The non-fungible tokens (NFTs) art and collection craze has taken the world by storm as one of the digital age's most popular "must-have" goods. Investing in riskier digital assets such as cryptocurrencies and NFTs has become more common in recent years, but it remains a contentious issue. Many of the best cryptocurrency exchanges offer a distinct NFT trading platform that includes no gas fees and flexible storage choices. But why are these digital assets so valuable? How are NFTs created? Are they safe to invest in, and why are they so expensive to own? Here's all you need to know about NFTs, how they're created, and who should invest in them.
As the NFT market continues to evolve, it's important to note that the technology behind these digital assets is not limited to art and collectibles. In fact, NFTs are increasingly being explored for their potential in various industries, including real estate, music, and even identity verification. For instance, some forward-thinking companies are experimenting with using NFTs to represent ownership of physical properties, potentially streamlining the process of buying and selling real estate. In the music industry, artists are leveraging NFTs to offer unique experiences and exclusive content to their fans, creating new revenue streams and deeper connections with their audience.
What is an NFT? The acronym NFT stands for "non-fungible token." At its most basic, an NFT is a digital asset that connects ownership to unique physical or digital assets such as pieces of art, real estate, music, and videos. NFTs are bought and traded on the blockchain (the same technology as cryptocurrencies) and are typically purchased with cryptocurrencies such as ether (the primary currency for purchasing NFTs).
NFTs might be called modern collectibles. They can only be purchased and sold online, have no physical equivalent, and serve as digital proof of ownership for any particular item. Because NFTs are securely recorded on a blockchain, there is some assurance that the assets are unique, and this technology can also make it impossible to alter or counterfeit NFTs.
The environmental impact of NFTs has become a topic of increasing concern among environmentalists and tech enthusiasts alike. The energy-intensive process of minting and trading NFTs, particularly on the Ethereum blockchain, has raised questions about the sustainability of this technology. In response, some platforms and artists are exploring more eco-friendly alternatives, such as using proof-of-stake blockchains or implementing carbon offset programs. This growing awareness is pushing the NFT community to innovate and find more sustainable solutions, potentially reshaping the future of digital ownership.
NFTs for digital artwork have sold for millions of dollars, so saying they're popular may be an understatement. However, sales decreased sharply during the FTX fiasco and the 2022 bear market, which shook the US economy.
"By creating an NFT, creators are able to verify scarcity and authenticity to just about anything digital," says Calaxy co-founder and CEO Solo Ceesay. "In comparison to traditional art collecting, there are several copies of the Mona Lisa in circulation, but only one original. NFT technology facilitates the transfer of ownership of the original piece."
To truly grasp NFTs, you should first become familiar with the economic idea of fungibility.
Fungible versus Non-Fungible
Fungible goods can be easily exchanged with one another because their value is not determined by their uniqueness. For example, if you swap a $1 bill for another $1 bill, you'll still have $1, even if the new dollar has a different serial number.
Non-fungible objects are those that are not interchangeable. With NFTs, each token has distinct attributes and is not worth the same amount as other comparable tokens. Art and collectibles are frequently deemed non-fungible because there is only one original.
The concept of digital scarcity introduced by NFTs has sparked a fascinating debate among economists and digital rights advocates. While some argue that artificial scarcity in the digital realm is counterintuitive to the nature of infinitely replicable digital assets, others see it as a revolutionary way to assign value and ownership in the digital age. This tension between abundance and scarcity in the digital world is reshaping our understanding of value, ownership, and authenticity in the 21st century.
When you purchase an NFT, other people may be able to copy the image, video, or digital item that you possess. However, similar to purchasing a one-of-a-kind piece of art or a limited-edition print, the original may be more valuable.
The intersection of NFTs and intellectual property law is an emerging field that's catching the attention of legal experts worldwide. As NFTs blur the lines between digital and physical ownership, questions arise about copyright infringement, licensing, and the extent of rights conferred by owning an NFT. Some legal scholars argue that current intellectual property laws may need to be updated to address the unique challenges posed by NFTs. This legal uncertainty adds another layer of complexity to the NFT market, potentially influencing how creators, collectors, and investors approach these digital assets.
How do NFTs work?
Many NFTs are created and stored on the Ethereum network, although other blockchains (including Flow and Tezos) also support them. Because anybody can check the blockchain, NFT ownership can be easily verified and traced, while the individual or company that holds the token remains anonymous.
Different forms of digital assets can be "tokenized," including artwork, game objects, and stills or video from live broadcasts – NBA Top Shots is one of the major NFT marketplaces. While the NFT indicating ownership is added to the blockchain, the file size of the digital item is irrelevant because it stays distinct from the network.
Depending on the NFT, copyright or license rights may not be included with the purchase, although this is not guaranteed. Similarly, purchasing a limited-edition print does not automatically provide you exclusive rights to the image.
