What are NFTs?
March 06, 2023
Read Time 4 MIN
Please note that VanEck has exposure to Bitcoin and holds a position in Ethereum.
A non-fungible token (NFT) is a blockchain-based cryptographic token that cannot be exchanged one-to-one like BTC or ETH. NFTs may be wholly digital assets or tokenized replicas of physical assets. They can serve as evidence of authenticity and ownership in the digital space because they aren't interchangeable with one another.
Fungibility describes the interchangeability and near-identicality of an asset's parts. Fungibility allows for unrestricted trade and since there is theoretically no way to know the past of each unit, it is a desirable quality for currency. That is not a feature that collector things should have though.
These tokens are one-of-a-kind, scarce, and completely recognizable from one another. On the blockchain, NFTs can be used to represent physical items as well as digital collectibles. Other industries that can use NFTs include the metaverse and digital identity.
Additionally, NFTs are associated with a new type of digital art that has gained popularity. However, they also have potential uses in a wide range of industries, including fine art, video games, digital identities, licenses, certificates, and even fractional ownership of goods.
How Do NFTs Work?
For the creation and issuance of NFTs, there are several different frameworks. ERC-721, a protocol allowing the creation and exchange of non-fungible assets on the Ethereum blockchain, is the most well-known.
Other standards, such as ERC-1155, have been introduced. It creates a whole new set of possibilities by allowing a single contract to incorporate both fungible and non-fungible tokens. A better level of interoperability is made possible by the standardization of NFT issuance, which ultimately benefits users. It implies that transferring distinctive assets between several applications can be done rather simply.
Your NFT will be stored on an address, much like other blockchain tokens. It's important to remember that NFTs cannot be copied or transferred without the owner's consent, not even by the NFT's issuer. An NFT-enabled wallet like Trust Wallet is a good option if you want to store and access your NFTs.
Open marketplaces like OpenSea on Ethereum allow for the trading of NFTs. NFTs are subject to price variations in reaction to changes in market supply and demand as well as cultural trends to which some NFTs are linked.
The worth is not inherent in the object itself, just like with any other valuable item; rather, it is determined by those who appreciate it. Value is essentially a shared conviction. It makes no difference if it's fiat money, gold, silver, or a car; these items only have value because people think they do. Every desirable item gains value in this manner, so why shouldn't digital collectibles?
NFT Use Cases
NFTs can be utilized as investment products, collectibles, or for a variety of other useful uses. One of the main applications of non-fungible tokens is online gaming. Additionally, adopting blockchain to tokenize in-game assets is just going one step further given that many online games already have their own economies. The frequent issue of inflation that many games face might be resolved or at least lessened by the introduction of NFTs.
While virtual worlds are already thriving, tokenizing real-world assets is another fascinating application of NFTs. These NFTs can stand in for pieces of real estate that can be kept and exchanged as tokens on a blockchain. This could introduce some well-needed liquidity to many markets that otherwise wouldn’t have much, such as fine art, real estate, and rare collectible items.
Another industry that can profit from the characteristics of NFTs is digital identity. For many people worldwide, increasing privacy and data integrity would be accomplished by storing identification and ownership data on the blockchain. At the same time, friction related to exchanging personal data may be decreased by simple and trustworthy transfers of these assets.
How Do You Invest in NFTs?
One way to invest in non-fungible tokens is to buy them on NFT exchanges. NFTs cannot simply be purchased using a credit card or a payment service provider like PayPal. This technique requires both a crypto wallet and some cryptocurrency.
A more diverse way to gain exposure to the development of NFTs is to invest in the underlying technology. NFTs at their core are simply smart contracts that adhere to a certain standard. For a smart contract to exist and execute, it needs a smart contract platform and execution layer. Many NFTs are created using Ethereum. VanEck provides a straightforward, diversified and easy way to invest in a broad and dynamic selection of smart contract platforms that enable NFTs.
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Bitcoin (BTC) is a decentralized digital currency, without a central bank or single administrator, that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries. Beta of rig price is a measure of the price volatility of a mining rig compared to Bitcoin’s price.
Ethereum is a decentralized, open-source blockchain with smart contract functionality. Ether is the native cryptocurrency of the platform. Amongst cryptocurrencies, Ether is second only to Bitcoin in market capitalization.
Please note that VanEck may offer investments products that invest in the asset class(es) or industries included in this communication.
This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the cryptocurrencies mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Information provided by third-party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this communication and are subject to change without notice. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its employees.
