What Is an NFT?

From crypto enthusiasts on social media to celebrities like Paris Hilton and Snoop Dogg, everyone seems to be talking about NFTs, or non-fungible tokens. And it’s not surprising. Digital art NFT collections like the Bored Ape Yacht Club and CryptoPunks have sold for millions of dollars. And while the volatile NFT market has seen major dips, the big NFT marketplace OpenSea still has more than 1 million users. But before you jump into the virtual Wild West of NFTs, you should know exactly what you’re getting into.

What is a Non-Fungible Token (NFT)?

A common misconception is that NFTs are pieces of art. They are actually digital contracts that represent ownership of a piece of art — or whatever the NFT might be tethered to, as the concept can be applied to any type of media content.

Each NFT has a unique code or address that exists on the blockchain, an online digital ledger or database that records transactions. Think of this as a digital certificate of ownership. If you buy the image of a Bored Ape or a video clip from NBA Top Shots, each carries with it a unique code indicating it’s yours. You access your NFT through a private key which links to the blockchain and indicates proof of ownership. If you want to get technical, NFTs are unique because of the computer standard ERC-721.

But can’t people just browse pictures of Bored Apes online and save them to their phones or computer? Or download videos tied to NFTs off the internet? Yes, you can. (Although depending on the content, you may face some copyright issues.) Still, this is one of the reasons why critics call NFTs nothing more than digital bragging rights. But to the right person, that’s worth a lot of money. In fact, a collection of 101 NFTs from the Bored Ape Yacht Club sold for more than $24 million in 2021.

How do NFTs work

NFTs live on the blockchain, which is also the underlying technology that powers cryptocurrency. Bitcoin may be the best-known cryptocurrency, but most NFTs are purchased with ether (or eth) and exist on the Ethereum blockchain.

You can purchase NFTs through online marketplaces such as OpenSea, Rarible and Nifty Gateway. But first, you need a crypto wallet that allows you to store the various types of cryptocurrency used to purchase NFTs. You can purchase cryptocurrencies through major exchanges like Coinbase and Kraken or through investing apps such as Robinhood, SoFi and Webull.

But pay attention to any fees and limitations involved. Some crypto providers charge fees for buying cryptocurrency. And some apps don’t let you move your crypto outside the app and into an external digital wallet. This would make it impossible to use that crypto to buy NFTs.

If you’re interested in buying NFTs, be aware of the different kinds.

Types of NFTs

Here’s a glance at what you can expect in the NFT marketplace.

Digital art NFTs

Crypto art is one of the most popular forms of NFT. By the end of 2021, the digital art NFT market was valued at $41 billion, according to blockchain data company Chainalysis. That’s comparable to the conventional fine art market, worth $50 billion at the time. One of the most expensive NFT sales to date was for digital artist Beeple’s “The First 5000 Days,” which sold for $69.3 million through the auction house Christie's. The piece is a collage of 5,000 pieces of his work, which Beeple started working on in 2007. But you don’t need to have a few millions to dabble in NFT art. You can find pieces from about a few pennies to $25 among collections like Axie Infinity and Secret Society of Whales.

NFT GIFs

For those not in the know, GIFs are moving images shared via mobile phones and on the internet. You've probably used these before. They're free online. But that didn't stop a collector from dropping $690,0000 on an NFT of the popular Nyan Cat GIF. The GIF features a flying cat with a pop-tart as its body.

NFT Videos

NFT videos are also quite popular. Anything from a short YouTube clip to a sports highlight reel can be minted into an NFT. Like any NFT, these videos contain unique identifying codes that exist on blockchains and verify owners. Doesn’t sound like a big deal. Anyone can watch a YouTube video for free (or whatever you pay for internet access if you want to be real specific). But YouTube NFTs have sold for hundreds of thousands of dollars. For example, the 2007 viral YouTube video “Charlie Bit My Finger” as an NFT sold for $760,999 in 2021.

The world of professional sports is also scoring big money in the NFT space via short video highlights. As of spring 2022, the one-of-a-kind F1 Delta Time by Formula 1 is the most expensive NFT sports-themed video. It sold for $1.3 million, according to Bookmakers.com. Basketball-themed NFT videos have also grown in popularity. Collectors have spent more than $589 million on Top Shot NBA NFTs since it was launched in October 2021. NBA Top Shot clips are released in packages and numbered. For instance, one highlight can be minted and turned into 100 NFTs. This takes away some of the "uniqueness" concept, however. You and 99 other people can own an NFT of the same clip, even though each carries a unique address on the blockchain that binds it to different wallets and owners. Theoretically, this can drive down the value of a particular NFT since more than one person owns the same clip.

