What Is an NFT and How Do You Invest?
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The NFT world is exploding with digital art; huge names like Mark Cuban and Elon Musk are getting involved, and even the NBA has launched its own NFTs. But what are NFTs? Should you mint and sell your own? What are the pros and cons of NFTs? And are we in a bubble? I’ll answer all these questions and more in this guide so that by the end of it, you understand what everyone is talking about and might even end up creating your very own NFTs.
In this article
What are NFTs?
NFT stands for non-fungible token. Now, let’s break that down...
Being fungible means something is interchangeable with another of the same kind.
Money is fungible. If I give you $10, you could give me back $10 or two $5s, and we’d still have the same. It doesn’t matter how you give me $10 back, as long as it is $10.
Other examples of fungible assets are company shares and commodities like oil.
So, non-fungible items and assets are the opposite. They are unique. For example, art pieces, baseball cards, real estate, or even your pet dog or cat are non-fungible.
The token part means it is a token on the Ethereum blockchain. There are also NFTs on other blockchains, but in 95% of cases, we’re talking about a token on the Ethereum blockchain. By being on a blockchain, which is essentially an immutable ledger of transactions, a token can be easily transferred from one wallet to another, there’s a record of transactions and ownership, it can’t be duplicated or replicated, and it is fraud-proof.
When people talk about NFTs, they usually refer to digital goods like illustrations, videos, gifs, songs, and in-game items. I’ll discuss NFTs in relation to physical assets a bit later.
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NFTs as digital assets can be digital art like images or videos, in-game items, music, domain names, virtual real estate, and more. The applications for NFTs in the digital world are only increasing, as is the hype.
Before NFTs, if an artist created a digital illustration and released it into the world, it could be easily copied, and the original wouldn’t hold any value. But now, the artist can sell his illustration along with an NFT, which proves this one is the original. Simply put, The NFT works like a digital certificate of authenticity, proof of ownership, or signature from the creator.
In the same way, blockchain made digital money possible, a new application for it has been making digital art and collectibles possible. Standardization on a platform like the Ethereum blockchain makes it easier to create tools for minting new NFTs and markets to trade them.
Why are NFTs valuable?
By far, the most common questions regarding NFTs are about their value.
“Why are NFTs valuable?”
“Can’t I just copy that image/video/song?”
“Why would anyone pay thousands, or even millions, of dollars for a JPEG I can just download and own an indistinguishable copy myself?”
I’ll preface by saying the value of NFTs is mostly subjective, just like with normal art.
One could talk for hours explaining why a painting by da Vinci or Picasso is worth hundreds of millions of dollars. However, it is still mostly subjective and based on a person’s beliefs, perceptions, and preferences. Nevertheless, some find it valuable, and once more people find something valuable, a market emerges.
Anyway, I’ll do my best to show and explain the most common reasons why some might find NFTs valuable.
The likely biggest reason is human psychology and the need for status, recognition, attention, esteem, and approval by peers. We want to feel appreciated, respected, valued. Otherwise, why would someone pay hundreds of dollars for a brick with the word “Supreme” written on it?
It is also a vehicle for displaying our identity. We buy specific clothes, haircuts, or even food to further solidify and show who we are.
In addition to the status aspect, NFTs bring scarcity into the digital asset world. The token represents the value and ownership of a piece of digital art. Similar to how the paper of a $100 bill itself is worthless, but what the paper represents is what holds the value.
You can now own a unique and rare digital asset. Everyone can own a copy of one of Beeple’s illustrations, one of the most renowned digital artists in the world. Yet only one person can say and prove he owns the original art piece since he holds the NFT.
The utility of an NFT can also help drive the value. The NFTs might be in-game items like a sword or armor or a fully decorated digital house. With players ready to pay thousands of dollars for skins and other in-game objects, seeing how an NFT might hold value is easier. A ticket to an event like the Super Bowl can also be sold as an NFT.
