Cryptocurrency has skyrocketed in popularity for various reasons. Many people have made money through mining, trading, and staking in the world of blockchain technology. Another popular aspect of the blockchain is the NFT or non-fungible token.
What is a non-fungible token, and why are people spending so much on them? This article will delve into the basics of NFT. It will help you appreciate the significance of the NFT space and what makes NFTs a total gamechanger. It might even prompt you to mint your own NFT or buy and sell them online.
What is an NFT?
A non-fungible token, commonly known as an NFT, is a unique cryptographic token on a blockchain network. Because it has a unique identification code and metadata, unique cryptographic tokens cannot be replicated.
NFTs function as communicators or information tokens. However, unlike cryptocurrencies like Ethereum and Bitcoin, NFTs are not fungible and mutually interchangeable.
NFTs essentially act as a digital contract to present ownership of digital media like videos, art, memes, music, and even real-life objects like real estate and designer sneakers. Each NFT contains an address or unique code that exists on a blockchain. A blockchain is an online public ledger or database that records transactions. Thus, information is open to all.
Buying a digital asset is like buying a digital certificate of ownership. If you purchase the digital art from the Bored Ape Yacht Club, you buy a unique key that confirms that the NFT is exclusively yours. Once you buy NFTs, you'll get a private key that links you to the blockchain and verify your ownership.
On the one hand, any on the internet can simply search for an image of a Bored Ape and save it on their computer or mobile device. Buying NFTs means owning the original copy; anyone can verify your claim.
Why purchase NFTs when you can keep the artwork for free? Let's say you buy an original Monet painting. The original has a much higher value than the duplicates you can find at a museum souvenir shop. While anyone can have a replica for a more affordable price tag, owning NFTs means you are the exclusive owner of the original digital file. An NFT can be worth a lot of money, especially if the associated digital files become more popular. Thus, you can even make money from NFT sales.
What's the difference between fungible and non-fungible tokens?
A fungible token like Bitcoin or Ether can be replaced, while a non-fungible token cannot. If this still sounds confusing, fungible means something can be replaced with another identical item. It also means the thing is unique. For example, a dollar bill is fungible because the value remains the same once you trade it with another dollar bill.
Another significant distinction between the two concepts is the information that these store on the blockchain network. Fungible cryptocurrencies such as Bitcoin have value. Meanwhile, an NFT is a digital deed of ownership to a digital file. An NFT's value is tied to the underlying asset it represents.
A deed to a house or property cannot be replicated in the real world. The same principle applies to the coding and information stored within an NFT on a blockchain network.
How does a non-fungible token (NFT) work?
NFTs reside on the blockchain network, the underlying technology that also powers cryptographic assets. Bitcoin may be the most popular cryptocurrency worldwide, but most NFTs are purchased with Ether (ETH). They also exist on the Ethereum blockchain.
You can purchase non-fungible tokens from NFT marketplaces like Rarible, OpenSea, and Nifty Giveaway. Before exploring the NFT market, you need to open a crypto wallet. A crypto wallet allows users to store various types of cryptocurrencies used to buy NFTs.
You can buy cryptocurrencies from popular exchanges such as Kraken and Coinbase or investing apps like Webull, SoFi, and Robinhood. Before you purchase NFT projects on the NFT marketplace, be wary of the fees and limitations involved.
Some crypto providers charge a specific price for buying cryptocurrencies. In addition, some apps don't allow you to move your crypto out of the app and into an external digital wallet. Hence, it would be impossible for you to use that crypto to buy NFTs.
What type of digital asset can you buy online?
There are different types of NFTs, granting you the freedom to choose what kind suits your taste and interests. Here are some types of NFTs people usually buy.
Digital art NFT
NFTs have become huge in the art world, and for a good reason. Crypto art is one of the most popular NFTs worldwide. The value tied to the digital art NFT market has skyrocketed to over $41 billion as of 2021. Considering how the first cryptocurrency, Bitcoin, was introduced only in 2009, that growth is astronomical.