NFT Video games

In 2021 the online game CryptoKitties became immensely popular among crypto enthusiasts. The game allows players to buy, sell and "breed" unique NFTs of digital kittens. For '90s babies, this may conjure up memories of Pokemon, Tamagochi and GigaPets. But you probably never bought a Pokemon for $1.1 million. That's approximately what the CryptoKittie Founder #40 sold for in 2021.

However, the mainstream gaming world is just testing the waters of NFTs. Today, you can purchase NFTs tied to game items such as an exclusive clothing gear for a playable character. However, NFTs have raised some controversy among the gaming community. Many gamers see it as a money-making scheme rather than a way to improve the gaming experience. In a 2021 interview with Axios, head of Xbox Phil Spencer said, "Microsoft won't be chasing this gimmick any time soon." But in April 2022, a Microsoft representative told Bloomberg that the company was "aware of and looking into NFTs." So, major gaming providers may soon consider NFT adoption to compete.

Are NFTs a good investment?

Some experts believe NFTs aren't great investments. "Do not treat it as an investment" warns James Wang, head of tokens at Amun, a cryptocurrency issuer. "Treat it as speculation. Don’t bet the barn on a single NFT or collection. Follow different projects so you’ll have a chance to learn and iterate."

But speculation isn't the only risk you'll encounter in the NFT universe.

NFT Risks

First of all, NFTs technically aren’t an asset class. They’re a form of blockchain technology that represents ownership of something such as an image or a video or clothing. Think of the NFT itself as a digital deed of ownership that declares you own that cartoon monkey.

So you really need to understand the value of what the NFT is tied to. For instance, collections of avatars such as the Bored Ape Yacht Club can sell for a handsome amount of money. They’re popular today as hordes of enthusiasts rally for them on social media, and they get lip service from the likes of Jimmy Fallon. So, no doubt, they’re popular today. But what if the NFT craze dies out and people move onto the next big thing? Or a new NFT collection dwarfs today's hottest hits. You may be left with something worthless.

And while many people see NFTs as digital collectibles similar to fine art or limited edition baseball trading cards, some treat these as investments such as a stock, which people would eventually sell for a profit. But there's a big risk here. If you dropped $100,000 for an NBA Top Shot clip and the demand for these suddenly tanks, you’ll have trouble finding someone willing to pay more for it than what you paid.

NFT Volatility

Make no mistake, the NFT space is a highly volatile one similar to the crypto space and anything involving the so-called metaverse and web3 dimension. Consider this: Sina Estavi, a high-profile crypto investor, bought an NFT of Twitter co-founder Jack Dorsey’s first ever tweet for $2.9 million in March of 2021. In April 2022, he put it up for auction and the highest bid he was offered was about $14,000.

“NFTs are inherently speculative assets and extremely volatile, which by nature are risky,” says Pat White, co-founder and CEO of Bitwave, a company that helps businesses adapt to digital assets. “Sometimes that’s a good thing, like when the moonbird you bought at $7,600 grows a hundred times overnight. Sometimes it’s bad, like when the NFT you bought for $2.9 million can’t get a bid over $14,000.”

And like anything financial, NFTs aren’t immune to scams such as phishing operations. These cases involve hackers tricking people into giving up their crypto wallet keys or seed phrases. They then use this information to steal the wallet’s content including NFTs.

NFT scams

In February 2022, hackers launched a phishing scheme and stole more than $1.7 million dollars worth of NFTs from users on OpenSea, one of the biggest NFT marketplaces. Earlier that year, New York art collector and gallerist Todd Kramer claimed hackers stole more than $2 million worth of his NFTs.

And high-profile scams like these could theoretically help kill the hype behind NFTs and thereby their value. In fact, daily average sales of NFTs dropped by 92% during the week of May 2, 2022 compared to its high in September, according to data site NonFungible.

In any case, you should carefully vet any NFTs you’re purchasing. Research the people and companies selling the NFTs to make sure they’re legit and verified.

Should I invest in NFTs?

Wang recommends the NFT curious learn all they can about NFTs and join Discords (a type of social media community) before jumping into the market. In terms of security, he recommends using hardware crypto wallets, or “cold wallets,” rather than digital ones and to never give away your recovery key.

In addition, you should understand that you get access to your NFT or coins through a private key. If your recovery key is ever lost or stolen, you essentially lose your NFT forever. There’s no regulatory body responsible for helping you get it back.

But regardless of what happens to the NFT market, the technology behind it is here to stay. "At the end of the day, we need to remember that use-cases will come and go, but the technology that drives NFTs — digital assets in general — is what is revolutionary" White says. "We’re only beginning to see what is possible."

More from Money

6 Best Crypto Wallets of 2022

Lots of People Think NFTs Are Cryptocurrency (and They're Wrong)

3 Popular Crypto Scams (and How to Avoid Them)