Since the history of ownership of the NFT is saved on the blockchain, the history itself can influence the value. If you see someone famous or someone influential in the NFT space who has a track record for finding NFTs before they become highly sought after holding this specific token, it may make it more likely that this specific NFT will further increase in value.
Speculation is a big factor in the current valuations. A gold rush is going on, with people trying to figure out what NFTs will be valuable for years or even decades. The old and rare first editions often carry the most value, independent of whether you’re buying cars, paintings, sports memorabilia, trading cards, or NFTs.
Some see it as buying stock in the artist, an investment, where you hope and expect them to gain in popularity and your NFT becomes more valuable.
Lastly, a token's liquidity can affect its value. High liquidity translates to a higher value of NFT. Tokens that are standardized, easily tradable, and in high-demand categories are more liquid and, therefore, demand higher valuations than illiquid NFTs.
Popular NFT examples
Before we discuss how to mint and trade NFTs and what the future might hold, let me show you some of the most well-known NFTs in the market today.
CryptoKitties were the first NFTs to become mainstream. It is a game launched in October 2017 that allows players to breed and trade virtual cats. Sounds crazy, right? By December 2017, it was so popular that it caused severe congestion on the Ethereum blockchain, giving birth to memes that, of all the things that could be the downfall of blockchain technology, it was cats. The most expensive fetched over $100,000.
CryptoPunks were released before CryptoKitties in June of 2017. They are algorithmically generated 24x24 pixel art images. 10,000 of them were created, free for anyone to claim. Believe it or not, their popularity has risen dramatically recently, with the cheapest ones being sold for $25,000 and the most expensive for over $2 million.
NBA Top Shot are officially licensed NBA collectibles called moments. These NFTs are created on the Flow blockchain, and you can see and trade them on their platform. As of this writing, the transaction volume in their marketplace has surpassed $300 million.
Mike Winkelmann, known as Beeple, made headlines several times already with his digital artworks. In December 2020, his 2020 collection was sold over several auctions for a total of over $3.5 million, with some NFTs coming with a physical counterpart as well. As mentioned, at the time of writing this article, his collection “Everydays: The first 5000 days” went to the highest bid at nearly $70 million. This is the first time that one of the major auction houses auctioned digital artworks and accepted cryptocurrency as payment. This takes his earnings to nearly $100 million.
Some other notable NFTs assets are the 16,384 unique Hashmasks, the virtual world Decentraland owned by users, Sorare ’s fantasy soccer, 3LAU’s 33 digital albums sold for $11 million, and music found on EulerBeats, generated based on Euler’s mathematical discoveries.
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How to mint your own NFTs
If you’re a digital creator and you want to sell your art, images, illustrations, songs, and videos as NFTs, the easiest and quickest way is to mint the NFTs through a platform that offers this service and is also a marketplace.
The best-known ones are:
Some other platforms are curated and only work with known artists, athletes, brands, and celebrities. Two of the biggest ones are:
Before minting your tokens on the platform, you’ll need an Ethereum wallet like Metamask, with some Ether, to connect with the platform.
Once you connect your wallet, you can start creating your collection. Depending on the platform, you can pick different attributes for your NFTs. Attributes like:
- Name of the piece
- Author/Creator
- Supply: Single edition (one of this NFT), limited edition (x copies of this NFT), open edition (sale/auction is open for a certain amount of time, with an open-ended number of copies).
- Unlockable content that only the item owner can access. You’d then need to upload your artwork or copy the link of where it is stored.
- Royalties are what the creator of the NFT gets after every resale. More on this below.
- Other custom attributes
Once you have completed everything and uploaded the artwork, if necessary, you press the button to mint the NFTs, which are then created and recorded on the blockchain.
After creating the NFTs, you can list them for sale. You can choose the sale method and decide if it ’s an auction or a fixed-price sale, how long it’ll run for, and if there’s a reserve price. After picking the listing parameters, you can post your NFTs for sale.
