A Guide to NFTs: Everything You Need to Know About Non-Fungible Tokens

Investors are currently exploring options to hedge their portfolios against losses in today’s peculiar market conditions, whether they believe inflation is coming, currency devaluation is inevitable, or various markets could suddenly lose value. As a result, alternative investments like cryptocurrencies and, now, non-fungible tokens (NFTs) are becoming viable investments. This class of investments is still a pretty abstract concept for most, but they are only increasing in popularity.

If you’d like to know more about what the future may hold regarding digital assets and non-fungible tokens–particularly NFT crypto art–this article is a starting point.

Basic concepts that can help you understand NFTs

Here are some basic concepts that can help you understand how NFTs work.

Interchangeability

To understand what a non-fungible token is, we’ll start with the concept of interchangeability. An example of interchangeable assets is paper money and coins. For instance, if you have a $5 bill, it could be replaced with another $5 bill.

Someone could also give you five $1 bills or 20 quarters or any combination of paper money and coins that equal $5. Because you can exchange various amounts of dollar bills and coins to have the same amount of money, paper money and coins are fungible assets. That is, they can be replaced by another, similar object of equal value.

But let’s talk about rare coins. If you search for rare or collectible nickels on eBay, you can find various nickels minted in the early 20th century. These coins are selling for much more than $0.05 per nickel, even though we all know and pretty much agree that nickels are worth 5 cents.

These rare, collectible coins would not be considered fungible. You cannot replace these coins with other coins of the same denomination. The owner wouldn’t allow you to exchange a nickel minted, say in the 1990s, for one of their rare nickels.

Other examples of non-fungible assets might include other collector’s items, houses, and precious stones. These items have unique qualities that make them more or less valuable to the markets that ascribe value to unique features that help determine the items’ prices.

Tokenization

Tokenization involves creating a digital token that represents an asset either in part or in its entirety. The token itself doesn’t have any inherent value, but the asset it represents does. Tokenized assets can exist in the real world, like real estate, or on a digital platform, like a GIF file.

Blockchain technology

Finally, to understand non-fungible tokens or NFTs, you should become familiar with blockchain technology. In a nutshell, blockchain technology is records of data that exist on decentralized computer networks. This means that no one person or entity has control over data on these networks.

To record and validate transactions, a process called “mining“ occurs. Data recorded on the blockchain will exist on a “public ledger” that cannot be destroyed, altered, or hidden.

Because of these properties, blockchain enables significantly increased transparency for transactional activity. In other words, there’s an open, traceble record of transactions that are easily accessible and, ideally, easy to verify.

The ability to create verifiable, transparent data records have many promising applications like preventing identity theft or securing elections via blockchain protocols. Perhaps you are familiar with one application that is already in use today: cryptocurrency.

Cryptocurrency, like Bitcoin or Ethereum, is a digital form of money that can be used to buy goods and services like any other currency. Unlike government-issued money, such as paper dollars and coins, cryptocurrency is entirely virtual.

What makes an NFT valuable

When we put all of these concepts together, we arrive at how NFTs work and exactly why they have value as an asset. NFTs are a digital representation of an underlying asset that is limited in supply, unique, subjectively valuable, and easily authenticated because of blockchain technology. Because the market moves so fast, it’s difficult to work out which genres are trending and which NFTs will one day become the most expensive.

Here are a few examples of how NFTs are taking shape in real, highly-liquid marketplaces.

CryptoKitties

In 2017, the CryptoKitties game introduced the concept of NFTs to the general public when a group of developers wanted a way to teach users about how non-fungible tokens work.

The game allows users to purchase and sell digital “cats” with Ethereum. Users can also breed cats and sell rare offspring at a profit. Each CryptoKitty is unique and possesses special “cattributes” that reflect the digital genome programmed into the game’s protocols.

This digital breeding process produces cats whose unique genetic traits have varying degrees of rarity, making each digital cat unique and non-fungible. The highest price fetched for a CryptoKitty so far? One user paid a staggering $170,000 for a seemingly average digital cat.

NBA Top Shot

Organizations like the NBA are capitalizing on blockchain trading cards, or NFTs, as an additional income stream. The NBA Top Shot website has various sports highlight clips, known as NBA Top Shot moments, going for tens of thousands and even hundreds of thousands of dollars. This project is also spearheaded by Dapper Labs, the maker of the CryptoKitties game.

Each NBA Top Shot moment has a unique serial number that identifies and proves its authenticity, plus other information tied to a blockchain record that, in theory, cannot be hacked, fraudulently replicated, or altered.

