Full disclosure… we’re starting to love NFTs! But they can be a bit of a minefield. Don’t worry, our beginners guide to NFTs is here to help you out!
Let’s dive right in…
Explore NFTs
Introducing Our Beginners Guide To NFTs
OK, you’ve probably heard of cryptocurrencies like bitcoin, Ethereum, and Litecoin, but what about non-fungible tokens (NFT)?
If you have heard of NTFs, you may have heard them be conflated with cryptocurrency. This is because both of these digital asset classes depend on the same disruptive technology – blockchain, which made its debut alongside the first bitcoin.
So are NFTs and cryptocurrencies the same? Is an NFT just another addition to the growing zoo of cryptocurrencies? Should you consider them for your portfolio?
Actually, despite depending on the same technology, an NTF is not a cryptocurrency. In fact, it’s the opposite of a cryptocurrency, because a cryptocoin is a fungible token.
Let’s dig into the subject of non-fungible tokens so we can understand what they are, what role they play in the investment marketplace, and whether or not you should consider adding an NFT to your portfolio.
What Is A Non-Fungible Token (NFT)?
A non-fungible token is a digital token, meaning it has a unique serial number. This serial number, as well as the record of the owner of that NFT, is stored on a blockchain, a public and anonymized ledger spread across hundreds or even thousands of computer servers, making it hard to falsify.
Fair enough, so far this makes NFTs no different than a cryptocurrency. What makes NFTs different is that they represent ownership of an asset – a real-world asset. With cryptocurrencies, the token is the asset. An NFT is more like title to an asset.
Think about when you buy a house or a car. You “take title” to the house or the car, which means your ownership of that asset is recorded on a piece of paper. Just because someone is driving a car, or sitting inside a house, doesn’t mean they own it. This isn’t a circumstance where “possession is nine-tenths of the law.”
The owner of that asset is the person or company whose name is on the title. The title is just a piece of paper, but it codifies a valuable ownership interest. To guard the chain of ownership from falsification, these titles often get filed with a government office, like the County Clerk. If someone claims to be the true owner of that house or car and the dispute makes it to court, a judge can request the recorded title from the Clerk’s office and easily see who officially owns that asset.
In the case of NFTs, you can think of the NFT as the title, and the blockchain as similar to the County Clerk’s office. If ownership of the underlying asset ever comes into question, you can simply query the NFT on the blockchain ledger to confirm who really owns the asset.
So what kind of assets can be recorded with NFTs?
Virtually anything, as long as it is unique and can be distinguished from every other asset of its class.
One of the most popular current use cases is to record ownership of digital artwork for copyright and royalty purposes. Shoemaker Nike even owns a patent to use NFTs to distinguish each pair of sneakers as unique. NFTs are in the early stages, but they may eventually replace cumbersome traditional methods of titling physical property, including real estate, automobiles, fine art, jewelry, and more.
What Is “Fungibility?”
Something is fungible when it is interchangeable with its counterparts with no loss of value.
Fiat currencies like the US dollar are a great example. If you hand someone a rumpled, dirty one-dollar bill, and they hand you back a clean, crisp one-dollar bill, you aren’t any richer or poorer for the exchange. The dollar bills are of equal value and interchangeable with each other. One dollar is as good as the next, and at any given moment it has the same buying power.
Cryptocurrencies like bitcoin are also fungible. At any given time, one bitcoin is worth exactly the same amount as every other bitcoin. Each bitcoin has a unique serial number, but if two bitcoin owners were to exchange one bitcoin for another, neither of them is any richer or poorer for it. They own assets with different serial numbers, but those assets have identical values at any given time. They are interchangeable without loss; they are fungible.
By definition, a non-fungible token (NFT) cannot be exchanged for another NFT and be assured no gain or loss of value. Each NFT is tied to a unique asset, and therefore only as valuable as that asset. If two investors swapped NFTs, one of them might become immediately richer, the other poorer, because the assets underlying the NFT are almost never identical in value. They can’t be swapped without gain or loss of wealth. They are non-fungible.
How Do NFTs Work?
When a transaction occurs, the new owner of the NFT is recorded on the blockchain, a record that is public and hard to falsify.
Ethereum is often cited as the second most popular cryptocurrency behind bitcoin, but the Ethereum network is about much more than just the Ether cryptocoin.
