What the Heck is an NFT?
Wondering what on earth an NFT is? Yeah...Us too.
With the popularity of cryptocurrency continuing to soar higher and higher, NFTs are another type of digital asset taking the world by storm. In March, a digital artist known as Beeple sold an NFT for a record $69 million, garnering a lot of attention and inspiring many people to quickly become far more familiar with NFTs.
NFT stands for non-fungible token, which probably doesn’t mean a whole lot to you at this point.
“Non fungible” simply means that it can’t be interchanged with anything else. For example, a $20 bill is fungible. It’s interchangeable with any other $20 bill, two $10 bills, or any other combination of money that equals $20.
NFTs on the other hand are non-fungible because they are unique and one-of-a-kind. For that reason, certain NFTs are very valuable.
In it's most simple terms, an NFT is proof of ownership of a digital file.
Keep in mind that doesn’t mean the digital file will be exclusive to you—however it essentially gives you ownership rights of the original. Compare it to traditional art where the original may be worth money while other reprints or reproductions are virtually worthless.
Most of the hype around NFTs right now is related to digital art, but NFTs can be used with any other type of digital file as well.
Just like the digital file it’s related to, the NFT is digital and not something you can hold in your hand. As the owner of an NFT, you would store it in a digital wallet just like you would store cryptocurrency. It’s important to note that not all digital wallets are capable of storing NFTs. The digital wallet must be NFT compatible.
You’ve probably seen headlines or heard the news about NFTs being sold for huge sums of money within the past few weeks or months. There have been many large and to be honest, head-scratching sales of NFTs, some going for six, seven, and even eight-figure sums.
Right now, a lot of entrepreneurs, investors, and businesses are looking to get involved and ride the wave of NFTs. Some are purchasing NFTs as an investment, hoping the value will rise, similar to an investor who might purchase more traditional fine art. Some are using the soaring popularity of NFTs to generate publicity or exposure for a business. Others are getting involved because they think it’s fun or they want to collect something.
The meteoric rise of Bitcoin and some other cryptocurrencies has certainly contributed to helping people to realize the financial potential that exists. For most people, the interest in NFTs is primarily related to the newness of the opportunity and the hope that values will skyrocket in the future.
How Do NFTs Work?
To understand NFTs, it helps to first have a solid grasp of how cryptocurrencies work. Cryptocurrencies like Bitcoin, Ethereum, and others are digital currencies.
While the value of cryptocurrencies is prone to large and unpredictable swings, one of the major benefits is the difficulty of counterfeiting. All transactions use blockchain to record each transaction and ensure authenticity, making it nearly impossible to counterfeit.
NFTs work in a similar way. They use blockchain as a digital ledger to help prove ownership over a digital file, something that is otherwise very difficult to do. Most NFTs are currently using the Ethereum blockchain.
Digital files can be easily downloaded, shared, and copied, so thousands of people can have the same digital file on their computer or device. NFTs help by proving who has true ownership of the file.
The NFTs have value because, in part, they are difficult or impossible to hack. Others may be able to copy the digital file, but the NFT proves authenticity.
You can think of NFTs as modern-day trading cards. When I was a kid in the 1980s, I bought thousands of baseball cards hoping they would someday go up in value (spoiler alert, they didn’t). NFTs are essentially digital trading cards.
NFTs can be related to all kinds of digital files. It could prove ownership to digital art, digital music, a video clip, or even a spreadsheet. Even common, everyday digital files can have NFTs.
For example, The NBA is selling NFTs for clips of highlights from NBA games. Purchasing the NFT gives you ownership of the clip, but the same clips are accessible on YouTube and anyone can watch them.
Some YouTube celebrities have also created and sold NFTs for short clips of their YouTube videos.
The NFT craze opens up a few specific opportunities for making money or creating value.
- Artist - As an artist, you can create and sell NFTs for your digital artwork. This may allow you to make money with something that you’ve struggled to monetize in the past.
- Investor - If you’re looking for a high-risk, high-reward type of investment, NFTs could be a possibility. Many investors are purchasing with the intent of reselling the NFT, either in the short term or long term.
- Business - Some businesses are using NFTs primarily as a way to generate publicity, taking advantage of the massive amount of attention that NFTs are getting right now. An example is Injective Protocol purchasing $95,000 Banksy artwork only to burn it and turn it into an NFT.
As an artist or the creator of the NFT, you can choose to set royalties, which means you’ll earn a percentage of future sales if the value happens to increase and is re-sold in the future.
It should be pointed out that investing in NFTs is highly speculative and comes with significant risk. There’s no telling what the future might hold. You might stand to make millions with an early investment, or if this is a short-term craze that dies off, you could lose your entire investment. If you’re thinking of investing, be sure you only invest what you can afford to lose.
Marketplaces to Buy or Sell NFTs
If you’re looking to create and sell your own NFT or invest in NFTs, a marketplace is the easiest way to do it. It should come as no surprise that a quickly-growing number of NFT marketplaces have opened. It’s highly likely that this trend will continue and some new players will control a sizeable part of the market, but for now, here are a few of the leading marketplaces.
Noteworthy NFTs That Have Been Sold
- The artist Beeple sold “The First 5,000 Days” for $69 million. This work of art is a compilation of 5,000 of his designs.
- The artist Grimes sold NFTs for more than $6 million via online auction.
- Twitter CEO Jack Dorsey sold his first tweet for $2.9 million and donated the money to charity.
- YouTuber Logan Paul has sold clips of his YouTube videos for up to $20,000.
- The NBA is selling digital collectibles through NBA Top Shot.
We live in a world that’s changing very rapidly, and the NFT craze is a great example of this fact. A few years ago, it would have seemed unthinkable that ownership of a clip from YouTube or some other seemingly common digital file would be worth thousands of dollars.
NFTs present life-changing opportunities for some people who are able to cash in on the opportunity, but keep in mind that as an investment, NFTs are extremely speculative and fraught with risk. Be sure that you don’t invest money you can’t afford to lose.
The opinions expressed in this article are for general information purposes only and are not intended to provide specific advice or recommendations about any investment product or security. This information is provided strictly as a means of education regarding the financial industry. Any investment opportunity will come with risk and Think Save Retire accepts no responsibility for any losses incurred.