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NFTs, namely Non-fungible tokens, are the latest cryptocurrency phenomenon to go mainstream.
Earlier this year in March, a digital-only artwork was sold at Christie’s auction house for an eye-watering $69.3 million — but the winning bidder would not receive a sculpture, painting or even a print. Instead, they get a unique digital token known as an NFT.
While Bitcoin was hailed as the digital answer to currency, NFTs are now being touted as the digital answer to collectibles.
So what is an NFT?
An NFT is a digital asset that represents real-world objects like art, music, in-game items, videos, and even peoples’ identities, property rights, etc. They are bought and sold online, frequently with cryptocurrency, and they are generally encoded with the same underlying software as many cryptos. “Tokenizing” these real-world tangible assets allows them to be bought, sold, and traded more efficiently while reducing the probability of fraud.
What is the difference between NFTs and Cryptocurrencies?
Physical money and cryptocurrencies are “fungible,” meaning they can be traded or exchanged for one another. They are also equal in value — one dollar is always worth another dollar; one Bitcoin is always equal to another Bitcoin. Crypto’s fungibility makes it a trusted means of conducting transactions on the blockchain.
Unlike cryptocurrencies, NFTs are unique cryptographic tokens that exist on a blockchain and cannot be replicated, therefore, cannot be traded or exchanged at equivalency. Each NFT has a digital signature that makes it impossible for NFTs to be exchanged for or equal to one another (hence, non-fungible).
How do NFTs work?
Most NFTs are part of the Ethereum blockchain so they are individual tokens with extra information stored in them. That extra information is the important part, which allows them to take the form of art, music, video (and so on), in the form of JPG, MP3s, videos, GIFs and more.
Traditional works of art such as paintings are valuable because they are one of a kind. But digital files can be easily and endlessly duplicated. With NFTs, artwork can be “tokenized” to create a digital certificate of ownership that can be bought and sold. As with crypto-currency, a record of who owns what is stored on a shared ledger known as the blockchain. The records cannot be forged because the ledger is maintained by thousands of computers around the world.
NFTs can also contain smart contracts that may give the artist, for example, a cut of any future sale of the token.
How to Buy NFTs?
Before you start your own NFT collection, you’ll need to decide what marketplace to buy from, what type of digital wallet is required to store it and what kind of cryptocurrency you’ll need to complete the sale.
Some of the most common NFT marketplaces include OpenSea, Mintable, Nifty Gateway and Rarible. There are also niche marketplaces for more specific types of NFTs, too, such as NBA Top Shot for basketball video highlights or Valuables for auctioning tweets such as Dorsey’s currently up for bid.
You may also want to keep fees in mind as you research options. Most exchanges charge at least a percentage of your transaction when you buy crypto. Some marketplaces charge a “gas” fee, which is the energy required to complete the transaction on the blockchain. Other fees can include the costs for converting dollars into Ethereum (the currency most commonly used to buy NFTs) and closing expenses.
On top of that, 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.
Whether or not NFTs are here to stay, they have certainly become a new plaything for the uber-rich and there is real money to be made if you can make it happen. NFTs give new meaning to digital art, and the prices seen at sale indicate it is a real part of the future of art, and collectibles in general.
WadzPay is looking into how NFTs can become part of our ecosystem in the future.
Not investment advice.