If the NFT you want to mint is more complex, like a game or tickets to an event, your best bet is to get in contact with a developer or company that can assist you.
One common misconception I want to point out is that the artwork itself is not stored on the blockchain. The token, with its attributes and record of transactions, is stored on the blockchain. So, if you’re selling a digital asset like a song or image, the buyer will need a way to take possession of the asset. Most platforms have an option for you to upload it or provide a link the buyer can access.
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What are real-life use cases for NFTs?
NFTs, to the common outsider, may look like another trend that will pass with the tides of time because there is not much real-world application. However, NFTs greatly benefit many industries and can be used in various markets. Below are a few selections of markets that benefit from non-fungible tokens.
Collectibles
The sports cards and Pokemon trading card markets have exploded in the past couple of years, and with the shift towards a more digital age, NFTs can heavily impact the collectible market. With NFTs, there doesn’t need to be an in-person exchange for the collectible being sold; it can all be done virtually on the blockchain. There does not need to be any shipping or potential in-person scams that can occur during physical transactions. All digital collectible transactions would be verified and secured with blockchain technology behind NFTs.
Popular influencers and celebrities have shown strong interest in making their own NFT collectibles after seeing the success Logan Paul had with his own NFTs, which netted him $3.5 million in sales.
Gaming
Another beneficiary of the shift towards a more digital age has been the gaming industry, which has seen tremendous growth in numbers, surpassing many cable networks. NFTs benefit an industry like gaming because of how virtual items are purchased. Generally, every video game has its respective currency used to buy digital goods in that game. This means that having money in one game could not be used in another game, but with NFTs, this can be fixed.
Companies like Enjin are trying to make all virtual worlds interconnected. It is even possible to have all your gaming goods just on your phone, able to be exchanged using NFTs, blockchain technology, and their own cryptocurrency that will link completely different gaming worlds together.
Digital Art
NFTs have brought even more attraction to the digital art sector. One of the hardest problems digital artists face involves copyrighted material. With NFTs giving full ownership and blockchain technology showing public records, digital artists can even cut out the middleman by making peer-to-peer payments, which reduce fees and protect the integrity of the artwork.
Platforms such as Rarible and Opensea have created marketplaces where digital artists can highlight their artwork and have others bid for ownership.
Where do I buy and sell NFTs?
Now that you know what NFTs are and why they are valuable and have checked out some of the most famous tokens, you’re ready to buy your own NFT. But where do you start?
You can check out NFT marketplaces. Each has its own peculiarities, like whether anyone and everyone can list their NFTs there or if the market is curated. Most have the price listed in Ether (ETH), and some have it listed in dollars. Use the links I provided above.
You could also follow influencers to see if they’re launching their NFTs or follow trendsetters in the NFT scene and check out what they are buying, selling, and talking about. Some brands are launching their own platforms, like NBA’s Top Shot. Even auction houses like Christie’s now offer digital artwork.
The number of places you can find NFTs for sale is only increasing.
How do I buy and sell NFTs?
After you find the NFT you want to own, the process of buying is, in most cases, very similar to minting your own NFTs.
You’ll need an Ethereum wallet like Metamask to connect to the marketplace. Then, you can place your bid at an auction or buy the NFT directly. The same applies to listing your NFT for sale at one of these marketplaces.
One thing worth paying attention to is transaction costs. The Ethereum blockchain currently has a lot of traffic, which leads to higher transaction fees. Depending on how congested the blockchain is, a single transaction might cost upwards of $50.
Related: How to Invest in Crypto
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Features of NFTs
Blockchain Technology
NFTs are run by blockchain technology, which is the same technology powering some of the most popular cryptocurrencies in existence being Bitcoin, Ethereum, and many others. The appeal behind blockchain technology is that it is verifiable and secure. When a transaction is made on the blockchain, it is publicly recorded, and also transactions are irreversible. This means when exchanging something such as a digital good, the moment that transaction is completed, the good being sold cannot be taken from the owner.
