Since the introduction of non-fungible tokens (NFTs) on the Ethereum blockchain, many people have been wondering if they will increase Ethereum’s value over time.
NFTs are a type of digital asset that is unique and can be transferred from one owner to another.
The demand for these assets will likely drive their prices up over time. Still, it is unclear what effect this will have on Ethereum’s price, as numerous factors are involved.
What are NFTs?
NFTs (non-fungible tokens) are a type of digital asset that are unique in some way and can be transferred from one owner to another.
They are not fungible, meaning they cannot replace or substitute for each other as the same quantity. NFTs give their owners certain rights over an application or design which may have been previously inaccessible.
A simple way of thinking about NFTs are original digital artist paintings. When an artist creates an original piece, they can sell that piece. That is the original. There is only one. The artist can also create prints of that piece and sell those.
So, while anyone could have a “copy” of that art, only one person owns the original (or “owns the rights” to the original).
The value of this type of asset increases over time because it cannot be replicated infinitely in the way that digital media files could on a computer’s hard drive (although there are some exceptions to this).
This means that where traditional assets like stocks often experience depreciation due to inflationary pressures, such devaluation does not happen with these types of assets.
There is an absolute run on NFTs right now. It seems like everyone is creating their own non-fungible tokens to sell. That said, some of the most popular NFTs right now are ERC-1155, Decentraland, and CryptoKitties.
- ERC-1155 is an NFT that is specifically built for video games. It will allow gamers to trade the digital assets of their game and give them a sense of ownership over what they have collected or used in-game.
- Decentraland, as its name would indicate, was created by Decentral Inc. This Ethereum-based company helps people create blockchain-enabled virtual realities called “worlds.” For example, this token allows users to buy land within the world to construct buildings, visit others’ worlds, etc. I believe there are some VR components of it, too.
- CryptoKitties takes things one step further with NFTs – you’re actually buying kittens. That said, though, this isn’t just any old cat-collecting simulation: CryptoKitties allows you to collect and breed digital cats and has an in-game marketplace where you can buy or sell your digital kitties.
What is Ethereum?
Ethereum is a blockchain and cryptocurrency platform that enables developers to build decentralized applications.
Ethereum is the first major player in a new wave of cryptocurrencies.
Its token, Ether (ETH), was created by Ethereum’s founder Vitalik Buterin in 2015 during an ICO event where contributors purchased tokens with Bitcoin, receiving them for their contribution.
It acts as both a currency and a vehicle for smart contracts on the network. In addition to its use as an investment tool, Ether also fuels (or powers) actions on the Ethereum network through transaction fees paid in ETH—a sort of “gasoline” that keeps operations going on this type of distributed computing system.
This means it has two parallel functions: it can be used to buy things and also to pay for services.
For example, say Alice wants to list her house on the Ethereum blockchain with a smart contract that will automatically transfer ownership of the home when someone sends her an agreed-upon amount in ETH tokens. She would need some money from Bob, the buyer—and this transaction would include a small fee paid in ETH as compensation for all nodes validating and executing Alice’s code.
Every computation has a cost associated with it; fees are used both as incentives (to keep miners engaged) and disincentives (so spammers don’t clog up networks).
This means that Ether is not just another digital currency like Bitcoin: it is fueled by transactions that require other currencies or “gasoline” to compute the total cost of a smart contract.
How do NFTs impact Ethereum?
One of the most important factors to keep in mind when it comes to Ethereum and NFTs is that any token on an Ethereum-supported blockchain (e.g., ERC-20) can be treated as a collectible, meaning you will need to establish its scarcity by limiting how many exist.
This means that if someone wants to sell their tokenized artwork for $100, they would have set a fixed supply at 1,000 artworks, so each piece has some value. For instance: 500 are available through auction, while another 500 are reserved for private sale only.
So, basically, NFTs need technology like Ethereum or Ether to work. Now, that’s not to say that another similar technology to Ether couldn’t come along in the future. But for right now, we understand the correlation between the two. Because of that, one could assume that as the NFT craze continues, the value of Ethereum would continue to rise.
Now, know that anything related to crypto, blockchain, NFTs, etc., is anything but simple. But if we take lessons from other industries and, again, basic economics, one could imagine the rise in NFTs positively impacts Ethereum.
So should you invest in NFTs or Ethereum?
This is a difficult question to answer because the two are very different. So, you have to separate the analysis to determine which is the right investment for you, if either.
You should consider investing in NFTs if you see value in the ecosystem they’re building. You should invest in Ethereum if you believe it will become a fundamental element of our future digital world.
Yes, that’s sort of a “non-answer,” but there just isn’t enough information out there to make a solid recommendation. Both come with significant risks and rewards, and both could be the next major boom in our economy or falter as quickly as Beanie Babies did in the late 90s.
For what it’s worth, Gary Vaynerchuk loves the idea of NFTs and thinks they’re the future. So much that he started his own collection of NFTs, called VeeFriends.
What are the risks of investing in NFTs?
The main risks of investing in NFTs are the inherent risks of investing in anything, namely that you might lose your money. The other main risk is if Ethereum fails and NFTs are made obsolete by a different blockchain altogether.
Also, like investing in cryptocurrency, you will need to “store” the rights to your NFT in a secure location. Therefore, you will be required to enter a private key and address every time you want to trade your NFT.
Obviously, if this information is lost, so is your NFT.
There are also no rules or regulations around NFTs (at the moment), which means that you’ll have to make your own decisions about what is a fair price for the NFT and who can or cannot trade it.
What are the risks of investing in Ethereum?
Like NFTs, investing in Ethereum comes with risks, too. Like any other cryptocurrency, investing in Ethereum is risky because it is susceptible to hacking and theft.
The value of Ethereum has been very volatile, which means that the rate at which you make money can be just as unpredictable.
If you do choose to invest in Ethereum, make sure you’re prepared to lose all of the money you’ve invested. While I hope this isn’t the case, crypto is still highly volatile as an investment, primarily since there’s no intrinsic value tied to it.
There are a lot of reasons to be excited for the future of Ethereum and NFTs. The most obvious is that there’s potential upside in this volatile market after all. Still, it might not last long enough for you to make any money off your investment.
If you’re still interested, do your research before moving forward with an investment strategy. Be willing to lose everything if necessary because at least then you’ll have learned something new about investing.