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What is a Non-Fungible Token (NFT)?

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There’s a new type of digital commodity on the market. NFTs have been gaining a lot of notoriety among traders, investors, and collectors. So, what are NFTs, and why are they causing such a fuss? Learn more about these unique digital assets and why they’re being called the future of trading.

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How Do NFTs Work?

An NFT is a type of digital asset that has its unique identification codes and data stored on a blockchain, which is a type of decentralized database that is used for maintaining secure records of transactions.  Each token is the digital representation of a specific asset, such as a piece of art, media, physical item or access to certain benefits. These assets are one-of-a-kind and cannot be replicated. They come with unique identifying data, much like a fingerprint, that distinguishes them from other digital copies. This unique data makes each token inherently rare and thus valuable.

The phrase “non-fungible” means these items aren’t equal to each other in terms of price. Currency and other common commodities, such as gold, oil and even grain, are considered fungible. Fungible is a legal term that refers to goods or commodities whose individual parts are virtually indistinguishable from other parts and are essentially interchangeable. For example, a dollar will always be equal to another dollar. NFTs don’t work that way, however, each token having its own unique worth. No two NFTs are exactly alike. There can also only be one owner per NFT at a time.

NFTs are bought and sold using blockchain, the same technology as cryptocurrency. Digital tokens like Bitcoin or Ethereum live on the blockchain, which is made up of a series of digital nodes, each representing a specific transaction. This information cannot be deleted or erased, creating a permanent record of how many times the item has changed hands.

NFTs are typically purchased using various types of cryptocurrencies. They are traded specifically on the Ethereum blockchain, but other blockchains also support them.

Why Are NFTs Valuable?

If you’re like most people, you’re probably wondering why someone would pay so much money for a digital file. For example, an NFT of a famous painting may be worth just as much as the physical painting itself. Anyone can look up digital photos of the painting online. So why would someone pay so much money for a digital asset?

Prices of assets are heavily influenced by supply and demand. The more there is of something, the less valuable it is. There’s only one Mona Lisa, which is part of the reason why it’s considered one of the most valuable works of art of all time. NFTs are also rare, which is why some people are willing to buy them for large amounts of money.

Many traders and collectors will acquire these digital assets as an investment, hoping that the value will increase as more people try to buy into an NFT project. Others buy them for the exclusivity of owning an NFT from a certain creator or project. The price of an NFT all depends on the perceived value of the NFT and how much notoriety the asset has.

How to Buy and Sell NFTs

If you want to purchase an NFT, you will need a digital wallet that’s used to buy and sell cryptocurrency. You will then need to buy cryptocurrency, such as Bitcoin or Ether. You can purchase crypto on platforms like Coinbase, Kraken, eToro, PayPal and Robinhood.

Once you have some cryptocurrency in your digital wallet, you can start buying NFTs. Visit one of the popular marketplaces where NFTs are sold, such as OpenSea.io, Foundation or Rarible. These platforms have thousands of NFTs for sale but research the project to help determine if they will be valuable in the future. Look for items from recognizable names or artists. Remember that the value of NFTs isn’t usually based on the beauty or quality of the work, but rather how popular the asset is. 

If you are considering making your own NFTs, you will need to create your own digital asset. The NFT must then be minted, which means uploading the digital representation of the asset to the blockchain. Then you can upload the NFT to a supported marketplace where it can be bought and sold.

Are NFTs Worth It?

If you’re considering buying and selling NFTs, especially if you’re investing for the first time, there are a few things to keep in mind. It’s not clear where this trend is going. We live in an increasingly digital world where most of the content we consume lives online. NFTs can be used to represent digital content and art, but are also becoming popular vehicles to engage communities in Web 3.0 as companies and creators use NFTs to give token-owners exclusive access to information and services.

However, many experts urge caution. Some have called NFTs a bubble or fad. Currently, many tokens don’t have inherent value and are not value producing, their price being a reflection of their demand and popularity. The value of these types of assets or commodities can be volatile and hard to predict, making them risky.

Learn more about the ins and outs of using cryptocurrency before investing in an NFT. You may be able to make money by buying and trading NFTs, but they aren’t nearly as stable as other types of investment products, such as stocks or bonds. Use caution when investing in these commodities and only invest what you can afford to lose.

PLEASE NOTE: This article is intended to be used for informational purposes and should not be considered financial advice. Consult a financial advisor, accountant or other financial professional to learn more about what strategies are appropriate for your situation. Ent Credit Union does not buy, sell, store or transact in any form of cryptocurrency.

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