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What Are NFTs? A Resource Guide

January 28, 2022
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In the first 6 months of 2021, NFTs saw over $2.5-billion in sales. But what are NFTs?

Non-fungible tokens, or NFTs, are a type of digital asset that is not interchangeable with other assets. This gives them a lot of value. And while they've gained in popularity, there are still a lot of people who don't understand about this form of crypto.

But we've got you covered. We've broken down everything you need to know about NFTs in this guide.

Keep reading to learn more.

What Are NFTs and What Makes Them Valuable?

NFTs are digital blockchain assets.

You can't break them down into smaller units and trade on the blockchain like fungible tokens such as Bitcoin. NFTs have gained popularity in recent years, especially among blockchain art projects, but many developers are finding new uses for them all over the world.

Since you can't break NFTs down, they become more valuable. This makes them a versatile, tradeable good that has the potential to increase in value due to its scarcity - even if it has no other practical application.

When Did NFTs Start?

While blockchain technology has been around for over a decade, NFTs didn't appear until late 2017. CryptoKitties was the first major success story in the world of NFTs.

The game launched on November 28, 2017 and became massively popular almost overnight. It pioneered many of the concepts that are still being used today, including Ethereum-based asset management, transaction tracking and breeding.

The release of CryptoKitties helped to make NFTs a household name within the blockchain community. It laid out a blueprint for other developers to follow in building their own NFT projects.

In March 2021, the total value of all Ethereum assets ever released was estimated to be as high as $2.7 billion. Cryptokitties alone has a current market cap of almost $50 million.

How Are NFTs Different Than Fungible Tokens?

One of the best ways to understand how non-fungible tokens differ from fungible tokens like Bitcoin is by comparing virtual cats and digital artworks. You can buy both types of digital assets and trade for cryptocurrency, but they are very different kinds of assets.

This is because you can break down fungible tokens, such as Bitcoin, into smaller units and trade them on the blockchain, making them interchangeable with other coins of the same type. They are similar in every way, which means that one Bitcoin has the same value as another Bitcoin at all times. This allows it to be easily exchanged for other cryptocurrencies without any loss in value.

On the other hand, NFTs are not interchangeable with other tokens because they represent ownership of an individual asset. For example, if one person owns a digital painting and someone else buys it at auction, the latter does not own one-half of the original token. They now own two separate pieces that you can sell separately.

In summary, fungible tokens are valuable because you can break them down into small pieces to trade, while NFTs hold value because of their cryptographic uniqueness.

What Is the Ethereum Blockchain?

Ethereum is a public blockchain that allows anyone to write and execute smart contracts on the decentralized ledger. NFTs live on this network as Ethereum-based tokens.

This means that they can be traded freely but cannot be used for anything besides the purposes designed by the original developers. They must follow certain rules, such as making sure each token is unique.

NFTs are only "locked" to the Ethereum blockchain, which means they can technically be traded on any other platform that uses Ethereum. This makes it easy for developers to launch their own non-fungible tokens by deploying them on the Ethereum mainnet.

Risks and Benefits of Investing In NFTs

Fungible tokens like Bitcoin are easier to trade than non-fungible tokens. This is because you only need to trust the value of one unit to begin trading with an asset's blockchain. 

But when you look at NFTs, they have a unique potential to increase in price due to their scarcity - if they have no practical application whatsoever. This makes investing in NFTs a riskier proposition than buying fungible tokens for the time being. However, if non-fungible tokens become widely used in the future, this could be a profitable investment strategy.

NFTs are becoming more and more popular with each passing day. You can use them to represent anything from virtual pets like CryptoKitties to items in video games such as Fortnite Skins. Because of this, there is no typical NFT-related project - they can represent an asset of any kind, which is why they are so versatile.

Many NFT projects have raised significant amounts of money during their ICOs and development phases. For example: 

  • Fortnite Skins: $12 million
  • Arian Foster's Cryptokitty: $8 million
  • Decentraland: $24 million
  • CryptoKitties: $12 million
  • Axie Infinity: $400,000

However, there is no guarantee that crypto-collectibles can ever become a mainstream phenomenon.

How Do I Buy NFTs?

Because NFTs are not designed to be fungible, you can't buy them using a process like the one outlined above. Instead, you will first need to buy ETH or BTC with fiat currency and then transfer it into an exchange that lists non-fungible tokens.

There are dozens of different exchanges that list NFTs for trade, but the list of reliable options is much smaller. Sites like these are subject to change, so it's best to look at NFTs on your own in order to find the most accurate information possible. You can also find digital art spaces that are alive with NFTs.

