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Non-Fungible Tokens

Lesson in Course: Crypto (beginner, 9min )

NFTs have been making news headlines. What are they and should we buy one?

NFTs are digital collectibles built largely on the Ethereum blockchain. With the rise of interest in NFTs, creators are starting to use different blockchains to create NFTs as well. The common risks of investing in NFT are similar to investing in sports jerseys, name-brand shoes, and other collectibles. Instead of a physical product, people display NFTs through computer and smartphone screens.

Fungible vs non-fungible

Fungibility is an uncommon word, but it describes how unique something is. NFTs are non-fungible or the opposite of fungible.

Fungible

Fungible assets are stores of value that are interchangeable with another of the same type.

Gold is a fungible asset since a one-pound bar of pure gold is worth the same as a one-pound worth of coins and ingots. Other fungible assets include oil, company shares, bonds, other commodities, and currencies. In those examples, a barrel, share, certificate, or bill have the same value as another identical barrel, share, certificate, or bill. We can make copies of fungible assets, and they will retain the same value as the original.

Non-fungible

Non-fungible assets are unique, non-interchangeable, and cannot be divided into smaller units.

Diamonds, land, houses, and original art are examples of non-fungible assets. No two diamonds, plots of land, houses, or art pieces are the exact same. Even though we make copies of non-fungible assets, the original is still one-of-a-kind.

Fungible vs Non-fungible
 

Digitalization of reality

Part of the appeal of NFTs is the belief in the partial or complete digitalization of reality. Virtual reality and augmented reality could provide clues to what the future has in store. If a digital world overcomes the actual world, NFTs would eventually replace the Yeezys, Louboutins, and Mona Lisas. Instead, luxury might look something like this:

This Gucci ghost NFT sold for over $3,600

Other supporters of NFTs include artists and art enthusiasts. By listing their pieces as NFTs, artists around the world can sustain their livelihoods while maintaining $0 shipping costs, and gaining access to a worldwide market, instead of just their local market.

Common risks of investing in NFTs

Digital deterioriation

Bit rot is the slow deterioration in the performance and integrity of data saved on storage media. 

NFTs can be affected over time by websites going down and image file format changes. If the owner forgets or losses the password to the digital wallet, the NFT is lost forever.

Speculation

Unlike utility tokens, speculation ultimately drives the value of NFTs.

The value of an NFT is only as much as anyone else is willing to pay for it. Some of the highest selling NFTs have been memes or other art forms because of their novelty; however, what is popular or vintage today might not be tomorrow. Pop culture is fickle and hard to predict.

Most expensive NFTs

 

Regulatory

NFTs do not fit neatly in our current systems of regulations and laws.

Some unaddressed concerns include:

  1. What intellectual property rights, if any, are transferred through an NFT sale?
  2. Should NFTs be treated as a commodity or security?
  3. Are NFTs counted in US sanctions against other countries?
  4. Are NFTs subject to state laws?

Liquidity

Liquidity risk refers to "How quickly can I sell an NFT?"

Due to speculation, if an NFT goes out of style, we might not find a buyer before we need the cash.

Fraud

Copies have sprung up pretending to be the originals.

It is up to us to protect ourselves from scams and make sure that what we buy is the original. 

Buying NFTs

NFTs are sold on online marketplaces for ETH and require a crypto wallet. There are many marketplaces available for us to search and find one that might interest us.

 
 

Supplementary materials

The video below provides a deeper dive into NFTs and DeFi:

Here is a list of popular NFT marketplaces:

Opensea

Mintable

SuperRare

Actionable ideas

Speculating with NFTs comes with a large degree of risk. As a responsible investor, if we choose to buy NFTs, we should only do so with our play-money and not our retirement money.

Glossary

Fungible

Fungible assets are stores of value that are interchangeable with another of the same type. 

Gold is a fungible asset since a one-pound bar of pure gold is worth the same as one pound worth of coins and ingots. Other fungible assets include oil, company shares, bonds, other commodities, and currencies. In those examples, a barrel, share, certificate, or bill have the same value as another identical barrel, share, certificate, or bill. Copies of fungible assets can be made, and they will retain the same value as the original.

Non-fungible

Non-fungible assets are unique, non-interchangeable, and cannot be divided into smaller units.

Diamonds, land, houses, and original art are examples of non-fungible assets. No two diamonds, plots of land, houses, or art pieces are the exact same. Copies of non-fungible assets can be made; however, the original is still one-of-a-kind.

Bit rot

The slow deterioration in the performance and integrity of data saved on storage media.

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