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Don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investment and you should not expect to be protected if something goes wrong.
Take 2 mins to learn more
Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be high risk.
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For further information about cryptoassets, visit the FCA’s website here
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Collins Dictionary has announced that its Word of the Year 2021 is NFT, leading many to wonder what NFTs actually are. Here’s what there is to know about the new phenomenon.
An NFT – non-fungible token – is a digital asset that represents a real-world object like, for example, the Charlie Bit My Finger video that sold for £500,000 back in May. NFTs are bought and sold online, frequently with cryptocurrency, and are generally encoded with the same underlying software as many cryptocurrencies.
Although they’ve been around since 2014, NFTs are gaining notoriety now because they are becoming an increasingly popular way to buy and sell digital artwork. A staggering £123 million has been spent on NFTs since November 2017.
NFTs are also generally one of a kind, or at least one of a very limited run, and have unique identifying codes. “Essentially, NFTs create digital scarcity,” says Arry Yu, chair of the Washington Technology Industry Association Cascadia Blockchain Council and managing director of Yellow Umbrella Ventures.
This stands in stark contrast to most digital creations, which are almost always infinite in supply. Hypothetically, cutting off the supply should raise the value of a given asset, assuming it’s in demand.
But many NFTs, at least in these early days, have been digital creations that already exist in some form elsewhere – like the viral Charlie Bit My Finger clip, or securitised versions of digital art that’s already floating around on Instagram.
For instance, famous digital artist Mike Winklemann, better known as “Beeple” crafted a composite of 5,000 daily drawings to create perhaps the most famous NFT of the moment, “EVERYDAYS: The First 5000 Days,” which sold at Christie’s for a nearly £50 million.
Anyone can view the individual images—or even the entire collage of images online for free. So why are some people willing to spend millions on something they could easily screenshot or download?
Because an NFT allows the buyer to own the original item. Not only that, it contains built-in authentication, which serves as proof of ownership. Collectors value those “digital bragging rights” almost more than the item itself.
Your capital is at risk. Don’t invest unless you’re prepared to lose all the money you invest. This is a high‑risk investment and you should not expect to be protected if something goes wrong. Take 2 mins to learn more
Your capital is at risk. Don’t invest unless you’re prepared to lose all the money you invest. This is a high‑risk investment and you should not expect to be protected if something goes wrong. Take 2 mins to learn moreCopy Trading does not amount to investment advice.
NFT stands for non-fungible token. It’s generally built using the same kind of programming as cryptocurrency, like Bitcoin or Ethereum, but that’s where the similarity ends.
Physical money and cryptocurrencies are “fungible,” meaning they can be traded or exchanged for one another. They’re also equal in value — one pound is always worth another pound; one Bitcoin is always equal to another Bitcoin. Crypto’s fungibility makes it a trusted means of conducting transactions on the blockchain.
NFTs are different. Each has a digital signature that makes it impossible for NFTs to be exchanged for or equal to one another (hence, non-fungible). Charlie Bit My Finger, for example, is not equal to EVERYDAYS simply because they’re both NFTs.
NFTs exist on a blockchain, which is a distributed public ledger that records transactions. Investors may be most familiar with blockchain as the underlying process that makes cryptocurrencies possible.
Specifically, NFTs are typically held on the Ethereum blockchain, although other blockchains support them as well.
An NFT is created, or “minted” from digital objects that represent both tangible and intangible items, including:
Even tweets count. Twitter co-founder Jack Dorsey sold his first ever tweet as an NFT for more than £2 million.
Essentially, NFTs are like physical collector’s items, only digital. So instead of getting an actual oil painting to hang on the wall, the buyer gets a digital file instead.
They also get exclusive ownership rights. NFTs can have only one owner at a time. NFTs’ unique data makes it easy to verify their ownership and transfer tokens between owners. The owner or creator can also store specific information inside them. For instance, artists can sign their artwork by including their signature in an NFT’s metadata.
Blockchain technology and NFTs give artists and content creators a unique opportunity to monetise their work. For example, artists no longer have to rely on galleries or auction houses to sell their art. Instead, the artist can sell it directly to the consumer as an NFT, which also lets them keep more of the profits.
