What are NFTs?

Remember the uproar on the internet when the musical artist Grimes made millions of dollars on NFTs? Even Twitter CEO Jack Dorsey put up an autographed tweet for sale as an NFT. It was at this point that the rest of the world started to hear about NFTs. You are probably wondering, what is an NFT?

Let’s start with the basics. 

NFT stands for non-fungible token. In economics, a fungible asset is something with units that can be readily interchanged - like money. With money, you can swap a $100 note for two $50 notes and it will have the same value. However, if something is non-fungible, swapping it is impossible - it means it has unique properties, so it cannot be interchanged with something else.

It could be a house, or a painting such as the Mona Lisa, which is one of a kind. You can take a photo of the painting or buy a print but there will only ever be the one original painting.

An NFT is a digital asset that represents real-world objects like art, music, in-game items, and videos. They are bought and sold online, frequently with cryptocurrency, and they are generally encoded with the same underlying software as many cryptocurrencies.

Non-fungible tokens (NFTs) seem to have exploded out of the ether this year. Although they’ve been around since 2014, NFTs are gaining notoriety now because they are becoming an increasingly popular way to buy and sell digital artwork. A staggering $174 million has been spent on NFTs since November 2017.

“Essentially, NFTs create digital scarcity,” according to Arry Yu, chair of the Washington Technology Industry Association Cascadia Blockchain Council and managing director of Yellow Umbrella Ventures. 

This stands in stark contrast to most digital creations, which are almost always infinite in supply. Hypothetically, cutting off the supply should raise the value of a given asset, assuming it’s in demand. NFTs exist on a blockchain, which is a distributed public ledger that records transactions.

You’re probably most familiar with blockchain as the underlying process that makes cryptocurrencies possible. NFTs are typically held on the Ethereum blockchain, although other blockchains support them as well.

An NFT is created, or “minted” from digital objects that represent both tangible and intangible items, including:

Also, NFTs can sometimes be worth a lot. In theory, anybody can tokenize their work to sell as an NFT, but interest has been fuelled by recent headlines of multi-million-dollar sales. On February 19th, an animated GIF of Nyan Cat - a 2011 meme of a flying pop-tart cat - sold for more than $500,000.

A few weeks later, the musician Grimes sold some of her digital art for more than $6 million. It is not just art that is tokenized and sold. Twitter's founder Jack Dorsey has promoted an NFT of the first-ever tweet, with bids hitting $2.5 million.

Christie's sale of an NFT by digital artist Beeple for $69 million (£50m) set a new record for digital art. But as with cryptocurrencies, there are concerns about the environmental impact of maintaining the blockchain. Essentially, NFTs are like physical collector’s items, only digital.

So instead of getting an actual oil painting to hang on the wall, the buyer gets a digital file instead. They also get exclusive ownership rights. That’s right: NFTs can have only one owner at a time. NFTs’ unique data makes it easy to verify their ownership and transfer tokens between owners.

The owner or creator can also store specific information inside them. For instance, artists can sign their artwork by including their signature in an NFT’s metadata.

World Artists and content creators should be happy about NFTs. 

Blockchain technology and NFTs afford artists and content creators a unique opportunity to monetize their creations. For example, artists no longer have to rely on galleries or auction houses to sell their art. Instead, the artist can sell it directly to the consumer as an NFT, which also lets them keep more of the profits.

In addition, artists can program in royalties so they’ll receive a percentage of sales whenever their art is sold to a new owner. This is an attractive feature as artists generally do not receive future proceeds after their art is first sold.

Why are NFTs so valuable? 

Like all assets, supply and demand are the key market drivers for price. Due to the scarce nature of NFTs and the high demand for them from gamers, collectors, and investors, people are often prepared to pay a lot of money for them. If you’re keen to start your NFT collection, you’ll need to acquire some key items:

First, you’ll need to get a digital wallet that allows you to store NFTs and cryptocurrencies. You’ll likely need to purchase some cryptocurrency, like Ethereum, depending on what currencies your NFT provider accepts. You can buy crypto using a credit card on platforms like Coinbase, Kraken, eToro, and even PayPal and Robinhood now. You’ll then be able to move it from the exchange to your wallet of choice.

You’ll want to keep fees in mind as you research options. Most exchanges charge at least a percentage of your transaction when you buy cryptocurrency. Investing in NFTs is a largely personal decision. If you have money to spare, it may be worth considering, especially if a piece holds meaning for you.

But keep in mind, an NFT’s value is based entirely on what someone else is willing to pay for it. Therefore, demand will drive the price rather than fundamental, technical, or economic indicators, which typically influence stock prices and at least generally form the basis for investor demand.

All this means an NFT may resale for less than you paid for it. Or you may not be able to resell it at all if no one wants it. 

Now that you have a piece of thorough knowledge about NFTs, you’re ready to dive into the world of digital ownership and find out what it means for you.