What is an NFT? Investing in art on the blockchain (2024)

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• Non-fungible tokens are unique digital asset that represents ownership of real-world items like art
• NFTs use the same blockchain technology that powers cryptocurrencies but are not a currency.
• While NFTs have sold for millions, they're highly speculative assets that aren't for everyone.

The non-fungible tokens (NFTs) art and collection craze has taken the world by storm as one of the digital age's hot "must-have" items. Over the last few years, investing in riskier digital assets like cryptocurrencies and NFTs has become increasingly normalized and remains a hot topic of debate.

Many of the best cryptocurrency exchanges provide a separate NFT trading platform with no gas fees and flexible storage options.

But what makes these digital assets so valuable? How are NFTs made? Are they safe to invest in, and why are people paying so much to own them?

Here's everything you need to understand about NFTs, how they are made, and who should invest in them.

What is an NFT?

NFT stands for "non-fungible token." At a basic level, an NFT is a digital asset that links ownership to unique physical or digital items — such as works of art, real estate, music, or videos. NFTs are bought and sold along the blockchain (the same technology behind cryptocurrencies), and are usually purchased with cryptocurrencies, like ether (the main currency used to purchase NFTs).

NFTs can be considered modern-day collectibles. They're bought and sold solely online, have no physical equivalent, and represent digital proof of ownership of any given item. Since NFTs are securely recorded on a blockchain, there's a level of insurance that assets are one-of-a-kind, as this technology can also make it difficult to alter or counterfeit NFTs.

As NFTs for digital artwork have sold for millions of dollars, to say they're popular could be an undersell. But sales rapidly dropped after the FTX fallout and the 2022 bear market that stirred the US economy.

"By creating an NFT, creators are able to verify scarcity and authenticity to just about anything digital," says Solo Ceesay, co-founder and CEO of Calaxy. "To compare it to traditional art collecting, there are endless copies of the Mona Lisa in circulation, but there is only one original. NFT technology helps assign the ownership of the original piece."

It's helpful to familiarize yourself with the economic concept of fungibility to really understand NFTs.

Fungible vs. Non-Fungible

Fungible items are items that can be exchanged with one another with ease because their value isn't tied to their uniqueness. For example, you can exchange a $1 bill for another $1 bill, and you'll still have $1 even though your new bill has a different serial number.

Non-fungible items are items that aren't interchangeable. With NFTs, each token has unique properties and isn't worth the same amount as other similar tokens. Items such as art and collectibles are often considered non-fungible since only one original exists.

Highest NFT sales

Selling NFTs has been a lucrative business in the art world. Unfortunately, NFT sales took a hit in June 2022 with the bear market and falling more than 80% (to around $167 million) from its peak of nearly $1 billion in January. Here are some of the highest NFT sales from the last few years.

Sales in 2023:

• Kyle Mongraal sold the Sewer Pass Golden Key #21915 for $1.6 million (1,000 ETH) on February 27, 2023.
• Jimmy McNelis sold Bored Ape Yacht Club #7090 for $1.3 million (800 ETH) in February 2023.
• Larva Labs Studio sold "Crypto Punk #5066" on February 6, 2023, for $1.4 million (857 ETH).

Sales in 2022:

• The pseudonymous artist referred to as Pak sold "Clock" on February 9, 2022, for around $53.7 million (16,593 ETH), making it the second-highest NFT sale recorded.
• Matt Hall and John Watkinson (aka Larva Labs Studio) sold "Crypto Punk #5822" for around $23.58 million (8,000 ETH) on February 11, 2022.
• Larva Labs Studio also sold "Crypto Punk 5577" for $18.68 million in 2022.

Sales in 2021:

• Digital artist Beeple sold "Everydays — the First 5000 Days" for $69.3 million through a Christie's auction.
• A CryptoPunk NFT sold for $1.8 million at Sotheby's first curated NFT sale.
• Twitter CEO Jack Dorsey auctions an NFT of his first tweet, which sells for $2.9 million.

Other people may be able to make copies of the image, video, or digital item that you own when you buy an NFT. But, similar to buying a unique piece of art or limited-series print, the original could be more valuable.

How NFTs work

Many NFTs are created and stored on the Ethereum network, although other blockchains (such as Flow and Tezos) also support NFTs. Because anyone can review the blockchain can easily verify and trace the NFT ownership, while the person or entity that owns the token can remain pseudonymous.

Different types of digital goods can be "tokenized," such as artwork, items in a game, and stills or video from a live broadcast — NBA Top Shots is one of the largest NFT marketplaces. While the NFT that conveys ownership is added to the blockchain, the file size of the digital item doesn't matter because it remains separate from the blockchain.

