What are NFTs?

What are NFTs?

Non-fungible tokens (NFTs) are digital tokens that represent ownership of a unique asset, from paintings to trading cards. This page covers everything you need to know.
By: Charlie Hancox
Charlie Hancox
Alongside his passion for trading, Charlie has represented Great Britain and won national championships as a water polo player, and as… read more.
Updated: Mar 25, 2021
4/5 Star rating
Beginner
6 min read

Non-fungible tokens are pieces of digital data that represent ownership of something. Each individual NFT is tied to some form of asset, which can be a real-world item or exist purely online.

Keep reading to find out how NFTs work, how they’re made, and what to think about when buying one.

I. What is an NFT?

An NFT is a digital token that proves ownership of a unique asset. It can represent anything in a digital form, such as art, music, videos, video game items, trading cards, digital homes, and other forms of creative work.

They are stored on a blockchain, which is like a large, digital ledger. The first NFTs were founded in 2015 and based on Ethereum, and growing interest from investors has led to a rapid increase in their popularity. You can buy, trade and sell individual NFTS just like you would a single unique Bitcoin.

What does ‘non-fungible’ mean?

It means one of a kind. Fungibility means the ability of a good or asset to be readily interchanged for another of like kind, so non-fungible tokens cannot be interchanged. This is because the blockchain that each NFT runs on tracks the original file, verifying its ownership and preventing duplicates from having the value of the original item the NFT is tied to.

II. What are some examples of non-fungible tokens?

Pretty much anything can be an NFT, and we have listed some of the most prominent examples below:

  1. Digital art: Everydays—The First 5000 Days. The most valuable piece of digital art by market cap to be stored as an NFT was created by Beeple, a millionaire who has made his fortune selling NFT artwork. The piece was sold on auction for a whopping $69 million. Beeple took advantage of it being a purely digital asset and was creating it over a huge 21,069 pixels x 21,069 pixels, weighing in at over 0.3GB.
  2. Tweets: Jack Dorsey’s first tweet. The digital form of the Twitter founder’s first tweet, reading ‘just setting up my twittr,’ was sold for $2.5 million in an auction.
  3. Virtual worlds: Mars house. A virtual reality house on the planet Mars was sold in NFT form for $500,0000. It is a 3D digital file, and the owners can use it to have a virtual tour of their house. It is regarded as the first NFT digital house in the world.

Why are they valuable?

With numerous NFTs selling for millions of dollars, the main reason for this is their scarcity. Just as one could buy a piece of rare fine art and speculate on its value, one can buy a unique NFT and do the same. The token’s non-fungibility is key to their preserving its value, and it gives the purchaser peace of mind knowing that what they are getting is the real deal.

III. Why would I want to buy an NFT?

Because it is a rapidly growing market with increasing interest and trade volumes. Moreover, it is an entirely new way of owning, buying, and selling digital assets online. It is an easily-accessible market that could hold significant investment potential if it catches on beyond tech-educated users.

How do I buy a non-fungible token?

Buy one from an NFT marketplace. Some of the most popular marketplaces include Nifty Gateway, MakersPlace, SuperRare, Decentraland, and Rarible, though perhaps the largest and most popular marketplace is OpenSea.

You need to pay for the NFT with Ethereum, so buy some from an exchange and load the tokens into an online wallet. You can then create an account with your marketplace of choice, fund it with your ETH wallet, and purchase an NFT token of your choice.

Each marketplace segments the different types of NFTs into various categories for your convenience, and they can be purchased for a ‘buy now’ price, an offer price, or a bid if an auction is taking place.

Can I sell my own NFTs?

Yes. However, you need to create your own NFT first. Once you have done this, you can sell it on a non-fungible token marketplace and recieve the price paid in ETH directly to your wallet. If the item is sold again after your original sale, you will receive a royalty fee, which you can designate when you create the token.

IV. How are NFTs made?

Someone uploads a file to decide what the NFT represents, then it gets minted to the Ethereum network just as a token of ETH would. Once it is plugged into the system, it is tracked and its movements in the market and value are verified by a proof-of-work (PoW) mechanism. Essentially, miners make sure that the unique token’s value and location is never in question.

How can I create my own NFT?

To make an NFT, simply go to any platform that allows you to buy NFTs and find the ‘create’ section. Then, you can create a single NFT or even multiple collectable NFTs. To determine exactly what you are selling, choose a PNG, GIF, MP3 or another file type and upload it, though the cap is usually 30MB.

Then, you can name it and mint the token via the platform you have chosen. To put it on sale, you need to pay the ‘gas’ fee, which is like a processing fee. The movement of the token will then be tracked on the blockchain so its ownership, value and originality is never in question.

V. Are NFTs a safe investment?

All investments have the potential of making you money. However, in the case of non-fungible tokens, they are a very new asset class and you should definitely exercise caution. Make sure to do your own research before you put any of your own capital on the line.

Some problems have been reported regarding NFTs, such as fraud. This is because the NFT system does not require individuals to own the copyright to something before they mint it, and this has created something of a minefield for regulators and consumers alike.

Despite these concerns, NFTs could be an innovative way of trading digital assets on a new and expanding marketplace; just make sure you know exactly what you are buying first because there will be little in the way of help if you experience difficulties.

Charlie Hancox
Financial writer
Alongside his passion for trading, Charlie has represented Great Britain and won national championships as a water polo player, and as a budding film director, has… read more.

Related courses

What are tokenised stocks? Tokenised stocks are digital assets tied to the value of a share. Tokenised stocks are a way of buying stocks that represent the value of a company using cryptocurrency that can be bought on a cryptocurrency exchange. When you buy a tokenised stock, you…