The latest phenomenon in the investing world is the idea of non-fungible tokens, or NFTs, which represent a digital piece of artwork or other collectible online item. "Fungible" means something can be easily traded for something else of the exact same value. For example, a dollar bill is fungible because you can trade it for another dollar bill that's worth the same amount.

A non-fungible item is a one-of-a-kind item that can't be replaced by something else. NFTs allow someone to buy or sell a unique piece of digital art, and the buyer is the only one in the world to own that original piece.

NFTs are a new type of investment, but some have already sold for tens of millions of dollars -- proving that they can be lucrative. But are they the right investment for you?

NFT gold token against a blue background

Image source: Getty Images.

How do NFTs work?

NFTs are recorded on a blockchain, and each token holds information about a unique digital piece of art.

The types of art available as NFTs are virtually limitless. Twitter CEO Jack Dorsey recently made headlines for selling the first-ever tweet as an NFT for $2.9 million. An animated GIF of Nyan Cat, a 10-year-old meme, sold for more than $500,000. And digital artist Beeple sold a digital painting for a whopping $69 million.

NFTs become an investment opportunity when you consider the art's resale value. Similar to buying physical pieces of fine art, owning the art itself isn't necessarily the moneymaker -- it's selling that art to the highest bidder that brings in the big bucks. If you're able to purchase a high-ticket NFT and then sell it for more than you paid, you could make a hefty profit.

Also, the blockchain element of NFTs aims to prevent fraud and theft. While others can make copies of an original piece of digital art, there's still only one original -- and only the person who owns the NFT for that piece of art owns the original.

Similar to physical art, you can buy a print of the Mona Lisa, but there will only ever be one original Mona Lisa.

Are NFTs the right investment for you?

Because NFTs are a relatively new investment, there's still a lot to learn about them. In addition, it can be tough to put a price on digital art, which can make NFTs an incredibly risky investment.

When you invest in stocks, the stock price is how much the investment is worth. If you buy a stock at a certain price and then sell it when it's at a higher price, you can make a profit.

With digital art, though, how much it's worth depends on how much someone is willing to pay for it. There are no guidelines for how much a meme or a GIF or a tweet is worth, so it's anyone's guess how much you'll be able to get for it -- or whether you'll be able to sell it at all.

Pile of gold tokens

Image source: Getty Images.

If you're determined to invest in NFTs, set a spending limit and only buy what you can afford to lose. NFTs are highly speculative, so don't go into it with the expectation of getting rich. 

Also, it's a good idea to keep the majority of your money in safer investments, like index funds or ETFs. When the bulk of your portfolio is invested in relatively safe places, you're in a better position to take on risky investments.

NFTs are an interesting new type of investment, but they're not right for everyone. If you're curious about NFTs and have cash to spare, it may not hurt to get your feet wet. Otherwise, it's best to watch this phenomenon unfold from the sidelines where your money is safer.