Once you've bought some cryptos, visit an exchange that lists non-fungible tokens. Then, you'll need to exchange your BTC or ETH for one of the many cryptos that represent individual NFTs.

As with every investment decision, there is always a degree of risk involved when buying NFTs - especially in a volatile market like cryptocurrencies. But if you can find a good project and buy at a low price point, you'll be in a good position to make money.

The overall potential of NFTs is still unclear at this point. Most are not backed by any kind of legal agreement, which means they might never translate into real-world value. However, if the technology becomes widely adopted in some niche markets, there could be significant profits made.

How Do I Sell NFTs?

Since NFTs are not fungible, you can't sell them using a fluid process like the one outlined above. 

You will first need to buy ETH or BTC with your NFT and then transfer it into an exchange that lists non-fungible tokens. There are dozens of different exchanges that list NFTs for trade, but the list of reliable options is much smaller. 

Once you've bought some cryptos, visit an exchange that lists non-fungible tokens and then use your BTC or ETH to trade for an NFT of your choice.

As with every investment decision, there is always a degree of risk involved when selling NFTs - especially in a volatile market like cryptocurrencies. But if you can find a good project, buy at a low price point, and sell after the value has increased, you'll be in a good position to make money.

But before you can do anything, you must "mint" your NFT.

What Does it Mean to Mint an NFT?

In layman's terms, minting an NFT is the process of transforming a digital file into a crypto collectible or cryptocurrency on the Ethereum blockchain.

One example of how this works is with CryptoKitties. After users buy their cat, they can use the game's "Mewtation" feature to turn it into a unique token.

You can perform actions like these on what is called an NFT exchange -- or a marketplace. There are various on the market for people to access including:

  • OpenSea
  • Rarible
  • NBA TopShot
  • Mintable
  • Axie Marketplace

You can use these marketplaces to buy, sell and exchange their NFTs. This makes it easy and accessible.

What Are the Top Things to Look Out For?

The best way to make money with NFTs is to invest in a project that gains traction and increases in value as more users join the blockchain. So, here are some things you should look out for if you want to be successful:

Evaluate Market Trends & Competition 

Look at how many competitors there are and what kind of traction they're getting. Is it growing quickly or slowly? Has the project been around for a long time, or is it relatively new?

Evaluate The Value of The NFT 

Evaluate how much an NFT might be worth in the future. Do you think its value will decrease, stay roughly the same, increase, or decrease dramatically? Is the coin/token associated with it worth anything, and how much is it worth?

Evaluate The Company Behind The NFT

Look closely at the company behind an NFT to make sure you trust them. If they've already made a name for themselves or have strong support from investors and users, you can be fairly certain they will make a success of their project.

Evaluate The Project Behind the NFT 

Look closely at the project behind an NFT to make sure you trust them. If they have valuable ideas, a valuable business plan, and strong support from investors and users, you can be fairly certain they will make a success of their project.

Evaluate The Token/Coin 

Evaluate how much an NFT token/coin might be worth in the future. Do you think its value will decrease, stay roughly the same, increase, or decrease dramatically? Is the coin associated with it worth anything, and how much is it worth?

Interesting Facts About NFTs

There are other interesting facts about NFTs that you should be mindful of. Some of these include:

Leasing:

Some projects allow NFT users to lease their tokens to other users. You can do this by permanently transferring control of the NFT to another user, who can then perform transactions with it (such as selling it).

Price Arbitrage

Sometimes, the price fluctuates dramatically between different exchanges for one non-fungible token. We call this price arbitrage.

Mining

Not all NFTs are equal - you can mine some tokens. And there are others you cannot. In this case, mining refers to the processing of transactions on a blockchain network.

Categories

Many NFTs fall into one of three categories depending on their use-case: gaming, collectibles, and in-game items.

Multi-NFT Contracts

You can use some NFTs as a sort of contract that allows users to acquire other non-fungible tokens. This is still a popular use case for ERC-721 contracts.

Unique:

The most important thing to remember about NFTs is that only one user can own them at a given time. This makes them unique and scarce compared to their more common counterpart - fungible tokens.

Virtual Reality

Because of this, virtual reality has become an attractive use case for non-fungible tokens. For example, users of the Decentraland platform can buy land which they can then rent out to other users.

Digital Asset

Because NFTs are unique and scarce, many companies view them as valuable assets for digital-asset management.

Legal Status

There is no legal status for non-fungible tokens at this time.

Getting Started With NFTs Today

Hopefully, now you'll never have to ask, "what are NFTs?"

If you already own cryptos, find an exchange that lists non-fungible tokens. For now, it's important to do your research before buying any NFTs.

To learn more about how you can dip your toe in the world of NFTs and digital art, contact us today.

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