Indivisible and Full Ownership
NFTs are indivisible and created and traded in whole parts, meaning that when a person sells an NFT, the other person receiving it receives 100% of that NFT in full ownership. There are no purchasing portions of NFTs, such as how a person can buy 01 Bitcoin. An NFT is bought as one or not bought at all.
Scarcity
Perhaps the most important feature of NFTs is the fact that they are scarce, which is what gives them their value in the first place. Creators of NFTs could, in theory, create as many NFTs as they wanted, but this is practically never done. If every person could just have ownership of a specific kind of digital art, why would that art have any value? Such is the case with every NFT, which has a limited supply.
The innovations and advantages of NFTs
NFTs have brought a lot of innovation and opportunities not only in the digital art space but also with wider ramifications. But before we get there, let me paint a picture of how it was before NFTs, especially for a digital artist.
Before NFTs, there was almost no place for digital art.
Art pieces would only be created through commissioned work, and once they were created and shared, they had very little intrinsic value. It wouldn’t hold value because you couldn’t be sure it would remain the only copy since duplicated works were indistinguishable from the original piece.
Now, artists can focus on creating instead of where their next job comes from.
Now, digital art can hold value because a token serves as its certificate of authenticity, as the artist's signature on the piece.
NFTs also decentralize and increase access to and the creation of art. NFTs and digital art are similar to how platforms like YouTube and Instagram served as launchpads to thousands of new creators who otherwise wouldn’t have been able to dedicate themselves to the craft. Through this increase in access, creators can also list their work and get paid directly, decreasing friction and the fee a middleman would usually charge.
A feature of NFTs that I briefly mentioned before is royalties. When minting your own NFTs, you can set a specific percentage of royalties that go to the creator with each subsequent sale. If you create an NFT with 10% royalties and give it away for free, and three years down the road, it sells for $1,000 worth of ETH, $100 of that would be sent to your wallet. Just the implications of this alone are wide-reaching.
By design, every wallet in the Ethereum blockchain is anonymous. You don’t have to provide your ID when you create one, and because of this, you can buy digital assets anonymously. You get to decide if you ever tie your identity with your wallet together. Personal security is improved as a consequence since the public doesn’t know that a specific person has an NFT worth millions unless that person chooses to disclose it.
At the same time, the blockchain is also public. The chain of custody and how much was paid for an NFT are easy to find, bringing transparency to the opaque art world. If individuals choose to disclose their wallets to show off their assets, they can find out everything about that wallet.
Artists and creators also have the opportunity to create communities and membership clubs around NFT holders, rewarding those who support them and own their NFTs.
This is just the beginning; everyone is still figuring out the use cases for NFTs. More positive aspects are constantly being discovered and invented.
The risks and problems surrounding NFTs
We know that not all are roses. There are risks involving NFTs, kinks, and problems that still need to be ironed out, and independent of how much of an expert you are, the possibility of losing money is real.
The first big risk is losing your wallet.
Your wallet on a blockchain consists of a public key, an address anyone can see and send coins and tokens, and a private key, which gives access to sending and spending what’s on the wallet.
If you lose or someone hacks or steals your private key, the contents will probably be gone, and there is no central authority that has the power to give it back to you. There is no manager to speak to or a location you can drive to and ID yourself to get your belongings back.
This becomes even more important if NFTs are minted with the enabled royalties feature. The royalties would continue to be sent to a wallet that the owner can no longer access.
Another big risk is losing money if we are inside a bubble ready to pop. Good arguments can be found on both sides of this question, but it is undeniable that some valuations border on insanity.
Celebrities launching and minting NFTs with no plan on how to serve the community in the long term and with no goal other than making themselves rich. And with no established consistent demand like with antique cars, sports memorabilia, and art, which have accrued value over decades, many NFTs will likely see their value disappear.
