If the evolving realm of cryptocurrency and NFTs has you scratching your head and trying to figure out if this new world is the right investment for you, you’re not alone.
In a recent survey from security.org, only 20% of Americans were familiar with NFTs, and less than that understand how they connect to cryptocurrencies. Investing in this latest technology requires a thorough understanding of its purpose and how all of the pieces are connected.
So before opening your digital wallet, read on.
Defining NFTs and Ethereum
It’s essential to understand each component independently before defining the relationship between NFTs and Ethereum.
In a sense, non-fungible tokens (NFTs) are collectible items, but instead of physically holding and storing them in a sock drawer or safety deposit box, they are digital assets. NFTs could be a piece of digital art, a music file, an NBA video clip, or any item that has value to the buyer. The latest NFT craze of CryptoKitties is just one example of how NFTs are rapidly evolving.
The originality of the item determines the NFTs value. Since there is only one, the value increases as more people express interest in owning the item. Thus, think of it as a framework for capturing a unique unit of value.
The NFT market offers unique monetization opportunities for artists and content creators. Instead of relying on a gallery or broker to sell a piece of art, an artist can now create the art as an NFT and sell it to someone directly. This process removes the middle man and keeps more of the profit in the artist’s hands.
NFTs aren’t just for digital versions of printed art. Hollywood actors create digital entertainment as NFTs and make it available to those who want to own a piece of the content, skipping big-time movie producers and production companies.
When you buy these digital assets, the rights to the intellectual property are coded into a smart contract and prove you are the owner of that particular unit of value.
So how do you buy an NFT? This question leads us to the next component ‒ Ethereum.
Ethereum, Ether, and Their Relationship to Bitcoin
According to its website, “Ethereum is the community-run technology powering the cryptocurrency Ether (ETH) and thousands of decentralized applications.” Essentially, Ethereum creates a better financial sector for people worldwide who live in places where financial services are limited.
Although both are based on blockchain technology, unlike Bitcoin, which serves as merely a currency, Ethereum is much more powerful and encompasses an entire network of businesses and applications.
How NFTs and Ethereum Are Connected
To buy and store NFTs, you need digital currency (cryptocurrency) and a digital wallet, both of which can be obtained from various platforms such as Opensea or Rarible. And you generally cannot purchase non-fungible tokens through NFT markets without using Ether.
Since NFTs are built on the Ethereum network and require Ether to purchase, this is driving up Ethereum’s value and demand.
Will Ethereum Become More Valuable as the NFT Industry Evolves?
Development of the crypto market is ongoing, and innovation in the space has a long way to go. Every business owner is thinking about how they will plug into the token industry, and individual investors are cautiously optimistic at best.
Many businesses have begun to accept cryptocurrency as payment, allowing them to sell and ship to regions of the world they didn’t have access to before. This new financial ecosystem is no longer reserved for the wealthy or Wall Street moguls.
Most of what people are building on the Ethereum platform is financial. Thousands of people and startups in the Ethereum system are hopeful that what emerges will replace or improve the existing financial sector.
However, fear, uncertainty, and doubt remain. The industry is still very volatile and susceptible to panic selling by young investors who lack confidence and regulators who do not know how to approach and review the market.
While NFT sales continue to climb, remember that NFTs you want to spend your life savings to buy only have a market value as high as the next buyer who wants the same asset.
Fiat money retains its value because the government and national economies are stable, and entities such as the Internal Revenue Service are deeply involved in controlling inflation. While cryptocurrencies offer an alternative to the fiat money system and its inherent weaknesses, the risks of Ether and NFTs are also high with a decentralized finance (or DeFi for short) governance system.
This more innovative, decentralized token economy allows for many new business models and ownership of assets among global populations. However, since Ethereum and NFTs are inextricably linked, it will be challenging for the other to survive if one is unsuccessful.