Depending on the NFT, the copyright or licensing rights might not come with the purchase, but that's not necessarily the case. Similar to how buying a limited-edition print doesn't necessarily grant you exclusive rights to the image.

As the underlying technology and concept advance, NFTs could have many potential applications that go beyond the art world.For example, a school could issue an NFT to students who have earned a degree and let employers easily verify an applicant's education. Or, a venue could use NFTs to sell and track event tickets, potentially cutting down on resale fraud.

What does it mean to mint an NFT?

Simply put, minting an NFT means turning a digital file (like a JPEG, GIF, or PNG) into a digital asset or crypto collectible on the blockchain. When your unique token is published on the blockchain, you can sell it. You'll need to pay a small amount of cryptocurrency to mint an NFT.

You can create a collectible as a single image or as multiple images. Depending on the marketplace you use to host your NFT, you may be able to add a name, description, and other metadata to your token. You can also set royalty amounts on your NFT, which are percentages you will make from every subsequent sale on the secondary market.

NFTs vs. cryptocurrency

NFTs and cryptocurrencies rely on the same underlying blockchain technology. NFT marketplaces may also require people to purchase NFTs with cryptocurrency. However, cryptocurrencies and NFTs are created and used for different purposes.

Cryptocurrencies aim to act as currencies by either storing value or letting you buy or sell goods. Cryptocurrency tokens are fungible tokens, similar to fiat currencies like a dollar. NFTs create one-of-a-kind tokens that can show ownership and convey rights over digital goods.

How to buy an NFT

You can buy, sell, trade, and create NFTs from online exchanges or marketplaces. The creator or current owner may choose a specific price. Or, there may be an auction, and you'll have to bid on the NFT. Here are some of the most popular NFT marketplaces:

• Foundation: A community-curated marketplace that requires creators to be invited by other creators already part of the platform.
• Nifty Gateway: An art-focused marketplace that works with big-name brands, athletes, and creators.
• OpenSea: One of the first and largest marketplaces where you can find NFTs for various collectibles.
• Rarible: Offers a range of NFTs with an emphasis on art. Uses its own RARI token to reward members.
• SuperRare: A marketplace that focuses on curating and offering digital art.

NFTs can be highly speculative assets. Some people have made thousands or millions of dollars selling NFTs. Others spend a lot of money on a digital asset that winds up being worthless.

The sign-up process can vary depending on the marketplace. Generally, you'll buy NFTs using a cryptocurrency like ether (Ethereum's native cryptocurrency), although the price may also be listed in dollars. Depending on the marketplace, different fees may be associated with each transaction.

Risks of investing in NFTs

The high-priced and headline-making NFT craze also attracts scammers and fraudsters, so investors should beware. Some may try to sell you something and tell you it's an NFT when it's not. Others might claim they have the right to sell an NFT of a piece of work they don't own and don't create. Some of the most common acts of fraud in the NFT marketplace include:

• Wash trading: The act of inflating the price of a digital asset like an NFT or cryptocurrency by buying and selling assets through multiple accounts and manufacturing a heightened appearance of demand.
• Impersonations and fake NFTs: Impersonators will duplicate a popular NFT to fool potential buyers into thinking they are buying the real deal.
• Rug pulling: When an NFT seller/developer promotes future features that can be applied to a digital asset and lures investors to invest in the project. After that, the seller/developer backs out of the project and retreats with the project funds.

What is considered one of the largest NFT scams was a rug-pull scheme in 2022. Le Anh Tian, the founder of Baller Ape Club, launched the collection only to delete the project's entire website, launder the project's $2.6 million investor funds, and transfer them across multiple blockchains (aka chain-hopping).

The Department of Justice charged Le Anh Tuan with conspiracy to commit wire fraud and conspiracy to commit international money laundering on June 30, 2022. The lawsuit has yet to be fully resolved.

The best way to avoid getting scammed is to thoroughly research and fact-check information before buying or selling an NFT.

Should you invest in NFTs?

While NFTs may have many practical applications in the future, they're primarily used with digital art today.

"For creators, NFTs create a seamless way to sell digital art that might not have much of a market. Additionally, there are ways in which creators can get paid fees for each subsequent sale of the art," says Ceesay. "On the flip side, collectors can speculate on digital art and have bragging rights on rare collectibles on the chain."

If you're considering purchasing an NFT as an investment, know there's no guarantee it will increase in value. While some NFTs sell for thousands or millions of dollars, others may remain worthless.