Cryptocurrency is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value, but it does not have legal tender status. Cryptocurrencies are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not generally backed or supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies. The value of cryptocurrency may be derived from the continued willingness of market participants to exchange fiat currency for cryptocurrency, which may result in the potential for permanent and total loss of value of a particular cryptocurrency should the market for that cryptocurrency disappear. Cryptocurrencies are not covered by either FDIC or SIPC insurance. Legislative and regulatory changes or actions at the state, federal, or international level may adversely affect the use, transfer, exchange, and value of cryptocurrency.
Investing in cryptocurrencies comes with a number of risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks. In addition, cryptocurrency markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing. There is no assurance that a person who accepts a cryptocurrency as payment today will continue to do so in the future.
Investors should conduct extensive research into the legitimacy of each individual cryptocurrency, including its platform, before investing. The features, functions, characteristics, operation, use and other properties of the specific cryptocurrency may be complex, technical, or difficult to understand or evaluate. The cryptocurrency may be vulnerable to attacks on the security, integrity or operation, including attacks using computing power sufficient to overwhelm the normal operation of the cryptocurrency’s blockchain or other underlying technology. Some cryptocurrency transactions will be deemed to be made when recorded on a public ledger, which is not necessarily the date or time that a transaction may have been initiated.
Investors must have the financial ability, sophistication and willingness to bear the risks of an investment and a potential total loss of their entire investment in cryptocurrency.
- An investment in cryptocurrency is not suitable or desirable for all investors.
- Cryptocurrency has limited operating history or performance.
- Fees and expenses associated with a cryptocurrency investment may be substantial.
There may be risks posed by the lack of regulation for cryptocurrencies and any future regulatory developments could affect the viability and expansion of the use of cryptocurrencies. Investors should conduct extensive research before investing in cryptocurrencies.
Information provided by Van Eck is not intended to be, nor should it be construed as financial, tax or legal advice. It is not a recommendation to buy or sell an interest in cryptocurrencies.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.
© 2023 Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.
Related Funds
DISCLOSURES
Definitions
Bitcoin (BTC) is a decentralized digital currency, without a central bank or single administrator, that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries. Beta of rig price is a measure of the price volatility of a mining rig compared to Bitcoin’s price.
Ethereum is a decentralized, open-source blockchain with smart contract functionality. Ether is the native cryptocurrency of the platform. Amongst cryptocurrencies, Ether is second only to Bitcoin in market capitalization.
Please note that VanEck may offer investments products that invest in the asset class(es) or industries included in this communication.
This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the cryptocurrencies mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Information provided by third-party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this communication and are subject to change without notice. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its employees.
Cryptocurrency is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value, but it does not have legal tender status. Cryptocurrencies are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not generally backed or supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies. The value of cryptocurrency may be derived from the continued willingness of market participants to exchange fiat currency for cryptocurrency, which may result in the potential for permanent and total loss of value of a particular cryptocurrency should the market for that cryptocurrency disappear. Cryptocurrencies are not covered by either FDIC or SIPC insurance. Legislative and regulatory changes or actions at the state, federal, or international level may adversely affect the use, transfer, exchange, and value of cryptocurrency.
Investing in cryptocurrencies comes with a number of risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks. In addition, cryptocurrency markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing. There is no assurance that a person who accepts a cryptocurrency as payment today will continue to do so in the future.
Investors should conduct extensive research into the legitimacy of each individual cryptocurrency, including its platform, before investing. The features, functions, characteristics, operation, use and other properties of the specific cryptocurrency may be complex, technical, or difficult to understand or evaluate. The cryptocurrency may be vulnerable to attacks on the security, integrity or operation, including attacks using computing power sufficient to overwhelm the normal operation of the cryptocurrency’s blockchain or other underlying technology. Some cryptocurrency transactions will be deemed to be made when recorded on a public ledger, which is not necessarily the date or time that a transaction may have been initiated.
Investors must have the financial ability, sophistication and willingness to bear the risks of an investment and a potential total loss of their entire investment in cryptocurrency.
- An investment in cryptocurrency is not suitable or desirable for all investors.
- Cryptocurrency has limited operating history or performance.
- Fees and expenses associated with a cryptocurrency investment may be substantial.
There may be risks posed by the lack of regulation for cryptocurrencies and any future regulatory developments could affect the viability and expansion of the use of cryptocurrencies. Investors should conduct extensive research before investing in cryptocurrencies.
Information provided by Van Eck is not intended to be, nor should it be construed as financial, tax or legal advice. It is not a recommendation to buy or sell an interest in cryptocurrencies.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.
© 2023 Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.