Consumer Handbook: Should You Be Investing In NFTs?

Apr 28, 2021

What is an NFT, and should you be investing in this digital purchasing craze? People want to own something that’s completely unique, and the ability to purchase ownership of online assets opens up a whole new world of possibilities, but it also creates risks.

First, NFT stands for “non-fungible token.” If you’re like most people, that doesn’t help much. Think of it as a digital certificate of authenticity. To better understand what non-fungible means, it helps to first define fungibility, which is the ability to replace an item with one just like it. Basically, something fungible is interchangeable. For example, when you end up with four quarters, you might not want to carry them around because they are heavy and they jingle, so you might trade them in for a one dollar bill. You have the same amount of money even though you traded metal for paper, four objects for one. Other examples of fungible items might be frequent flyer miles, bitcoin or casino chips. Each can be exchanged for another item of the same value.

With digital assets, it’s possible to track ownership through blockchain technology. This digital string of numbers and letters identifies the original asset and can be traced back to the person who created it, indicate how many times it was sold and who now has ownership. When someone purchases an NFT, the transaction is added to the digital ledger. That makes a digital asset that can be reproduced into something unique and scarce. The token is stored on a secure digital database so people can publicly verify whether or not it’s an original and prove ownership.

While the idea of owning something original and unique is attractive, and some NFTs will likely grow in value over time, NFT collecting comes with risks. Part of the problem is that digital files can be reproduced an infinite number of times, with every pixel exactly the same as the as the original.

When you buy an NFT you’re buying a token. The actual asset linked to that token isn’t something you can lock up in a safe. You might receive permission to use, listen to, copy and/or display it, but there’s nothing to stop the rest of the world from making and enjoying copies just like what you paid for. NFTs also come with these risks.

The NFT market is so new, it’s hard to establish an asset’s value. Just like with counterfeit money and art forgery, scammers sometimes try to rip off original creators and buyers using fakes. Sometimes fraudsters claim they’re the true creator, setting up profiles and accounts to impersonate a celebrity or artist. If you don’t know how to do your research, you could pay big money for a copy or knockoff.