As a digital sports clip collector, you could watch LeBron James dunk over and over again by dropping a cool $250,000 to own one of his Top Shot moments. There’s a record of completed, verified transactions on the platform. The records or sales and resale activity alone proves just how high prices can go in this marketplace—because the NBA earns a commision on every trade and some of this goes to the players, NBA Top Shot has become an additional revenue stream for the NBA

Axie Infinity

In 2021, gamers got an entirely new genre to play with: it was called play-to-earn, and a game called Axie Infinity spearheaded its success. The actual game is an unremarkable monster-battling game. However, what made it unique was the crypto-laden economy that powered it—and it’s generated almost $4 billion in sales, as of February 2022. That makes it the most popular NFT collection so far.

The premise of play-to-earn games like Axie Infinity is that the games actually reward you for playing them. Rewards take the form of cryptocurrencies, in Axie’s case the volatile AXS token and the SLP token—that’s Special Love Token, a cryptocurrency that you can use to “breed” the critters you need to play the game. These monsters, as well as the in-game land and virtual items, are NFTs; each is unique and can’t be removed from your wallet by anyone else.

Crucial to understanding the potential of play-to-earn crypto games is the idea of decentralization. In the next few years, Sky Mavis, the Vietnamese development studio behind Axie Infinity, will cede control over the network to holders of AXS tokens. This means that as well as having absolute control over the monsters they own as NFTs, players will be able to decide who develops the game—even if that means giving Sky Mavis the boot.

In March 2022, hackers stole $650 million from the blockchain that powers Axie Infinity, Ronin Network.

Authenticity, scarcity, and subjective value of NFTs

Like real sports trading cards, NBA Top Shot NFTs derive their values from characteristics like scarcity and authenticity. These characteristics are somewhat artificial and, at times, arbitrarily created by the NBA and those who ultimately trade NFTs in this marketplace.

The NBA has built scarcity into the Top Shot market by limiting the unauthorized circulation of game video footage in real life (via copyright permissions) and creating tiers on the Top Shot platform:

• Common: 10,000+ available

• Rare: 150-4,999 available

• Legendary: 25-499 available

• Platinum Ice Ultimate: 3 available

• Genesis Ultimate: 1 available

If you think of these crypto-collectibles like sports trading cards, you can guess other characteristics that might add value to these NFTs. Highlights featuring high-performing players, remarkable plays, or iconic team match-ups will garner more money and have higher resale values. Rookie moments and certain serial numbers might also add value to a particular highlight.

How NFTs can generate income

As an owner of an NBA Top Shot NFT or any other asset represented by an NFT, you are free to consume it at your leisure or hold on to it, hoping that it will appreciate. Because the NBA Top Shot website has a built-in marketplace, you can sell items in your collections for a short-term (or long-term) profit.

Other options for NFTs include repurposing them for other uses like virtual or augmented reality. Either way, these NFTs are assets that you own and can use as you wish.

It’s worth noting that NBA players have a revenue-sharing agreement on NFT sales, so they also benefit from being featured players in these clips. This brings us to another important aspect of NFTs: how stakeholders like creators, producers, or other parties with ownership rights can profit from selling their work, image, or likeness as an NFT.

NFTs for creators

One growing application for NFTs has been in the creative world. Artists like Mike Winklemann, of Wisconsin, aka Beeple, reports having sold $3.5 million of his NFT art in a single weekend. As of this writing, a collector has paid $69 million for one of Winklemann’s pieces at a Christie’s auction. According to the exclusive art dealer, this was the first auction that featured purely digital work and accepted cryptocurrency as payment for artwork.

Another recent example of artists profiting from NFTs sales is Tim Canter’s recent digital art exhibition. He’s the artist behind the cover art, stage designs, and videos for the world-famous band, Imagine Dragons. For his online art exhibition, he created digital versions of select pieces, which he then converted into NFTs for sale on the Terra Virtual (TVK) platform.

Why NFTs are so popular right now

One of the main reasons is that NFTs have simply made dealing in collectibles more practical.

With technology, NFTs can possess new properties that were not formerly available with traditional collectible items like:

• An immutable record of authentication

• Scarcity protocols

• The ability to exist in a digital wallet with other digital assets

• The potential to function across various digital platforms

• The ability to be owned, sold, and purchased in multiple marketplaces

• Programmability or addition of features and benefits associated with unique NFT serial numbers

These enhanced features are drawing creators, collectors, and investors in increasing numbers. What used to be an obscure, cumbersome, and somewhat exclusive process for creating, selling, and trading collectible assets like art has now become incredibly accessible, secure, and, thanks to many NFT marketplaces, more liquid.

The wholly unpredictable and cult-like nature of memefication and virality, when thrown into the mix of attributes that determine how popular and valuable a digital asset could become, can make NFTs even more puzzling. See the 8-bit Nyan Cat GIF sold in an online auction in early 2021 for almost $600,000.

The rise of blockchain technology

One obstacle of NFT adoption is a lack of understanding regarding the underlying technology. Today, more people are not only familiar with blockchain technology and cryptocurrencies but are also actively participating in these markets. The general public’s understanding of cryptocurrency and crypto collectibles is increasing and spurring more participation in these markets.

