Non-Fungible Tokens (NFTs) are unique digital assets that represent ownership of a specific item or piece of content in the online world.
Why It Matters: Unlike cryptocurrencies (such as Bitcoin), NFTs cannot be exchanged on a one-to-one basis due to their unique attributes, such as the one-of-a-kind nature of the asset they represent. Despite wild fluctuations in the market, some NFTs are still worth millions of dollars—and experts believe their day has yet to come.
The first NFT, Quantum, was created in 2014 by Kevin McCoy. The concept first emerged in the world of online gaming, where players could purchase unique virtual items for use in their games. Today, NFTs have expanded far beyond gaming and are now being used to represent ownership of everything from digital art and music to collectibles and even real estate.
Less than a decade later after its inception, the NFT market cap is worth $10 billion.
Are they worth the hype? Or is the fad over? Let’s take a deep dive into everything you need to know about NFTs—including how to buy your first.
NFTs: the future of online assets
NFTs are digital assets built using the same cryptographic technology as other cryptocurrencies but designed to be non-fungible. That means an NFT is so unique that you can’t exchange one for another. In contrast, cryptocurrencies and fiat money are fungible, meaning you can trade or exchange a dollar for a dollar, for example.
What makes NFTs so unique is that they are powered by blockchain technology, which provides a secure and transparent ledger of all transactions involving NFTs. This means that ownership of an NFT is easily verifiable and cannot be tampered with, making them ideal for use as digital assets.
What makes NFTs so valuable?
In a word: uniqueness.
NFTs are coded like assigned digital signatures that make them different from each other. This design makes the asset highly coveted. Being unique means they can’t be replicated and there can only be one true owner of the asset.
The rise of NFTs has created a whole new market for digital content and has disrupted traditional industries such as art and music. For artists and musicians, NFTs provide a new way to monetize their work and connect with fans, allowing them to receive direct compensation for their creations in a way that was previously not possible.
For collectors and enthusiasts, NFTs offer a new way to own and collect unique pieces of digital content that have value and significance. With the rise of NFTs, the market for digital assets has exploded, and many people are now investing in NFTs as a way to diversify their portfolios and earn a return on investment.
How do NFTs work?
NFTs are tokenized assets that live on the blockchain—predominantly, for the moment, Ethereum.
When an NFT is minted (created), the information is stored on the blockchain like a certificate. Individuals can link it to an asset to show ownership. By tokenizing assets, they become easy to buy, sell, or trade since data of their ownership can be verified on the blockchain.
You can tokenize virtually anything as an NFT. For example, former Twitter CEO Jack Dorsey sold his first tweet as an NFT for almost $3 million. Recently, NBA basketball clips were tokenized and sold as NFTs as well.
However, people are developing other use cases. NFTs are becoming increasingly popular in Web3 games, used as in-game assets to either spruce up characters or trade in-game collectibles. They can also be used as collateral in decentralized finance.
How to buy NFTs
As most NFTs live on the Ethereum blockchain, you need ETH to buy a collectible. Begin here:
Step 1: Set up a crypto account
If you don’t already have a crypto account, you’ll have to set one up with a crypto exchange. There are two types of exchanges where you can buy and sell cryptocurrencies: decentralized (DEX) like Uniswap and dYdX and centralized exchanges (CEX) like Coinbase, Binance, etc.
Step 2: Open a crypto wallet
Next, open a crypto wallet to buy ETH. There are two types of crypto wallets: hot and cold. Hot wallets are either software or mobile apps for storing your crypto assets; however, they’re prone to hacks. In contrast, cold wallets aren’t web-based: they’re physical wallets and are generally considered safer for storing assets. That said, if you lose your seed phrase—a security protocol meant to protect your wallet—you could lose all your assets.
Once you’ve opened a crypto wallet, transfer ETH from the exchange to the wallet.
Step 3: Transfer crypto to your wallet and buy NFTs
The next step is to connect your crypto wallet to an NFT marketplace. An NFT marketplace is a platform that connects NFT sellers to buyers. Some of the most popular are Opensea.io, Rarible, and Foundation.
These marketplaces have different features.
- Opensea and Rarible are open marketplaces that allow anyone to buy, sell, or mint NFTs.
- Foundation is a closed marketplace where NFT artists require an invitation to join the platform. This exclusivity often translates to higher prices.
Once you’ve loaded your wallet with ETH and chosen the NFT you’d like to purchase, follow each marketplace’s protocol to purchase your new asset! Keep in mind that buying NFTs accrues some fees from the marketplaces.
Trading NFT can be a high-risk endeavor due to market volatility and the proliferation of scammers. Here are some of the most popular scams to be aware of to reduce your chances of losing money.
- Rug pull. Aka, the “pump-and-dump” scheme. Social media influencers and scammers build hype around an NFT project, raise awareness, and encourage people to buy in order to drive its price up. When the price reaches a certain level, they sell, make a huge profit, and leave newer buyers with worthless assets.
- Counterfeit NFTs. People can copy other NFTs and sell them as theirs, leaving you with a fake. Make sure to only buy from a verified source.
- Phishing and catfishing scams. This is also popular on social media with celebrity impersonators and random people advertising or incentivizing you to join an NFT project. Some have even built fake marketplaces to scam unsuspecting people.
- Free mint scams. This entails promising you airdrops or a new mint for joining a project. But when you join and connect your wallet, they’ll gain access to your wallet and steal your funds.
Tips for trading NFTS safely
The list is endless, so always do your due diligence. But these few tips will help you navigate the world of NFT marketplaces.
- Don’t trade with any amount you can’t afford to lose
- Do your due diligence
- Ignore spam messages
- Use strong security measures