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Article by Lauren Bryant
In recent years, there has been an increasing social interest in different forms of investment, with the likes of NFTs turning mainstream, and now recognised as a part of popular culture. This article provides insight into some types of investment, including NFTs, cryptocurrency, and equities:
NFTs (Non-Fungible Tokens)
NFTs are cryptographic tokens that exist on a blockchain. One-of-a-kind digital assets, NFTs are distinguished by original metadata and identification codes. As each piece of art is unique or non-fungible, it cannot be traded at equivalency, unlike cryptocurrencies. Although the NFT market experienced major growth during 2020, tripling in value to $250 million, the first known NFT was designed years earlier. On the 3rd May 2014, digital artists Anil Dash and Kevin McCoy created “Quantum”, a short video of McCoy’s wife Jennifer, which was later minted on the Namecoin blockchain and sold to Dash for $4. Common examples of NFTs include digital game items or avatars, as well as real-world assets such as artwork and real estate. The “tokenisation” of these physical items, which involves the replacement of sensitive data elements with surrogate values, aims to limit the possibility of fraud. In turn, it also allows NFTs to be bought, sold, and exchanged more efficiently.
Evolving from the original concept of cryptocurrencies, NFTs offer a second level, a reinvention of traditional trading and loan structures in modern finance systems. The greatest benefit of NFTs lies in market efficiency. Transforming real-world assets into virtual ones streamlines business processes, removing the necessity for agents or intermediates, and enabling artists to connect with their audiences directly. Although many experts believe that the phenomenon of NFTs will inevitably disperse, with digital copies far easier to replicate than the physical asset itself, the market for NFTs continues to grow.
Cryptocurrency, crypto-currency, or crypto, is a digital currency and an increasingly popular, alternate form of online payment. Some of the most well-known forms of crypto include Bitcoin, Ethereum, and Litecoin. Operating free of any central authority, cryptocurrencies are independent of traditional intermediaries such as banks or the government. Instead, they use a decentralised system to record and issue new units, utilising cryptography to secure transactions, which are then recorded on a data-storage ledger (the blockchain). Users must have a cryptocurrency wallet, enabling them to confirm identification, store encryption keys, and gain access to funds. Mining is the process through which several cryptocurrencies, including Bitcoin, generate new units of crypto, verifying and securing the blockchain. In return for their contributions, computers on these vast, decentralised networks are rewarded with new coins. This then incentivises miners to maintain the blockchain, creating a supply-demand dynamic.
Importantly, the blockchain infrastructure supporting cryptocurrencies is fundamentally secure. Once an entry is made in the blockchain, it cannot be deleted. Moreover, as the blockchain is stored across several computers, one hacker can’t access it in its entirety. Another benefit of cryptocurrency is that the crypto market never closes. There is no need to wait to begin buying, selling, or trading, and income can be generated outside of normal working hours. However, the cryptocurrency market, which remains relatively small in size, is more susceptible to price fluctuations, and is perhaps, not the best investment if you’re looking to create stable returns. The curators behind Ethereum stated that, at times, the blockchain had reached “certain capacity limitations”, causing potential financial losses and slower transaction rates.
Like NFTs, crypto found itself in the hands of the mainstream media and even celebrity A-listers, enabling it to be explained quickly and simply to mass media consumers. Recent events saw the likes of Kim Kardashian, Paul Pierce, and Floyd Mayweather being sued by investors for advertising cryptocurrency, without disclosing prior payment to do so. A largely unregulated industry, celebrity endorsement of crypto often fails to address the high-risk factors involved or its majorly speculative assets. As Gary Gensler, the chair of SEC, states, “Celebrity endorsements… don’t mean that an investment product is right for you or even, frankly, that it’s legitimate…each investment has its own risk and opportunities.”
Equity investments, like stocks, involve purchasing shares of a company, which can then be traded on a stock exchange. Equity can also be offered when joining a new company as an employee. The greatest advantage of equities is the ability to increase returns through capital gains and dividends. The stock market also enables investors to sell stocks whenever they’d like. Economists utilise the term “liquidity”, meaning that shares can be turned into cash with low transaction costs. Yet, although they have potentially high payouts, because equities don’t pay at a fixed interest rate, they don’t provide guaranteed income and expose investors to risk. Investor’s money is dependent upon the failures and successes of private businesses, companies that may be unable to pay off debt or tackle rising inflationary pressures. Bonds – loans made to a company and paid back with interest – are often more favourable than equities. They tend to be less risky and offer consistent returns, with higher interest rates. However, even though bonds are typically safer, they often result in lower returns on investments.
This article intended to provide an insight into different types of investment, including NFTs, cryptocurrency, and equities. However, there are several other options, such as mutual funds and EFTs, which are equally as significant. When determining the best investment strategy, there are three main factors to keep in mind, alongside seeking financial advice: the effort required to carry out an investment, risk tolerance, and expected returns.