The value of the NFT market can be compared to the traditional high-end art market, which had a value of $50 billion at the time. One of the most expensive NFT sales to date is the digital artist Beeple’s “The First 5000 Days.” This particular NFT sold for over $69 million through the famous auction house Christie's.
However, you don't need millions of dollars to start buying NFTs. You can purchase NFTs for as low as a few pennies to $25 through collections like Secret Society of Whales and Axie Infinity. The value of digital artwork highly depends on the tangible assets it is tied to.
You probably know by now that GIFs are moving images you can share via a mobile device or on the internet. These moving images can be anything and everything under the sun, like a cartoon clip or a dancing banana. GIFs can be accessed for free online.
While you can find GIFs for free, some people have spent a lot of money to buy GIFs. A collector once paid $690,000 on the popular Nyan Cat GIF. In case you're wondering, this is a flying cat with a pop-tart on its body.
NFT videos have also become popular recently. Anything from a sports highlight reel or movie clip can be minted into an NFT. 'Minting' is the process of uniquely publishing your own NFTs into the blockchain for them to be purchasable. While you can mint pretty much anything, some images, music, and videos are bound by copyright, so you should be careful before you put an NFT into the marketplace.
Like other NFTs, NFT videos have unique identification codes on blockchain networks and confirm owners. Anyone can watch a YouTube video online for free. However, YouTube NFTs have been sold for hundreds of thousands of dollars. The once-viral “Charlie Bit My Finger YouTube video has been sold as an NFT for a staggering amount of $760,999 in 2021.
The professional sports world has also made much money from NFT collections, mainly through short video highlights. So far, the most expensive sport-themed NFT video is a one-of-a-kind F1 Delta Time by Formula 1. This has been sold for more than $1.3 million.
Basketball-themed NFTs have also become extremely popular. Since it was launched in October 2021, collectors have spent over $589 million on Top Shot NBA NFTs. In case you're interested, you should know that NBA Top Shot clips are released numbered and in packages. Hence, one highlight clip can be minted into 100 NFTs.
However, this can take away the uniqueness factor that makes NFTs so popular in the first place. You and 99 other users worldwide can own an NFT of the same video clip, even though each of you will be given a unique address on the blockchain. In theory, this lack of exclusivity can drive down the value of a particular NFT because more than one person can have the rights to the clip. Because of basketball's popularity, these digital objects remain valuable to collectors and basketball fans.
NFT Video Games
The online game CryptoKitties became immensely popular among NFT enthusiasts in 2021. This video game allows users to sell, buy, and 'breed' unique NFT of digital kittens. The popularity of these digital assets stems from people's interest in Tamagochi, Pokemon, and GigaPets. However, CryptoKittie Founder #40 has sold an NFT for $1.1 million. You probably haven't spent that much money on your toys.
In recent years, the gaming world has been injecting NFT transactions into its platforms. Nowadays, you can buy NFTs tied to game items such as skins, weapons, or exclusive gaming gear for your video game character.
On the other hand, selling NFTs through video games has become quite controversial. Some gamers view these commercial transactions as money-making schemes instead of valuable improvements contributing to one's overall gaming experience.
Nevertheless, NFT creators have the opportunity to make some serious money from NFT tokens. Non-fungible tokens in gaming have allowed players to earn physical money by contributing to the development of NFT tokens.
How do you mint an NFT?
While you purchase NFTs online, you can also participate in the NFT marketplace by making your NFT through minting. This is the procedure of associating a specific data set with a particular object or file. When picking a file, you should consider that item's copyright and intellectual property rights. You might end up in an ugly legal issue if you're not careful.
Before anything else, you should open a crypto wallet. This is where the newly minted NFT will be stored once the process is finished.
To mint an NFT, you must select a marketplace and open an account there. Every marketplace has its unique process. However, the general rule is to upload the file you want to associate with your NFT.
