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The investment world can be difficult to understand, especially given the myriad asset classes, fund structures, and tax deferral vehicles available on the market. Complexity increases exponentially, taking into account previously immeasurable situations such as pandemics and negative interest rates.
Not only that. Increasingly popular technologies such as mobile payment apps, peer-to-peer lending platforms, robo-advisors and blockchain-based databases are revolutionizing the way businesses, financial transactions are managed and invested.
What Are Non-Fungible Tokens?
This leads to the topic of this article, Non-Fungible Tokens (NFT). NFTs are digital representations of assets created and stored using blockchain technology. Each NFT has a unique identification code that distinguishes it from other NFTs and prevents duplication. Each NFT is also expandable. That is, it can be combined with another NFT to form a third, completely unique NFT.
Fungible vs. Non-Fungible Assets
Let’s start with the word substitutable. Substitutable assets are assets that can be easily exchanged for another asset of the same type and value. For example, US dollar bills are accepted. You can exchange them with each other to get the exact same value. You can do the same with cryptocurrencies like Bitcoin. One Bitcoin is worth exactly the same value as another Bitcoin.
Conversely, a nonfungible asset is one of a kind. It is unique, irreplaceable and noninterchangeable. Examples include diamonds and original works of art. Each of these cryptocurrency assets has its uniqueness and cannot be replicated with authenticity. For example, each diamond has a specific cut, color, size, and grade. Two diamonds are not exactly the same as human fingerprints.
Now we can argue that there are no truly substitutable assets. After all, a handful of dollar bills inevitably have noticeable physical differences — perhaps tattered horns, ink stains, or different serial dates. This correctly emphasizes the importance of focusing on the value in use of an asset rather than its technical characteristics when classifying an asset as reasonable.
Top 5 Advantages of NFT Assets
1.NFTs Foster Marketplace Efficiency
The most obvious benefit of the NFT is its ability to make markets more efficient. Converting physical assets to digital assets can streamline processes, eliminate middlemen, improve supply chains, and increase security.
A great example takes place in the pocket of the art world. Thanks to NFTs, artists are increasingly able to connect directly with their audiences, eliminating the need for costly agents and time-consuming transactions.
Additionally, digitalizing artwork improves the validation process, further streamlining transactions and reducing costs. But the NFT has off-market applications. Ultimately, they can become an effective way to manage and control sensitive data and records of individuals and organizations.
Consider using our physical passports which must be presented at each point of entry and exit. By converting them into separate NFTs, we were able to significantly streamline the process of managing trips and identifying individuals. The savings, in terms of time and money, can be substantial.
2. Anyone Can Invest in NFTs
Investing in tokenized assets is available to everyone. Ownership of NFT token assets can be transferred more easily and efficiently to people around the world.
Besides that, there are NFTs for everyone’s budget, starting from few dollars and up to millions of USD for an NFT asset.
3. They Can Be Used to Fractionalize Ownership of Physical Assets
Today, it is difficult to subdivide ownership of certain assets such as real estate, works of art, and luxury jewelery. Sharing a digitized version of a building among multiple owners is much easier than a physical one. The same is true for precious jewelery and rare wine boxes.
Digitization can significantly expand the market for certain assets, increase liquidity and raise prices. At the individual level, we will improve the way financial portfolios are built, enabling more diversification and more accurate position sizing.
4. The Blockchain Technology Behind NFTs Is Very Safe
NFTs are created using blockchain technology, a system for recording information that cannot be hacked, modified, or erased. In essence, the blockchain is a digital ledger of transactions that is replicated and distributed throughout the participant’s peer-to-peer network.
Every NFT stored on the blockchain has a clear record of the chain of credibility and ownership, which in theory prevents the NFT from being abused or stolen. Once the data is added to the chain, it cannot be modified or deleted. This means that the simplicity and reliability of each NFT will be maintained, promoting an unfamiliar level of trust in many markets.
5. NFTs Can Provide Diversification Benefit to an Investment Portfolio
NFTs are different from traditional investments such as stocks and bonds. As discussed above, they have unique properties that offer the benefits we are just beginning to understand and recognize.
You can improve its efficiency by adding NFTs to your investment portfolio. Basically, this means achieving a better risk / return ratio.
NFTs are an exciting creation and they are getting more and more attention as their use cases multiply. The price tags that attracted headlines were tied to a number of NFTs that ignited the flames. However, prudent investors should exercise caution when considering purchasing these assets, as NFTs are highly liquid and volatile.
Don’t buy them with the expectation of three or four digit returns. The real value of NFTs lies in their potential to transform the way markets work and improve the way we manage and control sensitive information. Here, the sky is the limit.
However, if you want to join the blockchain movement and see NFT ownership as your way to go, get started. However, do so responsibly. Don’t put a lot of money in the NFT and always try to set up low cost positions. Otherwise, you could end up in a miserable situation – financially and emotionally.
Disclaimer: The opinion expressed here is not investment advice – it is provided for informational purposes only. It does not necessarily reflect the opinion of EGG Finance. Every investment and all trading involves risk, so you should always perform your own research prior to making decisions. We do not recommend investing money you cannot afford to lose.