What Is An "NFT" And Why You Should Care

"Rapid development of blockchain technology is leading to some interesting new concepts, including the idea of collecting "one of a kind" art in the form of digital tokens." Eric Coons

First off, I want to encourage any of you reading this to think hard and long before you leap on any bandwagon, much less s bandwagon as uniquely volatile as blockchain. I know that blockchain technology is all the rage at the moment, with tales of Bitcoin "millionaires" permeating every nook of the internet. Yet, for every so-called success story, there are hundreds of others serving as cautionary tales of the many risks inherent in emerging technology. It could be fun to play around with cryptocurrency, but you must be confident that you can afford to lose any money you decide to invest, especially if you are within ten years of retiring.

Before you leap, be sure that losing money on the blockchain won't wind up tanking your entire retirement plan. "Exercise caution!" is also what I tell my clients when they call asking about the latest blockchain fad: non-fungible tokens (NFTs.)

What are NFT's and why is everyone so excited about them?

Essentially, anything that is non-fungible" cannot be replaced with anything else. For example, a pound of silver is fungible. You can trade the silver for another pound of silver and you'll have the same thing. NFTs, on the other hand, are considered rare and irreplaceable.

As you continue to read this article, keep in mind an essential rule of money. For commodities and assets to be recognized and used as money, they must be fungible, portable, durable, and stable, among other things. So, right away, you must assume that NFTs are not considered money because they are not fungible in the same way as gold or silver, Bitcoin, Ethereum, or other cryptocurrencies.  If this is the case, what are they good for, and why are people making millions of dollars auctioning them?

How do NFTs work?

NFTs are part of the blockchain, a kind of gigantic digital ledger that records and verifies encrypted transactions. I won't delve into the many details of this decentralized platform in this article. For simplicity's sake, let's just say that blockchain technology may store and retain more value than fiat (printed) currencies. The ability to maintain value when government-backed money is losing it is part of the allure of the blockchain.

Nearly all NFTs are part of the Ethereum blockchain, which produces the "Ether" cryptocurrency. Ethereum is billionaire Mark Cuban's cryptocurrency favorite because of the Ethereum blockchain's ability to store more information than many other blockchains, including Bitcoin's.

What kinds of NFTs are people purchasing?

An NFT can essentially be anything digital. A lot of recent NFTs are photographs, drawings, video clips, and other fine art. The musical artist and Elon Musk companion Grimes, for example, has reportedly made millions selling NFTs of her work for $7,500 each. Tweets of famous people have also been turned into tokens and auctioned off. It seems, for the moment, that pretty much anything goes in NFT Land.

Will this become like art or baseball card collecting or more like "Beanie Babies?"

I am sure that the person who paid $200,000 for footage of a slam dunk by NBA great LeBron James is crossing his or her fingers, hoping that this will happen. You might be asking, at this point, can't people just copy digital files as much as they want? You are right; you can copy digital files. NFTs' appeal, though, is that they give you ownership of the work. Just as the case with physical art collecting, anyone can buy a Picasso print, but only one lucky collector can own the original.

My take on NFTs.

NFTs are not for the faint of heart. Not only do you need to understand the underlying technology thoroughly, but you must also trust the person from whom you're buying your NFT. Like any nascent technology, NFTs are attracting a fair share of scammers and con artists ready to blind you with science and tech-speak while they empty your pockets.  However, if you are into collectibles and speculative assets, enjoy financially supporting artists that you admire, want to discover more about the technology, or just like to experiment with money you can afford to lose, then NFTs might work for you.

Do yourself a favor and discuss your interest with your spouse or significant other and your financial team first. If you don't you might find yourself going sideways.