It is a safe bet that over 90% of NFTs will be worthless in a couple of months or years, even if they were bought for thousands of dollars.
Also, since the barrier to entry is so low, the demand likely won’t keep up with the supply of new NFTs. It also makes creating a name for yourself as a distinguished creator is harder.
The user experience and interface for anyone buying NFTs, especially for someone new to the crypto and blockchain world, are far from simple and easy. We’ll get there one day, but until then, it is easy to understand why some might get overwhelmed trying to buy an NFT.
Sometimes, new artworks go on sale at specified times. This becomes a problem when bots front-run humans and buy everything before humans have a chance. Many sales have sold out in under a second, leaving no chance for those interested to buy it fairly.
One risk that is rarely mentioned, since most NFTs are on the Ethereum blockchain, becomes real when buying NFTs on proprietary instead of decentralized blockchains and platforms.
What happens if, in a couple of years, the platform closes, the website becomes unreachable, or the company goes bankrupt? You’re not even left with worthless tokens, you are left with nothing, since you won’t even be able to access the blockchain to transfer and trade your tokens.
And lastly, since the technology and markets for NFTs are so new, you’ll have trouble finding someone willing to insure the new NFT you just bought for $2 million.
Should I invest in NFTs?
I won’t pretend to know where this ride is headed and be wary of anyone else promising they know. But if you’re interested in NFTs and the industry, there are a couple of situations in which I find buying interesting.
If you like a specific artist, are a fan of his work, and want to support him, buying an NFT is a way to do so.
If you’re looking to get a return on your investment, first editions and timeless art by known artists hold their value better, even if they’re more expensive to buy at first.
The old adage, “During a gold rush, sell shovels,” also applies here. If you’re looking to invest in the NFT boom without directly buying NFTs, you can look to invest in protocols, governance tokens, the infrastructure, and similar vehicles that drive the market.
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NFTs in relation to physical assets
While most of this article was geared toward digital assets on the Ethereum blockchain, one can also sell and acquire NFTs with physical assets.
The case for NFTs with physical assets is a bit more complicated for now because the value lies less in the token itself and more in the asset. The token serves more as a certificate of authenticity than plain ownership.
Just imagine we have the technology to create perfect copies of another physical asset. How would you distinguish one from another? An NFT solves this problem.
It is also worth noting that some digital NFTs come with their physical counterparts, like some of Beeple’s works or 3LAU’s digital albums, which came with physical vinyl.
What the future might look like for NFTs
While the implications and applications for NFTs are just being discovered and tested, and some consider it in a bubble, one can’t help but wonder about the effects and ramifications NFTs will have in our future.
Official documentation like birth certificates and academic credentials could be given out as NFTs. In a future where virtual reality plays a bigger role in our day-to-day lives, NFTs in the world could become huge, and a glimpse of this is given in the book/movie Ready Player One.
An NFT owner could lend his art to a digital museum or even create his own digital museum.
Valuable NFTs could be used to get NFT-collateralized loans.
Your house deed and your stock might soon be NFTs.
The college textbook industry, which charges high prices for textbooks with single-use codes so students don’t resell them, could adopt NFTs with royalties. This would allow them to lower prices while still making money on the resales.
Ticket scalping may soon be a thing of the past. Some initiatives are testing NFTs as event tickets with great response and zero scalping, leaving less money in the hands of scalpers and bringing it back to the hands of fans, artists, and venues.
The bottom line
We have a long way to go until NFTs mature; we are just seeing the beginning, the first big wave of mainstream adoption. A lot is being experimented and tested, and some will lose money, but through trial and error, NFTs could evolve to become an essential part of our lives.
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Writer
Claudio is a freelance copywriter specialized in finance and cryptocurrencies. Besides writing, he is interested in biohacking, trading cryptocurrencies and being curious.
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