NFTs 101: A Newbie’s Guide to Non-Fungible Tokens
If there is one big buzz word in the world of crypto right now, it is “NFTs.” They come up in discussions surrounding just about every topic under the sun, whether it is art, investing, video games, or sports.
But what are NFTs? A lot of articles just assume that you already know.
If you have no idea what an NFT is and you are tired of being out of the loop, you are in the right place. In this guide, we will explain what NFTs are, how they work, and how people are using them. We will also answer some of your questions about them.
Ready to do some good ol’ fashioned learnin’ ?
What are NFTs?
“NFT” stands for “non-fungible token.”
The simplest way to define NFTs is this:
A unit of data that is 100% unique and which cannot be interchanged with any other unit of data.
NFTs live on the blockchain. You can use them to buy and sell “ownership” of just about anything, whether it is physical or digital.
Indeed, you have probably seen some of the wild stories about people selling jpegs for millions of dollars using NFTs.
Let’s dive in a little bit deeper so you understand more about how this works.
It is useful to understand the concept of what it means for something to be “fungible” or “non-fungible.”
The easiest way to explain it would be to simply substitute in the words “interchangeable” or “non interchangeable.”
Most economic assets you can think of are fungible. Consider the dollars in your wallet. One dollar is interchangeable for another.
This is also true of commodities like gold. One gold bar of the exact same size and quality as another is interchangeable with it.
Cryptocurrencies also are fungible. Every bitcoin is interchangeable with every other bitcoin. There is nothing distinguishing between them.
In order for an asset to be non-fungible, it must be unique.
Unlike gold, diamonds generally fall into this category. It is difficult for them to be interchangeable because they have so many distinguishing attributes.
A one-of-a-kind piece of art also is non-fungible. An example would include an original painting or sculpture.
Interchangeable art items, on the other hand, are fungible. Any two copies of the same edition of a book or album are generally interchangeable, unless they have been personalized in some way (i.e. signed).
This is also true for digital images, which can be copied and pasted at will.
Now that you understand the difference between fungible and non-fungible, let’s get back to talking about NFTs.
As we stated, an NFT is a non-fungible unit of data. Every single NFT in the world is unique and non-interchangeable with every other NFT.
This quality makes NFTs useful as a digital marker of ownership. An NFT can be linked to a particular item, whether digital or physical, and then one may purchase “ownership” of that item.
As we mentioned, jpegs themselves are fungible. Say you purchase an NFT for a jpeg. This will not stop anyone (including you) from duplicating the image and spreading it around.
But what no one else can do is duplicate your NFT. No matter how many people have the jpeg on their hard drives, you and only you can claim to “own” the image through the NFT.
You can think of NFTs as a way of introducing scarcity into a market where it would not otherwise exist.
What ownership entails depends on the rights the original owner of the image conferred upon you through the transaction.
Vladislav Zorov, blockchain technology lecturer at Kingsland University, explains, “It seems a common theme is, for example, you get no rights to use the image for commercial purposes – so, if your plan was to spend a bunch of money on some NFT art with the intention to build a unique website design for your business, it won’t work. You only get rights to display it in the context of promoting that you own the NFT, e.g. in virtual art galleries and games (which I guess could be pretty cool, especially with modern VR worlds and the kind of events that happen in those, like concerts and live DJ parties and what not).”
As Zorov concludes, you are basically buying bragging rights. Additionally, purchasing an NFT gives you a chance to support the seller, i.e. an artist you enjoy.
And have you ever wondered if you can invest in crypto and still be eco-friendly? Wonder no more!
What are People Doing With NFTs?
By this point, a better question might be, “What aren’t people doing with NFTs?” But here are some examples of ways people are making use of them:
As just discussed, a lot of people are buying NFT art. Often, this takes the form of celebrities purchasing NFTs for avatar jpegs. But there is a wide range.
While not really a big thing yet, there is a lot of talk in the video game industry of using NFTs in conjunction with microtransactions. NFTs also could help players to manage, sell, and trade their digital games.
It is now possible to buy a domain name with a one-time fee for life through an NFT domain registrar.
You can now own specific NBA replay highlights by purchasing their associated NFTs through a specialized marketplace called NBA Top Shot.
At the time of this writing, NFTs are helping Ukrainian war efforts. CNN reports, “Isaac Kamlish, Nathan Cohen and Isaac Bentata — ages 23 to 25 — gathered around their laptops earlier this week and helped launch the first-ever sale of one-of-a-kind digital collectibles by a national government. In 24 hours, Kyiv, using technology developed by the trio, sold more than 1,200 non-fungible tokens, or NFTs, raising about $600,000 to help fund its defense against Russia.”
While digital uses of NFTs are getting most of the attention right now, non-fungible tokens also could have practical uses related to physical goods.
For instance, say you purchase a physical piece of fine art. If you receive an NFT as part of your purchase, you have an easy way to verify your ownership at any point.
