What are NFTs? Non-Fungible Tokens Explained

A Tweet selling for more than $3.59 million? A single pixel of digital artwork selling for over $1.7 million? Art collecting has gone digital with the emergence of NFTs.

By now you’ve probably heard of people buying digital artworks, memes, videos, celebrity pictures – anything digital, really –which can be attached to what’s known as a non-fungible token, or NFT.

NFTs run on blockchain technology, like bitcoin does. But unlike the cryptocurrency, one NFT can represent ownership of a unique digital asset, such as a multi-million dollar tweet. This ability to grant ownership means that even if people can copy a digital image as many times as they want, there is only one – or a certain number of – ownership certificates made available, creating scarcity and theoretically adding value.

So, while some people might be buying NFTs simply for fun or to support their favourite artist – and others to secure ownership of and usage rights in digital artwork – some are buying into NFTs as a type of speculative asset which they hope will rise in value over time.

Canstar spoke to crypto expert Simon Peters from social trading platform eToro to ask him some questions about how NFTs work, how to buy in and what to consider when buying them. Here are his answers.

What is a non-fungible token or NFT?

An acronym for non-fungible token, an NFT is a digital certificate of authenticity that uses blockchain technology to prove ownership and scarcity of digital assets. ‘Non-fungible’ means that unlike regular money or cryptocurrency, the certificates can’t be replaced by a different, identical item.

On the other hand, much like traditional cryptoassets, NFTs are stored in digital wallets which allow them to remain secure.

How do NFTs work?

Most NFTs are created on Ethereum’s blockchain, which is immutable, so it can’t be altered or tampered with. This means that no one can undo ownership of an NFT or replicate the exact same one.

NFTs are unique, but they are also permissionless, so anyone can create, buy or sell an NFT without requiring approval from a central authority.

Basically, an NFT is like a unique collectable card in a forever-open store window that anyone can admire, but only one single person can own at any given time.

How do I buy NFTs?

There are multiple marketplaces that you can use to buy and sell NFTs. Depending on which marketplace you choose, you’ll be able to purchase different types of art or collectables. Most of these websites have secondary marketplaces with a variety of NFTs, but each platform operates differently.

Some of the more popular NFT marketplaces include:

• NBA Top Shot (licensed NBA collectables)
• Nifty Gateway (owned by the cryptocurrency trading platform Gemini)
• Opensea
• Sorare (limited edition soccer NFT cards)
• SuperRare

As most NFTs are Ethereum-based tokens, many marketplaces for these collectables accept Ether (Ethereum’s cryptocurrency) as payment.

Most marketplaces use an auction format, so bids need to be submitted for an NFT. Others operate more like an exchange, using the highest bid (the highest price the buyer will pay) and lowest ask (the lowest price the seller will accept) for NFTs that have several prints.

What can be sold as an NFT?

NFTs can be created and sold for literally any kind of digital asset, although they vary in their tradability, liquidity, and interoperability (how easy they are to move across to different digital wallets or marketplaces).

They can relate to anything from animations, digital artworks, domain names, and in-game items for video games, collectables, famous tweets, memes, ‘tokenised’ real-world assets like real estate and designer sneakers, to digital albums and music, virtual blocks of land and video footage.

Some famous examples of items sold as NFTs include:

• Paris Hilton sold a picture of her cat for over $US17,000 (close to $AU22,000).
• The artwork called “Everydays: The First 5000 Days” created by graphic designer Beeple sold at Christie’s auction for $US69.3 million (around $AU89.62 million.
• Twitter co-founder and CEO Jack Dorsey auctioned off his first tweet for nearly $US3 million (around $AU3.88 million).
• An animated GIF of Nyan Cat (a 2011 meme of a flying pop-tart cat) sold for around $US500,000 (around $AU647,000).
• Grimes sold some of her digital art for almost $US6 million (around $AU7.76 million).
• A video clip of LeBron James blocking a shot in an LA Lakers basketball game went for $US100,000 (around $AU129,000).
• Lindsay Lohan sold an image of her face for over $US17,000 (around $AU22,000,  (and the buyer quickly re-sold it for $US57,000 (around $AU73,700).

just setting up my twttr

— jack⚡️ (@jack) March 21, 2006

Are NFTs a good investment?

It’s hard to say definitively, because each NFT varies substantially and the market is still very immature. Very similar to traditional artwork, the value of these assets are also very subjective – where someone sees high value, another may not agree.

Depending on where you are located in the world, there may also be tax implications when actually buying the NFT with crypto, as well as when the NFT is sold or ‘disposed’.

So as a prospective investor, you’d have to weigh up these implications with the potential price appreciation of the NFT.

Simon Peters is a cryptoasset analyst at eToro, with a detailed knowledge of crypto markets and the crypto industry. In his role at eToro, he also helps high-net-worth clients with their investments in cryptoassets. Simon has a degree from Brunel University London in Mechanical Engineering, and has a CFA UK Level 4 Certificate in Investment Management.