In addition, artists can program in royalties so they’ll receive a percentage of sales whenever their art is sold to a new owner. This is an attractive feature as artists generally do not receive future proceeds after their art is first sold.
Art isn’t the only way to make money with NFTs. Toilet paper manufacturer Charmin auctioned off themed NFT art to raise funds for charity. Charmin dubbed its offering “NFTP” (non-fungible toilet paper).
Nyan Cat, a 2011-era GIF of a cat with a pop-tart body, sold for nearly £424,000 in February.
Even celebrities like Snoop Dogg and Lindsay Lohan are jumping on the NFT bandwagon, releasing unique memories, artwork and moments as securitised NFTs.
If you’re keen to start your own NFT collection, you’ll need to acquire some key items:
First, you’ll need to get a digital wallet that allows you to store NFTs and cryptocurrencies. You’ll likely need to purchase some cryptocurrency, like Ether, depending on what currencies your NFT provider accepts. You can buy crypto using a credit card on some platforms. You’ll then be able to move it from the exchange to your wallet of choice.
You’ll want to keep fees in mind as you research options. Most exchanges charge at least a percentage of your transaction when you buy cryptocurrency.
Once you’ve got your wallet set up and funded, there’s no shortage of NFT sites to shop.
Foundation is one notable example of a large NFT marketplace. Here, artists must receive “upvotes” or an invitation from fellow creators to post their art. The community’s exclusivity and cost of entry (artists must also purchase “gas” to mint NFTs) means it may boast higher-calibre artwork.
It may also mean higher prices — not necessarily a bad thing for artists and collectors seeking to capitalise, assuming the demand for NFTs remains at current levels, or even increases over time.
Although these platforms and others are host to thousands of NFT creators and collectors, be sure you do your research carefully before buying. Some artists have fallen victim to impersonators who have listed and sold their work without their permission.
In addition, the verification processes for creators and NFT listings aren’t consistent across platforms — some are more stringent than others. So when shopping for NFTs, it may be best to keep the old adage “caveat emptor” (let the buyer beware) in mind.
Just because you can buy NFTs, does that mean you should? It depends, Yu says.
“NFTs are risky because their future is uncertain, and we don’t yet have a lot of history to judge their performance,” she notes. “Since NFTs are so new, it may be worth investing small amounts to try it out for now.”
In other words, investing in NFTs is a largely personal decision. If you have money to spare, it may be worth considering, especially if a piece holds meaning for you.
But keep in mind, an NFT’s value is based entirely on what someone else is willing to pay for it. Therefore, demand will drive the price rather than fundamental, technical or economic indicators, which typically influence stock prices and at least generally form the basis for investor demand.
All this means, an NFT may resale for less than you paid for it. Or you may not be able to resell it at all if no one wants it. Do your research, understand the risks—including that you might lose all of your investment—and if you decide to take the plunge, proceed with a healthy dose of caution.
Cryptocurrency is unregulated in the UK. The UK regulator, the Financial Conduct Authority, has repeatedly warned investors that they risk losing all their money if they buy cryptocurrency, with no possibility of compensation.
Your capital is at risk. Don’t invest unless you’re prepared to lose all the money you invest. This is a high‑risk investment and you should not expect to be protected if something goes wrong. Take 2 mins to learn more
Your capital is at risk. Don’t invest unless you’re prepared to lose all the money you invest. This is a high‑risk investment and you should not expect to be protected if something goes wrong. Take 2 mins to learn moreCopy Trading does not amount to investment advice.
Financial Promotion approved for the purposes of section 21 of the Financial Services and Market Act 2000 by Richdale Brokers & Financial Services Ltd (FRN 769876). Date of approval: 13/05/2022
Robyn Conti is a freelance financial writer based in Los Angeles, CA. She has been writing about workplace retirement plans, investing, and personal finance for the past 20+ years. When she isn’t feverishly working to meet a deadline, Robyn enjoys hanging out with her kids, drinking coffee, reading, and hiking.