One of the latest digital trends to emerge from the crypto-universe, NFTs are ‘Non-Fungible Tokens’.
However, you’d be forgiven if that explanation left you with more questions than answers. Questions around what they do, how they can be acquired and why some individuals are paying millions of dollars for them?
Before these questions can be answered, we first need a concrete understanding of an NFT’s meaning. “Fungible” – a common term in economics – simply means “replaceable”.
The easiest example of a fungible object is money, which can be readily exchanged for any currency of equivalent value. Another example could be a line of mass-produced trainers, all made to be identical in look and quality.
When we think of non-fungible objects, we typically think of works of art. Something made entirely singular and unique. But it could also include a pair of the aforementioned trainers if they had then been signed by a celebrity athlete or had someone’s initials added to them. It’s this uniqueness – through either creative, cultural or personal value – that makes an object non-fungible.
For those who have dealt in cryptocurrency, ‘token’ will be a familiar term. While cryptocurrencies on the blockchain have fungible tokens, making them replaceable and easily exchanged, NFTs are represented by a unique NFT crypto token. This means they can be used as proof of ownership of an individual and exclusive asset – with works of digital art being the most common so far.
How do NFTs work?
While the transfer and ownership of NFTs are identical to that of any cryptocurrency on a blockchain, they do have a key difference. This is a distinct digital signature that means it can’t be directly interchanged with another token.
Although an NFT will include this digital signature to make it unique on the blockchain, creators could still offer multiple of a single asset. Much like a limited retail release, these could be fifty copies of a single album or one of the hundreds of trading cards.
NFTs do also have an additional feature over regular cryptocurrency for the benefit of creatives and artists looking to sell their work as an NFT. They can be paid royalties every time their work is either purchased or exchanged at a royalty rate that matches their needs. This can empower digital artists to start enjoying a larger stake in their success, which many have felt cut out from – particularly on music platforms like Spotify.
This connection between creator and consumer reveals part of the reason why some NFTs are selling for such great amounts. However, there is still more to understand about some of the prices seen on NFT marketplaces.
Why are NFTs valuable?
There have already been numerous articles detailing some of the highlights of NFT exchanges. Not just on their staggering price tags but also some of the surprising items that are being put up for sale in the first place.
From Jack Dorsey auctioning off Twitter’s first tweet to highlights of NBA matches, it seems like any digital asset you can conceive of is being bought and sold. But with digital files like photos and videos being easily copied and downloaded, it’s easy to be left wondering why NFTs have any value in the first place.
While some NFTs are being auctioned with their proceeds going to charity, others purely offer an opportunity for fans of content creators to support them directly. A lucrative market built around valuation and speculation has also emerged, further attracting hedge funds and investors into cryptocurrencies.
Some say that NFTs are a natural progression for the fine art market. A new playground for the wealthy to buy and sell digital assets they simply want to own or will sell for a sizable return in the future.
It can be argued that it’s blockchain technology itself that piques and satisfies a desire to be recognised as the singular owner of an object. With blockchains being a public ledger that is verified by countless computers across the world, they can become galleries that permanently display ownership of an exclusive asset for all the world to see.
This is perhaps even more true of NFTs sold directly by celebrities. Imagine your direct interaction with a personal hero, forever being captured on the blockchain.
How can you get NFTs?
Although some feel that the NFT bubble might have already burst, NFTs have opened new ways in both supporting artists and changing how we exchange goods. Connections between the physical world and the more abstract realm of NFTs are already being patented.
With how quickly cryptocurrencies were adopted across global markets, it appears likely that many of us will look to buy NFTs soon.
While any blockchain can design its version of NFTs, they are almost exclusively traded on the Ethereum blockchain. So to participate in auctions and purchase them, you will need to have ETH available in your wallet.
Currently, several popular websites perform as retailers and auction houses for NFTs, such as OpenSea, Mintable, Foundation and more. With straightforward and standard transactions, you only need to browse, bid and buy at your leisure.
This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis.