If you’ve found yourself confused by the world of NFTs and crypto over the past few months, you’re not alone. It seems like every time blockchain and crypto technologies make the headlines, something is mystifying about it all.
No one can truly quantify how or why the original Nyan Cat meme was sold as an NFT, for over $700,000 worth of Ethereum. Who in their right mind would pay that much for an internet GIF? Why is Grimes making millions of dollars just by selling her NFTs?
What is this sorcery?
What Are NFTs?
Sorcery, maybe. But if you understand the technology, it makes a whole lot more sense. Non-fungible tokens, or NFTs, are essentially a unique form of cryptocurrency, or token. They are called “non-fungible” because they are unique, cannot be replaced by anything else, and are secured through the blockchain.
It’s important to understand that when you own an NFT, you are the only one in the world to own that particular token. You can sell it, trade it, or hold on to it — referred to as “HODLing” in the meme, retail investing, and crypto communities.
Why Would Anyone Buy an NFT?
Like any purchase, people may acquire NFTs for many reasons. Investors might buy a high-value NFT hoping its value will continue to grow. Creatives might purchase an NFT just to own a piece of history or because they simply like the content. Others might be collecting sets, similar to collecting high-value trading cards or toys.
In the end, the “why” doesn’t matter as much as the how.
What Are NFTs, Exactly?
To the uninitiated, it may not be clear what people are buying, exactly, when they acquire an NFT. One of the most common assets is digital artwork of some kind.
However, NFTs can be anything digital, from fine art and music to encrypted Tweets. Yes, Jack Dorsey, the founder of Twitter, really did sell one of his Tweets as an NFT. It was his very first one on the platform.
Many artists, creatives, and even some celebrities are selling unique content through the NFT marketplace. Depending on who you buy from, and where, you’re going to receive various types of digital content.
What Can You Do With NFTs?
As for what you can do with them, it depends on what the NFT is.
Several web-based games have appeared, running on the blockchain, allowing players to collect gear, characters, and other in-game content as NFTs. Some examples include Neon District, Mega Crypto Heroes, Gods Unchained, and more. Players can trade, sell, or utilize the NFTs and content within their respective games.
Digital “fine art” can be viewed, traded, and sold on a marketplace. While nearly anyone can see a representation of the artwork, the NFT is proof of the original’s authenticity, like a certificate or a fine piece in a museum. Someone might own that artwork, which means they have an ownership deed and certificate of authenticity, and they hold all the value. They lease it to the museum, and everyone else can browse and view the artwork, but that’s it.
Other NFTs include interactive content like videos, dynamic photos, GIFs, and more. When creating an NFT — or “minting” it — it’s possible to embed unique content only visible to the token owner. In that case, owning the NFT would give you exclusive access to whatever experience it offers.
What Do NFTs Have to Do With Crypto?
Most NFTs are minted as part of the Ethereum blockchain. Like Bitcoin, Dogecoin, Monero, Stellar Lumens, and many others, Ethereum is a cryptocurrency. The blockchain is the foundational technology or system that allows the currency to be traded.
Yet, unlike some of the other crypto opportunities, the Ethereum blockchain was designed to support various forms of development, which is where the NFTs come into play.
Much like Ethereum, NFTs can be traded, sold, and transferred through the Ethereum blockchain, except they are used to store information. That information is the digital content, which is what makes the NFTs valuable.
NFTs can and do exist on other blockchains, but the Ethereum-based marketplace is one of the most prominent, and the most common. Every time an NFT is created, sold, or transferred, it costs Ethereum. And like any cryptocurrency, it can be converted into fiat money.
Second only to Bitcoin, Ethereum continues to grow in value, especially thanks to NFTs and their widespread use.
What Else Do I Need to Know?
Whether you plan to get involved with the crypto and NFT communities or not, there are some other things you should know.
For example, if you’re investing in cryptocurrencies, buying NFTs, and trading them, especially, you may owe taxes on those transactions. Because you’re not paying taxes during a transaction as you would with fiat currencies, you’ll end up owing a form of back taxes.
The rates differ depending on the asset and its values, but with cryptocurrencies, those taxes can become substantial pretty fast. If you’re not careful, you may end up owing the government a lot of money, which can put you in a bad spot.
Like cryptocurrencies, NFTs are stored in a “wallet,” which could either be a software or a hardware wallet. If you lose access to that wallet by forgetting a password, misplacing the hardware, or something similar, you also lose access to all of your crypto and NFTs.
This is no different than misplacing your wallet or handbag, but it’s still something to keep in mind. If you’re going to get involved in the crypto scene, make sure you properly secure your wallet(s) and keep your passwords and access codes safe — including your unique backup phrase key.
Finally, while the NFT world has exploded in popularity recently, there’s no telling where it will be months or even years from now. If the cryptocurrency community is a good indication, growth is to be expected, and it will become an invaluable part of the modern digital world.
No one knows if that’s going to happen, however. And it’s just as likely the market could crash. Make sure you understand the risks before getting involved.
NFTs and Crypto: What Now?
Now that you understand the basics of NFTs and crypto, you will have a better understanding of what’s going on when an artist sells their artwork for millions of dollars. It’s a lot like the conventional art world. No one can truly tell you why one piece is more valuable than another, other than being attached to renowned names. You get the opportunity to own a one-of-a-kind digital item, and you can share in its value by selling, trading, or HODLing.
If you’d like to participate, you’ll need an Ethereum wallet — or a wallet for whatever blockchain you’re going to use — along with some cryptocurrency. In the case of Ethereum, the currency is needed to purchase NFTs, but it’s also needed to mint them and list them on an open marketplace, such as OpenSea.