Six Things to Know About NFTs in 2021

NFTs have blown up in 2021 in the blockchain sector. But what exactly are NFTs? NFT stands for non-fungible tokens which are assets such as artwork, real estate, or collectibles in a token version. While you may have heard the buzzword of NFTs, you might not know much about them and how individuals are adding this strategy to their financial portfolios. Keep reading for 6 things to know about NFTs in 2021.

What are NFTs?

Non-fungible tokens are a digital asset that represents tangible objects. They are similar to cryptocurrency in how their record of existence resides on blockchains and there is not a physical item that represents them in reality. What makes non-fungible tokens different from cryptocurrency is that NFTs are unique and typically one of a kind. 

How do NFTs work?

NFTs reside on a blockchain, specifically the Ethereum blockchain, which is a public ledger used to record transactions. A non-fungible token is created from digital objects that represent tangible and intangible assets, such as art, music, and designer clothing. Instead of having a physical item, you have a digital file. For example, if you purchase an NFT of a collector’s piece of art, you receive a digital file instead of the physical painting. 

What are NFTs used for? 

Non-fungible tokens give artists and creators the ability to monetize their pieces in a different way. Normally artists can only sell their pieces at galleries or auction houses. Now artists can sell directly to consumers. Through NFTs, artists can retain more profit and can receive royalties on their pieces if they are sold to a new owner. 

How do ownership rights work with NFTs?

The concept of ownership from purchasing a digital asset that represents a physical asset can be quite confusing. Typically, when you purchase a piece of art, you are the sole owner, and you own the physical painting. With NFTs, you can have a record showing ownership of the token that represents the specific asset, but the creator of the asset can still own the intellectual and creative rights to the asset. Each NFT transaction entails different ownership rights. 

How are NFTs created and purchased?

The owner of the physical asset must go through the process of changing the file into a digital NFT before it can be sold. There are different platforms that can be used to create your NFT. Creators have to pay to have their items turned into an NFT. When it comes to purchasing NFTs, the process is like an online auction. You do need a digital wallet to hold your NFTs. You will also need to purchase cryptocurrency in order to buy NFTs. 

Is it smart to buy NFTs? 

While NFTs have been around since 2014, they are still a risky asset to purchase. The future of the asset is unknown since there is little to no history on how they will perform long term. The decision to invest in NFTs is fully up to you. One thing to keep in mind is the value of NFTs are based on what another person is willing to pay, not regular economic supply and demand. 

Overall, NFTs show how much investment options have grown and flourished. Treat NFTs the same way you would any other investment; Be aware of the risk, stay vigilant, and know what you are getting yourself into. 

Sources:

What Is An NFT? How Do NFTs Work? – Forbes Advisor 

https://www.techrepublic.com/article/nfts-cheat-sheet-everything-you-need-to-know-about-non-fungible-tokens/ 

NFTs in 2021: The Challenges & Opportunities | by Fusible | Jun, 2021 | Medium 

How I Became a Professional NFT Artist (Well, Sort of) | by Allen Gannett | OneZero (medium.com) 

 

Malik S. Lee, CFP®, CAP®, APMA®
Malik Lee is the Managing Principal of Felton & Peel Wealth Management. A CERTIFIED FINANCIAL PLANNER™ with more than 15 years of financial services experience, he is a Guest Lecturer at Morehouse College, serves on the CFP Board Council of Examinations, and is a Board Member for the FPA of GA.
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