One could also picture a scenario where NFTs are tied to high value and collectible items. Whenever the item changes hands, the NFT goes with it.
This would be much better than a certificate of authenticity if you are purchasing, say, a diamond or a signed baseball card.
Are NFTs a Good Investment?
We’re always looking for a great investment around these parts!
Naturally, the popularity of NFTs has a lot of people wondering if they are good to invest in. Could you buy a cheap jpeg today and turn around and sell it next year for boatloads of cash?
Well, probably not. For one thing, NFTs are not technically assets the same way currencies or commodities are (yet).
For another thing, the risk is very high, and it is unlikely that an investment in NFTs will pay off for the average retail trader.
Time quotes personal finance expert Humphrey Yang as saying, “For the average investor, I think that it’s generally a bad idea unless you just want to buy into it for the artwork, and you’re OK with never seeing that money again.”
Of course, the discussion above concerns NFTs for non-utilitarian items such as jpegs. The situation may be different if we are talking about more NFTs for assets with practical value.
Referencing Nick Donaraski, CEO of blockchain technology at ORE System, US News & World Report says, “Some NFTs can provide investors with greater growth opportunities, depending on their applications, Donaraski says. NFTs with utility, like real estate contracts, will ultimately hold greater value in the future. An NFT can be a legitimate investment if investors understand what the NFT is being used for.”
The site then quotes Donaraski as explaining, “Making sure that you have something that has utility is a better bet for the long-term life of what an NFT is. If the NFT has utility, whatever the life span of the use case is, is the lifespan of that utility.”
So, if you are going to try investing in NFTs, start out by doing your homework. Make sure you know what you are getting into.
If you do decide to invest in something without practical value (like a jpeg), consider doing so in order to support the artist and have a good time, rather than thinking you are going to get rich.
Are NFTs a Good Business Opportunity?
If you are reading this as an artist, your next thought might be to get into selling NFTs yourself. Could you get rich selling jpegs?
Some people certainly are. But those are just the stories you hear about. There are piles upon piles of NFTs for art swirling around the internet that are not earning massive amounts of money.
There have also been issues with plagiarism. WIRED reports, “RJ Palmer is an artist who focuses on creature designs and worked on Detective Pikachu. In the past, work of his on DeviantArt was copied wholesale, minted as NFTs, and listed for sale on OpenSea.”
You do not need to be selling NFTs yourself to be plagiarized in this manner—but some artists are so upset they prefer to steer clear of NFTs altogether.
Another issue is that most NFTs are supported by Ethereum. That means that if you are successful in selling an NFT, you will be paid in ETH.
The problem there is that ETH’s “gas fees” are ridiculous, and the transactions themselves are not always reliable.
How bad those transaction fees are depends on when you make the transfer. If you are lucky, you might only pay a few dollars. But if you are unlucky, the fee could be in the triple digits.
It can be hard to predict surges in ETH gas fees. A jump from the low end of the fee range we mentioned to the high end can take place within seconds. To make matters worse, if your transaction fails, you do not get a refund on the fees.
While efforts are being made to solve this problem, it is one to be aware of in the meantime. Even if you sell an NFT of a jpeg for hundreds of dollars worth of ETH, you could wipe out your profits in fees.
Oh, and did we mention there is a fee you have to pay to a marketplace to “mint” your NFT? More on that later.
How Can You Buy and Sell NFTs?
If you want to purchase or sell NFTs yourself, here are the steps.
How to Buy NFTs
- Sign up on a cryptocurrency exchange platform. If you are not sure where to begin, take a look at our recommended platforms.
- Buy Ethereum to store in your wallet.
- Choose an NFT marketplace to use. Join and connect your wallet. OpenSea is the best-known, but there are plenty others out there.
- Take a look at what is for sale in the marketplace.
- When you find something you want to buy, you can pay for it using the ETH in your wallet.
If the platform does not also give you access to a wallet, sign up for a wallet as well.
Congrats! You are now the owner of an NFT. Feel free to use and enjoy the associated item or content you purchased in whatever way the seller permits!
While ETH is the most popular crypto for NFTs, there are hundreds of others you can also use. So, that may be an option if you want to steer clear of ultra-high gas fees.
How to Sell NFTs
- Start by joining a cryptocurrency exchange platform.
- Buy some Ethereum to put in your wallet.
- Pick a marketplace where you will list your NFT. Then, connect it with your wallet.
- Upload your digital content (for example, your jpeg).
- Create an auction and input details on the title, description and pricing.
- Submit payments for the listing fee and the minting fee.
- When someone purchases your NFT, you receive the payment, minus the commission charged by the marketplace.
- Once you have your ETH, you can either keep it in that form or you can convert it or sell it.
Again, check our reviews to find a platform that is right for your needs.
If you do not get a wallet with your exchange account, open a wallet account elsewhere as well.