The Ethereum network is currently the largest recorder of NFTs in the world. Remember Nike and the unique sneaker NFTs? Their patent is to record sneaker authentication NFTs on the Ethereum network! As a side-note, this may be another reason Ethereum may be set to take over the world! (As per Ethereum Explained Simply)
How Do You Buy An NFT?
Buying an NFT is actually much simpler than the concept behind them.
Opensea and other online marketplaces allow the easy purchase of your chosen NFT.
As most of them require payment in Ethereum, you’ll first need to open a cryptocurrency wallet. We highly recommend using coinbase.
Where Can I Buy NFTs
Where you buy an NFT really comes down to what blockchain it’s stored on, and personal preference. As well as the usual factors, such as availability or liquidity. If you are buying a Solana NFT project, you aren’t going to be buying it from Opensea, but you will likely buy it from Solanart. Many of the marketplaces are ringfenced to one another’s own network. EVM or Ethereum Virtual Machine compatible projects such as Polygon, Eth and Immutable X will have their own platforms, and Cardano will have it’s own.
What’s the difference between each blockchain’s NFTs? They are different art pieces ultimately. Cryptopunks on Ethereum are the original, while Solpunks on Solana, look the same, but don’t have that historicity of being a 2017 original. This really brings home the question of what truly is an NFT. For some, they are little more than a profile picture avatar, to other’s they are much more.
How To Explain #NFTs:
— Tokenomist (@RealTokenomist) November 15, 2021
My NFTs are membership cards to private clubs that are investing in themselves to increase the value and use of mine and other member's access.
You can take a picture of my membership card.
But you can't come in though.#rightclicksave #RightClickVictim
How Much Do NFTs Cost?
Many beginners to NFTs will probably wonder why some cost more than others, and sometimes the answers seem absurd. From FOMO mania to hidden built-in utility, the value of NFTs will differ wildly between projects and between items within a project.
Some NFTs are more than just art, they are a membership card to a private club that entitles them to additional benefits such as DEFI yield, more NFTs, access to private parties and so on. For those that vary in price within a project, it can come down to one looking more aesthetically pleasing than another, or pure rarity.
What Is Rarity All About?
Some have traits and attributes intentionally less common than others. For those, the value is pure bragging rights.
Sites like Rarity Sniffer or Rarity Tools, enable NFT collectors to spot tokens that have an enhanced rarity. Of course with any open market, the prices reflect simply what is required for you or I to part with them, and a sale only happens if the buyers want to pay that. There is no official price on anything, just a decentralized attempt at making a market.
One thing to know is that if the underlying cryptocurrency of that NFT shoots up, you tend to see the NFT prices fall in crypto terms, but maybe not in dollar/fiat terms. This reflects a view that maybe we still price these NFTs in Dollars, Sterling and Euros etc. Something many ardent crypto fans might challenge.
Finally when it comes to how much NFTs cost, on the Ethereum blockchain, the cost of using the network can shoot up and that can cause transactions to slow to a trickle and prices to fall where liquidity is low. Desperate sellers lower the price further to accommodate the increased transactions costs.
Lots to consider.
Why Are NFTs Important?
Eventually, NFTs may even throw open the doors for common consumers to invest in assets that were previously unavailable to them, including fine art, digital art, physical property, and much more.
Ok, this goes a little outside of a beginners guide to NFTs… but it’s still an exciting thought!
The process could be global, hard to falsify, and free of middlemen. Imagine buying real estate without the title office!
Alongside cryptocurrencies, NFTs represent a chance to globalize and democratize the entire finance ecosystem. Never in our lifetime has there been so much opportunity for the redistribution of wealth!
Are NFTs A Good Investment?
Every NFT represents ownership interest in a very unique asset.
To ask if an NFT is a good investment is to invite another question – “How good is the underlying asset?” Is the asset in high demand? Low demand? Can it be a source of rent or royalties? Will it appreciate over time?
There are as many possible answers to these questions as there are unique assets in the world. NFTs are so new on the scene that investing in them is highly speculative.
Every NFT should be evaluated solely on the merits of the underlying asset. Whilst we’d love to hype you up about the exciting new world of NFTs, thats the honest, grounded answer.
There you have it, a quick fire beginners guide to NFTs.
Now, learn how to keep your crypto safe, as well as your NFT’s!
Keep reading to dive deeper…
