Plain and simple, an NFT is a “non-fungible token.” Doesn’t that just clear everything up? No? Do you still have some questions?
Let’s first break down the definition. Non-fungible isn’t a commonly used phrase. But, put simply, it is something that cannot be replaced. It is unique. It is not something you can swap out for another.
A non-fungible token is an investment. It is something that cannot be traded for the exact same thing. These tokens are digital art. They can be anything digital, from an mp3 to a digital sketch. This digital artwork is sold as a digital asset.
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NFTs and Cryptocurrency
These terms are most often seen alongside those of “cryptocurrencies,” which is often another bucket of confusion, hard to understand in layman’s terms.
NFTs are like cryptocurrencies because they use similar programming in order to be created. They are deeply encoded files existing on a “blockchain.” A blockchain is a digital database underpinning currencies, such as Bitcoin and Ethereum. It is a distributed public ledger, designed to record transactions.
However, the major difference is that cryptocurrencies are fungible. They are a token able to be traded for those of similar value, much like an actual dollar. NFTs, by name, are not. They are non-fungible, and there is no way to replace them.
Cryptocurrencies, just to add confusion, are also often the funds or methods used to pay for NFTs. They are also encoded with the same underlying software.
We’ve taught you some fun vocabulary. Does this seem all straight to you now? No? Don’t worry, we’ll keep digging.
Who Is Using NFTs and Why?
At its simplest, an NFT is anything digital. An NFT can be a drawing, music, art, a .gif file, and even a Tweet. The NFT itself is something to own, a collector’s item of sorts.
NFT Ownership
You might be thinking to yourself, but isn’t everything on the net pretty much up for grabs? Couldn’t I just screenshot that same art? Couldn’t I rip off that .mp3 file? Sure, you could. Though we don’t encourage stealing, please.
Much like traditional art that hangs on a wall, you can think of an NFT as an original piece of art. You may very well have a poster print of the Mona Lisa. You may even have taken an illegal picture of it hanging in the Louvre. But you don’t own THE Mona Lisa. Only one person can. It is a one-of-a-kind piece of art.
Owning an NFT is similar to owning physical assets. Only one person can own the authentic, truly original piece of the work. And, while you may not see much difference, some collectors surely can. No two NFTs are alike. Each has unique properties and, just like pieces in the physical art world, are one of a kind.
Non-Fungible Tokens = One of a Kind
NFTs are unique and are not mutually interchangeable. Owners will have a certificate of authenticity to prove it, much like you might have an autographed original piece of art certified. With built-in authentication, and proof of ownership, the owner of an NFT can certainly prove it. Some, however, just dub this as “digital bragging rights,” or in other words a fancy payment to say “it’s mine.”
With pieces going for millions of dollars across different markets, clearly, there is a demand. But, like all markets, the supply and demand can vary greatly. The value, as they say, may be in the eye of the beholder.
The Artist
An NFT is similar to true art, too, in that artists are finding a unique way to sell content, this time online. The Internet created a wonderful way for people to share. Somewhere in the mix, those that create content such as art, literature, graphics, music, and drawings were happy to have that place to share.
But oftentimes, they were going largely uncompensated for that work. It was easy to steal. It was easy to reproduce. It was hard to track who was using it, where, and why.
With an NFT, unique programming means that there is only one original owner. Its creator has far more control over where that original, at least, gets used. This also means they can be compensated for said work.
Artists can even include things like a signature in the coding, denoting their work just like a hardcopy on canvas.
The Buyer
Buyers vary greatly, just like the artists. There are a lot of reasons they are buying, amounts they are paying, and NFTs they are acquiring. Largely, the “types of buyers” could be sorted into those casually enjoying giving back to the arts and those investing.
Some folks are watching this new NFT like a game. They enjoy keeping tabs on what is happening, and they want to keep an eye on it. They may participate mildly, purchasing NFTs for fun.
Small purchases can be made for simple reasons like you want the right to use an image as a profile picture, you think it’s “cute,” or you want to give some props to an artist you like.
In its simplest terms, it is minimally a way to give artists some money. The term “starving artist” exists for a reason, and for many, giving to that cause is valuable enough.
The second type of buyer however is more the investing type. There is a major market with top records getting $69.3 million. It’s not child’s play. It’s not trading cute kittens for crypto. It’s real-life cash exchanging hands in a unique way.
Buyers of this type are likely either collector, aiming to own “this that they must have,” or they are investing in a purchase, hoping the value will increase and they will rake in the profits.
The Logistics
Where do you find these NFTs and how would you go about purchasing one if you wanted to, and do you have to be a millionaire? The answers are easier than you might think.
NFT Marketplaces
The NFT marketplace exists in multiple forms for the buying and selling of NFTs. NFTs, being strictly digital artwork, is sold exclusively online. Sites exist such as:
- OpenSea
- Nifty
- Gateway
- Rarible
to buy and sell digital art.
They are open to anyone. If you want to sell, you will need to have your digital item programmed into an NFT format, encoded as required. Typically, an artist can upload a digital file to the marketplace, follow the instructions on making it an NFT, and place it up for sale.
Digital Wallets
If you want to buy, you’ll need to have cryptocurrency, for example, Ether. Online transactions are not done with physical money-changing hands.
All funds to buy NFTs come from a digital wallet. Other credit card-based firms such as:
- Coinbase
- Kraken
- eToro
can convert interested buyers’ funds into the necessary crypto. Consider this something like foreign money exchange, converting your dollars into crypto.
The Fine Print
As with any transaction, buying or selling, especially in the digital economy, you want to watch for fees. Some sites charge for every transaction at a flat rate, while others ask for a percent. Other transactions will incur closing expenses.
Some transactions even require you to pay for the “gas.” No, they aren’t driving a piece to and from a gallery, but much in the same way, some companies are charging a fee for the energy used to complete a transaction in blockchain technology.
After all, it is real machines working on real electricity, making this all happen. (This uniquely brings in an entirely different viewpoint on the “greenness” of the NFT, but alas a story for another time.)
Once the money is stored in your “digital wallet,” you are ready to buy. What you own as an NFT will likewise be stored in a virtual wallet.
If you’ve found your piece, paid your price, and completed the necessary fees, you’ll own an NFT. You’ll have a collector’s item. It will be solely yours.
The question is, was it worth it?
The Bottom Line
Whether NFTs are here to stay or are going to go the way of the Beanie Baby remains to be seen. Artists have found a unique way to monetize their work. They can now sell pieces to the buyer without a middle man. They don’t need a gallery or auction house, meaning they stand to make more profits.
Artists can even program the royalties of an NFT so that they get a cut of the future sales if the item is bought or sold again to a new owner. That’s something unheard of in the traditional art scene.
The Verdict Is Still Out
Ultimately, while the NFT has been around since 2014, and reportedly netted $174 million for artists since November of 2017 alone, there is not enough to study. The data is still happening, and there is clearly an uncertain future at best.
With no long-term research yet collected, the true future of NFTs will be determined as many markets are: by supply and demand. Will investors find more value in ownership of an NFT than just “online bragging rights” long term? Or will simple copies existing devalue the worth of an original?
But so far, looking good…
Thus far, investors are speaking with their cash. They are purchasing NFTs. They are paying high prices. Whether collectors or investors, they are playing the game. They are choosing to take their personal finance dollars right to the NFT Marketplace.
Like any investment, the future remains to be seen. There is always a risk when diving into uncertainty, but for now, many seem happy taking this leap of faith. The selling of digital art is becoming increasingly popular. The NFT market is certainly something to keep your eye on in years to come.