The fee to list your item usually will not be too expensive, but the fee to mint an NFT can be quite a bit higher.
There is also a transfer fee for receiving the ETH.
Because of the expenses involved with selling NFTs, it is important to do your research. Try and pick a platform you can afford to use and consider only listing NFTs if you have a good reason to believe they will sell.
Frequently Asked Questions About NFTs
Is this a “good investment”?
You know, probably not, but you do you!
- Are NFTs bad for the environment?
There are, unfortunately, some environmental issues with NFTs.
Columbia Climate School says, “The average NFT generates 440 pounds of carbon—the equivalent of driving 500 miles in a gas-powered car—producing emissions 10 times higher than the average Ethereum transaction.”
Thankfully, there are a lot of efforts being made as we speak to make NFTs, ETH, and crypto in general more environmentally friendly. You can see more in this Time article.
Considering how big NFTs have gotten, it is easy to forget that this technology is still in its early stages of development. Over time, the environmental footprint should decline.
If you are looking for broad recommendations for how you can limit your own carbon footprint while using cryptocurrencies, see our Green Guide to Crypto.
- Are NFTs a scam?
You do not have to go far on the internet right now to see someone saying, “NFTs are a scam!!!” (yes, with the triple explanation marks). NFTs are very divisive, so, naturally there are people who condemn them outright.
The general consensus is that NFTs are not a scam in and of themselves. How could they be? They are simply a way to mark ownership with a non-interchangeable token.
Are there scams in the NFT space? Of course. We could say the same if we were talking about stocks, currencies, crypto in general, or just about anything else financial.
The tendency for some people to label NFTs as scams in a broad sense probably reflects the disdain they feel for the ways they are used. These folks express general incomprehension at why someone would spend millions of dollars on a jpeg.
But no, if someone willingly pays a large amount of money for a jpeg and understands exactly what that means with respect to “ownership,” that person has not been scammed. They made an informed purchase. They are well aware that that they cannot stop other people from posting or downloading the jpeg. They purposefully paid for bragging rights.
- Are NFTs copyrighted?
Unless explicitly stated by the seller, you are not purchasing the copyright to a work when you buy the NFT.
Think of it as similar to what happens when you buy MP3s. You own those copies, but you do not own the copyright to the music.
Likewise, when you buy an NFT, you do not own the copyright to the jpeg or whatever else you got. You simply own the bragging rights associated with that specific transaction.
The biggest issue we have seen with respect to copyright problems is people selling NFTs for works they do not own, thus using them for commercial gain without the creator’s permission.
On the bright side, one possible application of NFTs that could help artists is in assisting them with capturing resale profits with accuracy.
Reuters explains, “While there have been decades-long disputes over artists’ resale royalty rights in the U.S., also known as droit de suite, NFTs present potential workarounds for artists in this respect. Currently, the EU, UK, Australia and the Philippines officially recognize artists’ resale royalties, whereas the U.S., as a whole, has long fought the idea … By contrast, NFT platforms do offer artists the possibility to claim resale royalties on subsequent sales of the artists’ work not otherwise traditionally offered in certain countries.”
- Are NFTs legal?
NFTs are legal. They are also unregulated. That said, they cannot legally be used to circumvent existing legal frameworks (i.e. copyrights).
We can expect regulators to take an interest in NFTs in the future, and perhaps attempt to classify them.
Jones Day writes, “By their nature, NFTs can be linked to a variety of different assets and represent numerous rights and obligations, making them challenging to classify. Although regulators so far have not provided official guidance about NFTs, it is possible that an NFT could be considered a “commodity” under the Commodity Exchange Act (‘CEA’),”
The post continues, “Looking beyond the CEA, many NFTs available on the market today appear unlikely to be considered ‘securities’ under the federal securities laws for a number of reasons. An NFT could be considered a security, however, if it were designed to provide an expectation of profit to the buyer based on the efforts of others and were marketed as such.”
We will have to wait and see how regulators end up weighing in on the matter.
- Are NFTs taxable?
Yes, NFTs are definitely taxable. If you invest in NFTs and you sell them at a profit, then you owe taxes on your capital gains.
If you sell NFTs, you must report the money you receive just like any other income. If/when you sell the crypto you made for US Dollars, you may also owe additional capital gains taxes.
Get Started With NFTs
Now you no longer need to scratch your head in confusion every time someone brings up NFTs!
Despite how arcane the concept of NFTs may sound at first, you can appreciate now that it is pretty simple and straightforward.
NFTs need some improvements from an environmental standpoint, but they do have a lot of potential for practical applications in a diverse range of fields and industries. And in the meantime, they are a lot of fun for the folks who are trading in them.
If you want to buy or sell NFTs, you need to start by opening an account on a crypto exchange platform. Check out our recommended crypto platforms now!
When You’re All Done With This, You May Also Want to Check These Out: