A beginner's guide to NFTs, the crypto potentially worth millions

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And yes, someone actually sold an NFT for over $69 million.

Video Transcript

Another day, another cryptocurrency. NFTs are the latest cryptocurrency rage with bands like Kings of Leon releasing their next album as limited edition golden tickets and NBA digital collectibles being sold for millions of dollars. But what are they really? Here’s what you need to know about NFTs, their value, and how they work.

An NFT is a non-fungible token, a unique unit of cryptocurrency created on a smart contract platform like Ethereum. Unlike fungible cryptocurrencies where all units of the currency are the same and equal, with a non-refundable token, every cryptocurrency unit, or token, is unique and cannot be replicated. So NFTs are unique digital certificates for intellectual property that might just be fun to own or potentially even profitable to trade.

And while you’re probably just hearing about them right now, they’ve actually been around for years. The first major use of NFTs was in 2017 with the game CryptoKitties, where people buy and sell digital cats with ethereum. The current NFT craze is mainly fueled by digital art and collectibles like Grimes selling her artwork for nearly $6 million.

People figured out that a unique digital object can be cool to own and might carry a big monetary value. It really depends on the platform. But given the vast majority of NFTs are created and traded on Ethereum, we’ll focus on that. NFTs are created on a Etherum’s blockchain, which is immutable, meaning it cannot be altered. No one can undo your ownership of an NFT or recreate that exact same one. They’re also permissionless, so anyone can create, buy, or sell an NFT without asking for permission.

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The value of NFTs doesn’t just come from a game of digital hot potato in which you purchase something, hoping you’ll sell it for more later, and on and on until the whole thing crashes. Ideally, the NFT should be valuable to you because you actually like it. If you’re an NBA fan, you might want to have an official NFT representing your favorite player. Or perhaps there is some digital art that you really want to buy.

Sure, many NFTs are just a digital image that you can easily right click and save to your computer. But because NFTs also live on the blockchain, it makes it extremely hard to truly copy them in their entirety. There’s an argument that NFTs are good for digital artists since they can actually get paid for their work. But it’s important to note that as of now, there’s nothing stopping people from simply tokenizing other people’s work, claiming it, and profiting off it.

NFTs are a developing space, and there’s a lot of hysteria and scamming going on. You might see a certain NFT sold for millions and think you’ll also be able to buy something for a few dollars and become rich selling it to someone later on. It can happen, but it’s rare. And that value can be manipulated. Someone who owns a lot of crypto can buy lots of NFTs and then sell them to their other cryptocurrency address for millions, artificially inflating the price.

In short, be careful. Just because some NFT was traded for a lot of money, don’t think it automatically means all other similar NFTs valuable too. And an NFT’s value isn’t the only thing to worry about. Like many other forms of cryptocurrency, NFTs carry a super significant environmental impact. For example, one artist estimated generating six NFT pieces took more electricity than his whole studio would have used in two years.

Sure, Ethereum, the platform where most NFTs reside, is planning to switch its model in a way that would make it more environmentally friendly, but it’s going to take a long time, and the actual switch might not happen for years. Buying an NFT because you like it, or maybe even to earn or lose a few quick bucks, is one thing. But investing in NFTs is different.

Given the digital nature of NFTs, it’s hard to compare them to artwork like statues or paintings. On the other hand, we live in a world where one bitcoin is worth more than $50,000. So things from the digital realm can certainly be very valuable and even sustain that value over longer periods of time. In any case, if you plan to invest in NFTs, you’ll need to dive deep into this complex world because each NFT market is slightly different.

It’s also pricey. Trading on Ethereum can be quite costly, as the network’s recent congestion is causing fees to rise. Finally, you’ll need to think strategically and follow the often rapidly changing cryptocurrency trends. In short, it’s possible to earn money by investing in NFTs, but you’ll have to do your homework.