As the underlying technology and concept improve, NFTs could have a wide range of uses beyond the arts. For example, a school may give an NFT to students who have received a degree, allowing companies to readily validate an applicant's education. Alternatively, a venue might employ NFTs to sell and track event tickets, potentially reducing resale fraud.
What exactly does it mean to mint an NFT. Simply enough, minting an NFT entails converting a digital file (such as a JPEG, GIF, or PNG) into a digital asset or crypto collectible on the blockchain. You will be able to sell your unique token once it has been published on the blockchain.
To mint an NFT, you will need to pay a modest quantity of cryptocurrency. You can make a collectible with a single image or numerous photos. Depending on the marketplace where you host your NFT, you may be able to provide a name, description, and other metadata for your token. You can also specify royalty levels for your NFT, which are percentages you will earn from each subsequent sale on the secondary market.
NFTs versus cryptocurrencies
NFTs and cryptocurrencies use the same underlying blockchain technology. NFT marketplaces may also force consumers to buy NFTs with cryptocurrencies. However, cryptocurrencies and NFTs are developed and utilized for a variety of objectives.
Cryptocurrencies are designed to function as currencies, either by storing value or allowing you to purchase and sell goods. Cryptocurrency tokens are fungible, similar to fiat currencies such as the dollar.
NFTs generate one-of-a-kind tokens that can demonstrate ownership and transfer rights to digital commodities.
How to Purchase an NFT
You can purchase, sell, trade, and create NFTs via internet exchanges or marketplaces. The inventor or current owner may set a specified price. Alternatively, there may be an auction in which you will have to bid on the NFT.
Below are some of the most popular NFT marketplaces:
Foundation: A community-curated marketplace where creators must be invited by other artists who are already members of the site.
Nifty Gateway is an art-focused marketplace that works with well-known companies, sports, and creators.
OpenSea was one of the earliest and largest marketplaces to offer NFTs for various collectibles.
Rarible: Provides a selection of NFTs with an emphasis on artwork. To reward members, the organization uses its own RARI coin.
SuperRare: A marketplace dedicated to curating and selling digital art.
NFTs may be highly speculative assets. Some people have made thousands or even millions of dollars by selling NFTs. Others invest a lot of money in a digital asset that ends up being useless.
The sign-up process varies based on the marketplace. Typically, you'll purchase NFTs with a cryptocurrency like as ether (Ethereum's native cryptocurrency), though the price may alternatively be published in dollars. Depending on the marketplace, each transaction may incur varying fees.
Risks of investing in NFTs
The high-priced and attention-grabbing NFT craze also attracts scammers and fraudsters, so investors should be cautious. Some may attempt to sell you anything and claim it is an NFT when it is not. Others may claim the right to sell an NFT of a work they did not own or create.
Some of the most common forms of fraud in the NFT sector include:
Wash trading is the act of inflating the price of a digital asset, such as an NFT or cryptocurrency, by purchasing and selling assets across several accounts to create the illusion of increased demand.
Impersonations and fraudulent NFTs: Impersonators will replicate a popular NFT in order to dupe potential purchasers into believing they are purchasing the genuine article.
Rug tugging occurs when an NFT seller/developer offers future features that can be implemented to a digital asset to entice investors to invest in the project. Following that, the seller/developer abandons the project and withdraws the project funding.
One of the largest NFT frauds was a rug-pull scheme in 2022. Baller Ape Club's founder, Le Anh Tian, debuted the collection only to remove the project's whole website, launder $2.6 million in investor funds, and transfer them across various blockchains (known as chain-hopping). On June 30, 2022, the Department of Justice charged Le Anh Tuan with conspiracy to commit wire fraud and conspiracy to engage in international money laundering. The lawsuit has yet to be completely resolved.
Before purchasing or selling an NFT, conduct extensive research and fact-checking to prevent falling victim to fraud.
Should you invest in NFTs?
While NFTs may have a wide range of practical applications in the future, they are currently employed exclusively in digital art. "For creators, NFTs provide a smooth means to sell digital art that may not have a large market. Additionally, there are ways for creators to be compensated for each successive sale of their work," explains Ceesay. "On the flip side, collectors can speculate on digital art and have bragging rights on rare collectibles on the chain."
If you're thinking about investing in NFTs, keep in mind that there's no assurance they'll improve in value. Some NFTs sell for thousands or millions of dollars, while others may be worthless.
As the NFT market matures, we're seeing an interesting shift in how these digital assets are perceived and utilized. Beyond the realm of digital art and collectibles, NFTs are beginning to find applications in areas such as gaming, virtual real estate, and even as a form of digital identity. This expansion of use cases is attracting a more diverse group of investors and creators, potentially leading to a more stable and sustainable NFT ecosystem. However, as with any emerging technology, it's crucial for potential investors to approach NFTs with a balanced perspective, understanding both the potential rewards and the inherent risks associated with this rapidly evolving digital asset class.
