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A beginner’s guide to understanding non-fungible tokens (NFTs)

The mania surrounding NFTs is truly insane. But none of this explains what non-fungible tokens are. In this post, we’ll get you up to speed.

nba top shot example
Image: KnowTechie

Like most things crypto, you either get it, or you don’t. In 2021, NFTs (or non-fungible tokens) are the latest blockchain innovation to excite techies and confuse normies. But, just like bitcoin, NFTs have hit the mainstream for one reason – the dizzying amounts of money people are paying for these digital assets.

On March 23, 2021, Jack Dorsey, founder of Twitter, sold his first-ever Tweet for 2.91 million USD. Pixelated icons known as crypto punks have sold for millions of USD – each. And a mysterious artist known as Beeple recently sold a compilation of his digital art for a gobsmacking 69 million USD – nice.

So yeah, the mania surrounding NFTs is truly insane. But none of this explains what non-fungible tokens are. In this post, we’ll get you up to speed.

What are Non-Fungible Tokens (NFTs)?

nba top shot nft
Image: KnowTechie

Fun… Fungi… Fungible? It’s a term that trips up everybody – except for techies, of course. So if we want to understand what an NFT is, let’s start by defining the term. Fungible refers to any interchangeable item – for instance, if I trade a dollar bill for another, it’s effectively the same object.

By contrast, a non-fungible item is something unique. The original Mona Lisa is non-fungible – even if you traded it for a Mona Lisa print, it’s NOT the same as the other side of the transaction.

That brings us to the other aspect of NFTs – the token part. Unlike physical objects in the offline world, digital assets are – or were – fungible. Even if you owned an original tweet, GIF, or digital painting, there was no way to distinguish it from a copy.

The non-fungible token solves that problem. NFTs contains metadata. This data verifies the digital item you hold is the bona fide original. Bound up in the blockchain, hackers cannot alter this information – this creates trust that has long denied digital art its inherent value. So, with the ability to prove asset ownership, digital artists can now sell their works in the same fashion as their offline counterparts.

TL;DR: NFTs prove the authenticity of original digital assets (GIFs, digital paintings, etc.). They do this through data embedded in an unhackable blockchain.

NFTs Have Triggered an Online Art Renaissance

Imagine, for a second, that you have Picasso-level MS Paint skills. You’ve spent a decade creating art for your self-published books (this is real btw).  But until recently, you haven’t been able to sell your original illustrations online. Not for a livable amount of money, anyway.

Any moron could create infinite copies. This fact alone depressed the value of ANY online asset – no matter how beautiful or complex.

In a few short years, though, the blockchain changed everything. Operating on Ethereum, Flow, and Tezos, NFTs have created the digital paper trail needed to verify ownership of online assets. The result? An explosion of online artists making bank on their creations.

Beeple is the most visible example of this. In months, he has made high eight-figures by tokenizing his best works. But he’s far from the only winner – from Grimes (Claire Boucher in real life) to Chris Torres of Nyan Cat fame (everybody’s favorite rainbow cat just sold for $600,000), long-time digital artists are finally getting paid.

NFTs can tokenize more than just art. Digital content creators have also used them to sell everything from digital sports cards to music. As a result, online creatives are now scrambling to sell works that had been collecting digital dust on their hard drives.

How Can I Get Into NFT Investing?

what is nba top shot
Image: NBA Top Shot

But what if you have the creativity of a piece of granite? If you have the stomach for speculative investing, you can always buy & sell NFTs.

Right now, the market is white-hot. Beeple-quality art is selling for seven-figures+, but even simple works are netting creators thousands of USD. Because of this, you can buy up a bunch of cheap tokenized pieces and try to flip them.

DISCLAIMER: This is tremendously risky. But if you’re prepared, how can you get into NFTs? Start by creating an account on an NFT marketplace – Nifty Gateway, Opensea and SuperRare all deal in digital art NFTs. If you want to trade virtual sports cards, head over to platforms like NBA Top Shot or Sorare.

Second, fund your account with crypto. These platforms accept many types of e-coins, but you can’t go wrong with ETH, as many platforms run on the Ethereum blockchain. A few allow USD stablecoins or even fiat currency – but don’t count on these options being available.

Third, do your research. Apart from the speculative froth, ask yourself – what makes a specific NFT valuable? Is it high-quality work? Is it part of a limited release? Does its artist have clout in the NFT community?

Lastly, buy your NFT. Most NFT owners sell their works in auction-style marketplaces, so be prepared for a bidding war. Before jumping in, always have a ceiling – this way, you won’t spend more than is economical.

Are NFTs far too risky for your tastes? You can still profit by investing in adjacent equities. Read up on these NFT stocks – as these assets grow and mature, related companies will benefit. 

Is the NFT Market in a Bubble?

The amount of money flying around the NFT marketplace right now is… stunning. Let’s revisit the sale of “Everydays: The First 5,000 Days” by Beeple – at 69.3 million USD, it alone made Mike “Beeple” Winkelmann the world’s third most valuable living artist.

To be clear, Mr. Winkelmann is exceptionally talented. But a quick look around the average NFT marketplace will make any rational investor nervous. Even Beeple himself admits it – the NFT market is in a massive bubble right now.

For a textbook example, you needn’t look any further than the Moon Cats phenomenon. Now, to be fair, it’s one of the earlier NFT projects out there. After being abandoned for several years, these randomized icon-sized cats were “given away” to collectors in a one-time lot of 25,600 characters.

After paying an Ethereum “gas fee” of roughly 40 USD, you could have your very own Moon Cat. However, due to their perceived scarcity, their owners began re-selling them. Recently, a Moon Cat sold for around 40,000 USD.

Now, we realize that art is in the eye of the beholder. But do you really believe a pixelated cat is worth 40,000 USD+? Unlikely – but for now, you could make some quick cash. Just realize that someday (probably sooner than you think), NFTs will crash hard. Some assets will even go to zero.

Invest, but do so at your own risk.

Bubble or Not, NFTs Aren’t Going Anywhere

There aren’t a lot of great options for low-risk investors right now. Interest rates are near zero, and bond yields aren’t much better. Real estate is booming, but is out of reach for many Millennials and Zoomers.

So, many have turned to online assets. The financial establishment dismissed crypto, but it’s still here. NFTs, despite the current speculator feeding frenzy, will likely have a similar trajectory. It will correct hard, but at its core, they offer real value for digital creators. NFTs, like the internet and crypto, will survive.

Just be sure to buckle your seat belt – the next few years will be a rough ride.

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