If something is fungible it means that one unit of that something is the same as another. A grain of rice is exactly the same as another. One US dollar is exactly the same. That’s why traditional money and grains of rice are considered highly fungible assets.
Something that is non-fungible has completely unique characteristics. A good example would be the famous Mona Lisa painting by Leonardo da Vinci. The original painting is a highly coveted piece of history. While it can be traded for other assets, the painting itself is distinct and it’s really not directly comparable to any other piece of art, much less any other kind of asset.
People may own a copy or print of the Mona Lisa—but there is only one original Mona Lisa. Other non-fungible assets include things like tickets to a show, a house, a trademark, or even a collectible NFT like CryptoPunks.
With many non-fungible digital collectibles being minted for hundreds of dollars and then eventually sold for millions of dollars, there’s a burning question running rampant throughout the NFT world…
Is the explosion of NFTs sustainable?
Collectibles will always have value among their target audience. Since collectibles make up arguably the most popular segment of the NFT market, it’s likely that there may be sustained growth. High-end art and wine collectors are always going to appreciate the value of those assets. Their own appreciation of those things is part of what drives the supply and demand dynamic necessary to sustain the value of those assets.
Among collectors, the same drivers that push an art dealer to spend $50 million on a rare work of art are also what drive investors to spend millions on a digital image stored on the blockchain (even though the image can be copied and pasted with a simple right-click).
Whether it’s the Mona Lisa or a CryptoPunk, human nature drives our desire for social status, wealth, and a sense of belonging, each of which are inherent within the world of NFTs.
A few dos and don’ts
While it may be tempting to buy a large number of NFT collectibles in the hopes of flipping a digital asset for millions of dollars, the reality is that sound investment principles apply to any investing sector (even in the digital world). Here are some basic principles to follow.
Never invest more than you’re willing to lose
Diversification is a recommended strategy for most investors. While a few NFT projects seem to steal the headlines on a regular basis, the majority of NFT projects are just like the majority of small businesses. They could fail.
NFTs are highly illiquid assets
It’s easy to trade Bitcoin for ether for one another because any number of exchanges maintain high levels of liquidity that facilitate large amounts of trades. If you invest in a very specific NFT niche and the broader NFT market begins to crash, you’ll begin looking for somebody to buy your NFT only to realize you might be stuck with a digital asset that no one wants to buy.
Be mindful of the links you click
Since a JPEG can be easily copied and placed on the blockchain, anybody can create projects that look very similar to blue-chip NFTs and try to pass it off to you as the real thing. Make sure you use a trusted NFT marketplace to buy your NFTs and double check that you’re buying the correct collection and not a knock off. Remember, while businesses and marketplaces have customer service teams, blockchains themselves don’t.
Although it can be a challenging space to understand for beginners, the NFT industry is putting a whole new spin on the concept of collectibles, the meaning of community, and the value of art and intellectual property. For those reasons, the long-term future of NFTs could be brighter than ever before.