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A work of art called “The Merge” by artist Pak sold for $91.8 million last year. To date, it remains the most expensive work of art ever sold by a living artist, but The Merge is neither a painting nor a sculpture. It is a non-fungible token (NFT).
An NFT is a digital asset that can represent real objects such as works of art or even real estate. These cryptographic assets are bought and sold online, often using cryptocurrency, and the ownership information is secured and stored on a blockchain, a type of distributed ledger.
As arts and sports NFTs soar in value to millions of dollars, many investors are wondering if NFTs are a good investment. Let’s take a closer look at how you can buy an NFT.
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What is an NFT
An NFT is something that cannot be duplicated – it’s the complete opposite of fungible.
The first known NFT, “Quantum,” was a video clip that was described as a monetized graphic. When it was created in May 2014, it eventually sold for $4. Since then, NFTs have grown into a $1.8 billion market, according to data from CoinMarketCap.
But what exactly is an NFT? Perhaps the first thing you need to understand is how an NFT differs from a fungible token.
If you think of two separate one dollar bills, they are the same. If I take your dollar bill and give you my dollar bill, we both still have the same thing. This means that a dollar bill is a fungible asset.
On the other hand, if you have a portrait painted by Pablo Picasso, swapping that artist’s work for a picture drawn by a three-year-old is not the same thing. This is the basic premise behind NFTs.
“The concept of fungible versus non-fungible has been part of our lives for centuries,” says Merav Ozair, blockchain expert and fintech professor at Rutgers Business School.
Ozair defines a fungible object as something that is interchangeable or indistinguishable from something else.
A bitcoin is an exchangeable token on a blockchain, and it doesn’t matter which one you own.
An NFT, on the other hand, is a unique blockchain token that is not interchangeable with any other token on that or any other blockchain.
Sources of supply for NFTs
The first purchase of an NFT is called minting.
Coinage is not the creation of NFT; Rather, the minting activates a smart contract that has already been created and places the NFT at a specific point in the blockchain network.
In this way, an NFT is a type of non-fungible cryptocurrency. NFTs have the same functions as other blockchain technologies. A given NFT is immutable on the blockchain and anyone can see its transactions, Ozair says.
Although you could potentially build your own blockchain to create and mint NFTs, most users choose an NFT marketplace to mint their NFTs.
There are two types of marketplaces for NFTs: centralized and decentralized.
Centralized NFT marketplaces
The main difference between a centralized and decentralized marketplace is that a centralized marketplace imposes certain limitations on what you can do.
When a marketplace is centralized, says Anthony Georgiades, co-founder of Layer One Blockchain Pastel Network, “You don’t necessarily have an obligation as a user to make sure you’re not infringing.” Instead, the marketplace does that for you.
Decentralized NFT marketplaces
On the other hand, anyone can hypothetically list anything on a decentralized marketplace. This can lead to copyright infringement or even fraudulent NFTs. Any of these factors could harm your investment.
In addition to the suggested price of the NFT itself, when they first mint an NFT, users pay both the NFT and the gas fee.
A gas fee is an additional fee that a blockchain network charges for using its computing resources.
Ethereum (ETH) is currently the largest network for NFTs, but there are other networks such as Flow (FLOW), Cardano (ADA) and Solana (SOL) to name a few.
However, each blockchain supporting NFT projects has its unique advantages and disadvantages.
Some networks also charge a gas fee for minting an NFT. Among the cryptocurrencies that support NFTs, Solana’s gas fees are relatively low compared to most others.
When minting NFTs, users may also want to look at gas charges for the network.
How to buy NFTs
Once an NFT is minted, the user typically has a free hand. Users can list the NFT for sale on the marketplace of their choice, trade it to someone else, or give it away for free.
Some NFT marketplaces, like Nifty Gateway and NBA Top Shot, accept credit cards for NFT payments. But many other NFT marketplaces may require cryptocurrency to make purchases.
However, on any platform, you need a crypto wallet to start buying NFTs.
A crypto wallet stores the keys to your NFT once the NFT has been purchased. These wallets can be stored either online or offline. Offline storage is usually recommended as it is considered more secure.
Once the NFT is either minted, purchased on the Marketplace, or transferred to you by the current owner of the NFT, it will appear in your wallet.
It’s important to remember when buying an NFT that “you’re buying a token ID that actually has that token stored on it,” says Georgiades.
Of course, if your NFT is a work of art, you can print physical copies of it or save the digital image, but the NFT you own is just the token ID. You do not own the rights to the image or the original image itself, unless such ownership is specified in your contract.
What is the value of an NFT
As with many things in this world, the value of an NFT is in the eye of the beholder.
That doesn’t mean that NFTs can’t command a high price. For example, in addition to The Merge’s price of $91.8 million, Beeple’s “Everydays: The First 5000 Days” was auctioned for $69.5 million.
“The value ranges from authentication to uniqueness,” says Ozair.
But not all NFTs come at a high price. Some are valued at less than a dollar. According to data from CryptoSlam, the median price among the $647 million in NFT sales in July 2022 was $115.15.
As with a painting, the market itself decides the final value. Obviously not every painting sells for $1 million, but some people believe some paintings could be worth that much. So you are willing to pay that price.
Of course, NFTs don’t have to be art. There are also sports NFTs that contain digital variations of trading cards and highlight reels. For example, a picture of LeBron James taken by Kimani Okearah sold for $21.6 million. Blockchain-based baseball game MLB Champions sold for $21.3 million, while a signed ticket of World Boxing Council (WBC) middleweight champion Jermall Charlo sold for $19.1 million.
Virtual land, i.e. space in the metaverse, can also be sold as an NFT. But after many multimillion-dollar purchases in 2021 and throughout 2022, the virtual land’s value has reportedly dropped more than 66%.
In the Metaverse, however, NFTs can also include accessories for users’ virtual avatars, such as images and clothing, says Jerry Eitel, partner emeritus and chief Metaverse officer at global accounting firm Prager Metis.
As the world becomes increasingly digitized, NFTs could even represent a title deed, a user’s medical record, proof of ownership, or proof of attendance. These things may not be as easily transferrable from one owner to another, but they could each have their own unique place on a blockchain.
Of course, buying an NFT isn’t like buying a stock or putting cash into an FDIC-protected account.
There is no guarantee that the price of an NFT will increase. This means investors need to take the time to understand what they are buying when they buy an NFT and consider what value they think that NFT will have.