Ether or other cryptocurrencies can fund the actual minting process. Hence, you'll have to make an investment before you can make money from selling NFTs. Once the minting process is done, you'll obtain all the relevant information on your NFT. That particular NFT will also be registered in your digital wallet. From there, you have the option to keep, trade, or sell it.
Is a non-fungible token considered a good investment?
Considering the value of popular NFT marketplaces nowadays, can you consider NFTs a sound investment like how people view real-world assets? NFT ownership is still in its infancy years. Thus, personal finance experts have a lot of speculations regarding their value. After all, while they may be digitally representing physical assets, an NFT purchase doesn't grant you ownership of the real-world object.
In addition, you shouldn't invest all your money in a single NFT collection. It would be best to buy an NFT artwork from different collections to see how their equivalent values rise in the long run.
Hence, you should approach NFT art with a grain of salt. It would not be wise to pour all your money into such tokens whose value might depreciate tremendously in the long run.
What are the risks of non-fungible tokens?
As with anything in the physical world and digital economy, getting into NFTs have its risks. First, it must be clarified that an NFT is not an asset class on a technical aspect. This digital asset is a form of blockchain technology that serves as a digital representation of one's ownership. Basically, securitized NFTs are like digital deeds of ownership for NFT artwork or videos.
Hence, you should really understand the value of the underlying asset to the NFT is tied. This gives you an idea of the inherent value that digital assets will have in the long run. For example, collections of avatars from the famous Bored Ape Yacht Club enjoy great returns for their investment nowadays. However, the intrinsic value of these digital objects is tied to the popularity of NFTs.
In case an NFT project or NFTs in general plummets in popularity, the value tied to these assets will depreciate concurrently. In the worst-case scenario, you might be left with something worthless.
While many NFT enthusiasts perceive non-fungible tokens as digital collectibles similar to high art or limited edition trading cards, some look at NFTs as investment collateral. The general idea is that their NFTs would eventually sell for a profit.
However, there's a significant risk to treating NFTs this way. If you spent $100,000 on an NBA Top Shot clip and the demand for these suddenly declines, you'd have difficulty finding a collector willing to buy your NFT for a higher price. In turn, you will lose money in such transactions.
Similar to the cryptocurrency market, which is also tied to blockchain technology, the NFT space is highly volatile. In fact, anything connected to the web-3 dimension and the metaverse is highly volatile.
To put things into perspective, a high-profile NFT investor named Sina Estavi once bought an NFT of the first tweet by Twitter founder Jack Dorsey for $2.9 million in 2021. This is the first post on the mega-popular social media platform, Twitter. The following year, he put up the same NFT for auction. The highest bid he received was $14,000.
In short, the value of NFTs can rise and fall depending on the demand. You can only make as much money as people are interested in paying. In addition, the value of NFTs is tied to their popularity. If the hype dies, the money you invest will not return.
Like anything financial-related, NFTs are not immune to scams like phishing operations. These are cases that involve hackers tricking users into giving up their crypto wallet seed phrases or keys. They then use that information to steal their wallets' content, including NFTs.
NFT scams can potentially kill people's excitement over digital assets and drive people away from purchasing NFTs in general. Hence, you should be careful before buying any NFT project online. You must research the people and private companies selling NFTs to confirm they're legitimate and verified.
Should you invest in NFTs?
As mentioned, the world of NFTs is still in its infancy stages. As blockchain technology continues to thrive, the popularity of tokenizing tangible assets rises as well. Truth be told, you don't need to be rich to start collecting, selling, or buying NFTs. However, you are required to put out some money to get started.
As with any investment, you should be careful when purchasing or selling NFTs online. It would help if you only procured assets from legitimate sources. At the same time, it would not be wise if you poured all your money into NFTs. Even the most seasoned collectors have lost much money in the NFT marketplace.
However, if you're curious about blockchain technology and why there are so many crypto trading enthusiasts, you should start things slow. Before investing a lot of money into NFT projects, you go for affordable collectibles. From there, you can explore more expensive endeavors once you've gained some confidence. Collecting NFTs can be a fun hobby if you can afford it.