If that worst-case scenario happens, you better hope you backed up a copy or two.

Regardless of this internal contradiction, NFTs have continued to grow in popularity over the last 12 months.

According to Kraken Intelligence’s most recent market outlook report, NFTs had returns of 42 per cent in November 2021.

Kraken Intelligence manager Pete Humiston said that NFTs have gone from strength to strength in recent months as more mainstream investors and consumers grapple with the potential of the technology.

“The idea that NFTs could underpin such things like virtual real estate in a decentralized Metaverse has really captured investor’s imagination and may help explain the subsector’s consistent outperformance since the start of September,” he said.

Pointing to Mastercard’s recent acquisition of a CryptoPunk NFT, deVere chief executive Nigel Green predicted that 2022 would be a “massive year” for NFTs.

“With soaring interest from major investors like payments giant Visa, who understand and value that the future of almost everything is geared towards digital, demand is set to explode,” he predicted.

Article courtesy of Nestegg

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Zac Zacharia (Managing Director) has been assisting clients to create wealth and secure their futures for over 14 years.

He is also an accomplished presenter and educator

Co-authoring the popular investment book, Property vs Shares.