Everything You Need to Know About Non-Fungible Tokens
What are NFTs and why are some of them being sold for millions of dollars? Here is everything you need to know about the latest trend in cryptocurrency, including how (and if) you should invest.
Maybe you've heard of non-fungible tokens (NFTs) or maybe you haven't—but either way, they're blowing up right now. This artist's creation of Beyoncé as Jean-Etienne Liotard's Portrait of a Young Woman is an NFT. So is this gif of 2011's iconic Nyan Cat. So what exactly is an NFT? An NFT is a unique, authenticated, digital file. The item only exists in digital form—"this makes the value subjective, since there is nothing else like it to exchange for it," says Deacon Hayes, financial expert and founder of personal finance site Well Kept Wallet. NFTs are bought and sold online, usually using some form of cryptocurrency, like Ethereum. That Nyan Cat gif sold for a whopping $500,000 in February, and Twitter co-founder Jack Dorsey's first tweet ever was turned into an NFT and sold for $2.9 million in March.
If you're wondering why anyone would pay millions of dollars for a tweet or gif that you could screenshot or download—you're not alone. You can definitely just save a picture or video you love and have it for free, but an NFT allows you to know you own the real, original item. "An NFT is like any other token, it has its own authentication," says Merav Ozair, PhD, a blockchain expert and fintech faculty member at Rutgers Business School. "Therefore you have an ownership you can show."
Ozair says it's like going to a museum and taking a picture of a painting you really like. You can do that, but it doesn't mean you own an original Picasso—and Insta-worthy as it may be, it probably won't be worth millions of dollars. Read on to find out more about the hype surrounding NFTs, how you can invest, and what the future holds for these coveted digital tokens.
Why are NFTs important?
NFTs are allowing people to buy and sell digital assets like never before. While cryptocurrency can be used interchangeably, NFTs have unique identification codes stored on a blockchain that sets each one apart. Digital art, music, and even digital sports cards are all NFTs you can buy.
"For the artist, this has created a new source of revenue and outlet for their art or music," says Hayes. "For the consumer or the investor, it gives a new opportunity for you to purchase or invest in a new asset class."
Ozair believes NFTs have more value than a regular collector's item like a ticket or an album. "You have the album, it's something that can stay there forever it's never going to be scratched or destroyed," says Ozair. "It can be a memorabilia that you can sell in 10, 20 years if the album becomes a hit."
Kings of Leon released their latest album When You See Yourself as an NFT a month ago, becoming the first band ever to do so. The band also released an NFT that included perks like front-row seats for life, which is something you wouldn't be able to get with just a physical album.
Are NFTs a good investment?
The value of an NFT is largely based on what someone is willing to pay for it, so it's hard to say whether they will be a good investment long term. NFTs are really popular right now with artists and celebrities like ASAP Rocky, Snoop Dogg, and Lindsay Lohan creating their own NFTs—but how long will the trend last?
"Right now because NFTs are so hot, people are spending a lot of money to get in on this trend," says Hayes. "If things slow down and people decide they’d rather own physical items than digital items, the demand will go down which means the price and value of your investment might go down as well."
Ozair believes NFTs are just like any other investment—you have to give it some time to know its value. "You won't know until time passes," says Ozair. "To tell you now whether it's a good investment or a bad investment, I don't know." Invest wisely and keep an eye on NFT trends so you can see if it's the right move for you.
How can you make money from NFTs?
NFTs are giving artists a whole new way to sell their creations. But art isn't the only thing you can make into an NFT, and although not everything will go for thousands or millions of dollars, there are ways to make money from NFTs. Sites like Open Sea and Rarible allow artists to turn their work into an NFT and sell it on the platform.
And NFTs are not just for tech moguls and celebrities: "Everyone can create an NFT," says Ozair. "It all depends on how we educate people." Ozair says creating webinars to bring NFTs more into the mainstream and explaining how NFTs work is another way to make money, indirectly, off NFTs.
"Sometimes there's YouTube and advertising and you can somehow monetize it...but it's tough because everyone can copy it," says Ozair. "But if you NFT it, it can become like another stream of income. I'm not saying that everything will be sold for a million dollars, but there might still be people willing to pay for your video, or photo, or music."
Another way to make money from NFTs? Digital sports cards. Hayes says one of the most popular marketplaces for digital sports cards is NBA Top Shot, which sells digital moments of basketball players. A limited number of digital packs with three or four cards in each are released on a certain day. You usually have to wait in line to buy a pack before they run out. Then, you can list the cards on the marketplace to sell individually. "You can sell one card for more than the cost of the pack—to make your money back and then some," says Hayes.
What are some risks?
As with any investment, there are some risks associated with these trendy digital collectibles. Besides the value of your investment going down if demand for NFTs decreases, authenticity is another risk associated with NFTs.
One of the risks is knowing whether the person you're buying an NFT from truly has the rights to the item. Hayes says researching the seller key to making sure it's authentic. "Research is very important to make sure that you're buying something that someone actually has the rights to sell," says Hayes.
NFT platform Rarible has a multi-step process for buyers and sellers who want a to be verified. This includes submitting two social media profiles that show that you're sharing your work and engaged in the community, and behind-the-scenes footage of an item that you have created.
Ozair urges platforms and artists to consider solving this problem in a way that NFTs can be more community-based and less exclusive while still protecting creators and collectors. "The system is already built in, this is what Bitcoin is all about, but the question is how to create that within the NFT space...and it's possible, we're almost there," says Ozair.
So do your research, understand the risks, and find credible platforms to collect or create NFTs that could potentially earn you some money—or at least front-row seats to see your favorite artist.