Prevailing market conditions

In uncertain market conditions, like the ones we see today, investors may look to alternative assets, like NFTs, as a hedge. So far, the NFT concept is proving fairly successful: There are efficient NFT art marketplaces that demonstrate an impressive amount of liquidity where there was little to none before. It’s giving hesitant art investors and collectors more confidence while giving rise to another asset class that can readily appreciate and sell at reasonable prices. Some NFT marketplaces, like Rarible, have issued their own NFT art coins. Lots more NFTs are entirely free—if you’re early to a project, you can mint free NFT art. You can check market data of top selling NFT art on CoinMarketCap or CryptoSlam, or create your own NFT art on popular NFT art marketplaces like OpenSea.

Adoption

Another factor that might explain the increasing popularity of NFTs is that mainstream corporations, like the NBA, have adopted blockchain technology for digital goods with undeniable success. As of February 2022, NBA Top Shot reports $900 million in sales. A startling 650,000 people own these NFTs, the result of almost 16 million transactions.

Also jumping on the NFT adoption bandwagon are sophisticated art dealers, venture capitalists, institutional money, and creators themselves converting their work into NFTs for sale and resale.

How to buy NFTs

There are several different marketplaces where you can purchase NFTs and add them to your NFT art collection. We don't endorse any one of them over the others, but here are some examples, chosen at random:

• OpenSea

• Rarible

• Mintable

• SuperRare

• LooksRare

There are dozens of others that are specific to asset categories like sports, artwork and music.

How to create an NFT

Many of the platforms mentioned above have an interface that allows creators to convert their creations into digital crypto art. For instance, OpenSea gives creators a digital storefront. As long as you have a digital wallet, digital content to sell, and money to cover transaction fees, you can upload your work for sale on this digital storefront.

Some platforms even allow you to assign specific attributes to your work. For instance, you can indicate how many copies of your work are for sale and maybe even set a royalty on each resale.

Once you set up a profile and upload your work, the only thing left to do is wait for someone to buy your NFT creations. The smart contracts that govern these transactions automatically collect and distribute money to you, much like other traditional online marketplaces. You can display these NFTs in virtual worlds, like in Somnium Space, Spatial, or Decentraland.

You can also “mint” free NFT art—that’s when a collection launches to the public and grants anyone the right to snag an NFT for themselves. While these NFT art collections are sometimes touted as free, you mint have to pay a mint free. On the Ethereum blockchain, that fee could cost well over $100, meaning it might not be worth your while if you expect to sell the NFT for a lower price than that.

On platforms like Niftex, you can fractionalize your NFTs into millions of fungible NFT art tokens. An online group called PleasrDAO successfully did just this with a Doge NFT—the same mascot that’s used to represent the wildly popular Dogecoin cryptocurrency; as of February 2022, the fractionalised Doge NFT has an implied valuation of $91.6 million.

How to sell an NFT

Selling NFT art is easy. Once you create a profile on any one of several NFT marketplaces, you can set a price for your digital goods. And as long as you have access to a crypto wallet, you should have no problem selling your work on these platforms.

Limitations of NFTs

While NFTs might sound like the wave of the future, there are still some limitations to the technology. Although adoption is increasing, most people still don’t know much about NFTs and are not participating in these marketplaces.

Another issue is that NFTs don’t fully solve the authenticity issue. For example, NBA Top Shot moments can still be downloaded and copied without ownership of an official NBA Top Shot moment. This applies to other NFT assets, too.

The downside of some blockchain transactions is that they can be a cover for illegal activity. These transactions can be anonymous, which, some experts fear, could give rise to fraudulent, black market activity like money laundering or trafficking.

Another limitation of NFTs is that there are many standards and marketplaces that do not yet communicate or operate with one another. NFT collectors want their assets to reside and interact in digital spaces that are platform- or marketplace-agnostic, and NFTs that reside on, say, Solana, aren’t compatible with Ethereum (without the use of a fancy bridge, like Wormhole). Some critics of blockchain technology say blockchains are far too inefficient to net a real benefit to users as a whole. There are some reported issues regarding the environmental strain caused by the computing resources needed to mine blockchain data, which some argue is not a worthwhile means to achieve the end of blockchain assets. However, several blockchains that support NFTs, like Solana, Binance Smart Chain, and Avalanche, operate on a consensus mechanism called proof-of-stake, which has a significantly lower environmental impact. Ethereum, the most popular venue for NFT trading, is in the process of moving to a proof-of-stake blockchain.

NFTs as investments in your portfolio

It’s difficult to make predictions about their price, since they are less liquid than fungible cryptocurrencies. But they are an increasingly viable alternative investment gaining more traction by the minute. If you’d like to purchase NFTs as part of your investment portfolio, treat them like any other investment. Research, test and evaluate your outcomes. If it makes sense, buy, sell, or hold accordingly.