What we'll cover
The definition of NFTs
How cryptocurrency differs from NFTs
The risks and benefits of the NFT market
You’ve seen the headlines: Memes on sale for hundreds of dollars, tweets selling for thousands and GIFs going for millions. Technically, they’re all being sold as non-fungible tokens (more commonly called NFTs). If you’re wondering “What the heck is an NFT, exactly? And why do I keep hearing about them?” we’re here to help.
What is an NFT?
NFT stands for non-fungible token: a unique, identifiable digital asset that’s bought and sold through transactions on the blockchain. The “non-fungible” aspect basically means that it’s one-of-a-kind. That’s because no two NFTs are identical on the blockchain. Every NFT has a distinct, non-transferrable code to ensure it is verifiable and distinguishable from other tokens.
Just about anything digital can be turned into an NFT. Think: Tweets, TikToks, songs, images, memes, GIFs, digital trading cards, games, articles and more.
While they’ve been around for five-plus years, NFTs began picking up mainstream attention as the technology has become an increasingly popular way for artists to connect with buyers and sell their art. Most notably, a digital artist known as Beeple recently auctioned off an NFT at Christie’s auction house — and it sold for more than $69 million.
Now, an increasing number of artists, musicians, celebrities, businesses and others are selling NFTs as a way to share collectibles, gain attention and raise money.
What is the difference between NFTs and cryptocurrency?
The majority of NFTs live on the Ethereum (a type of cryptocurrency) blockchain, which means an NFT’s entire transaction history is recorded and available for public viewing. But NFTs and cryptocurrencies, like Ethereum and bitcoin, aren’t the same type of asset.
One of the main differences is the fungibility. Cryptocurrency is fungible — meaning you can trade one bitcoin for another and you’ll have the same thing with the same value. (The same thing goes for other types of currency, like dollars.) Because NFTs are non-fungible, each one has its own value.
It’s important to understand that even though they use the same type of technology, cryptocurrency and NFTs are different types of assets. NFTs usually represent things like media, art or other physical items — giving them subjective (and sometimes even sentimental) value. Crypto is a type of digital currency meant for transactions.
Learn more: Understanding cryptocurrency — What it is and how it works
How do NFTs work?
The person who creates, or mints, an NFT owns its copyright and can make as many copies of their NFTs as they choose. While a creator might make just one edition of an NFT, they could make five, 20 or 100 editions. Each would be considered its own NFT and each would have its own unique, identifiable code.
After creating an NFT, it's sold on an online marketplace, like OpenSea, Rarible or Mintable. There, buyers bid on the NFTs and purchase them, typically using cryptocurrency, though some platforms accept credit cards.
Once an NFT is sold, the buyer owns its and can sell it to someone else if they choose. (The creator still owns the copyright and future owners must ask for permission to replicate the NFT.) Typically, creators receive a percentage of the sale any time their NFT is resold.
What makes NFTs valuable?
Here’s one way to think about it: Anyone can see photos of the Mona Lisa online. You can buy prints to hang in your home or use a photo of the painting as your phone background. But only one institution — the Louvre — actually owns the original. Similarly, when it comes to music, anyone can stream a song and listen to it — but only one person owns the master recording.
Like with art, the price of an NFT has little to do with economic, fundamental or technical indicators. Instead, what gives an NFT value comes down to supply and demand, which is why their scarcity is important. If there’s only a couple versions of a certain NFT on the market and a lot of people really want to buy it, the price can go as high as people are willing to pay.
What gives an NFT value comes down to supply and demand, which is why their scarcity is important.
But if you can watch a video, read an article or download an image from the internet at any time, why would choose to spend money on it? Well, NFTs are all about having ownership over an original. In a way, it’s about having bragging rights — being able to say you own the original painting versus a poster of it.
Some people purchase NFTs to build a digital fine art collection. Others buy NFTs to collect digital trading cards or purchase exclusive assets from their favorite online creators, brands or celebrities. Some buy NFTs in hopes they can resell the digital asset for more than they bought it.
How much do NFTs sell for?
NFTs can sell for as low as the equivalent of $1 (a tiny fraction of one Ethereum) or as high as several million dollars. The cost of any given NFT depends on the demand for it. As of late April, the average cost of an NFT was about $1,500.
Are NFTs a good investment?
Like any form of investing, NFTs present potential risks and benefits you should weigh if you’re thinking about getting into the NFT market.
NFT risks
There’s no guarantee you’ll make a profit from investing in NFTs. For instance, if you buy an NFT of a meme for the equivalent of $100 and try to sell it but nobody wants it, you’d be out the money. Remember that the value of an NFT, like a physical asset, is often speculative and subjective, which can make it tricky to predict its future value.
NFT benefits
NFTs present a new avenue to tap into markets and asset types that have historically been less accessible to the masses (like the fine art industry). And with the security of blockchain technology, NFTs allow digital assets to be authenticated and owned in a totally new way.
While you probably wouldn’t want to invest your retirement fund in a Nyan Cat NFT, if you have the disposable income, you might find NFTs are an opportunity to add some diversification to your portfolio — or a way to snag ownership rights over your favorite .jpeg.
An NFT moment
NFTs have proven to be one of 2021’s most exciting digital innovation (so far). While the hype probably won’t last at this level forever, the future of NFTs and their potential usage is vast — especially as blockchain continues to become a more mainstream aspect of our cultural and financial lives.
