NFTs are simply one-of-a-kind digital tokens that cannot be exchanged. This is not like most other digital tokens you've probably heard of. Because each unit of Bitcoin and Ethereum is identical, they are fungible.
If you're wondering why these "unique" tokens are so popular among cryptocurrency enthusiasts, it's because NFTs can provide irrefutable proof of ownership. NFTs are created using existing cryptocurrency networks, such as Ethereum. In other words, you only need an internet connection and a digital wallet on your smartphone or computer to own an NFT. It is also not difficult to create or "mint" a new NFT. Several services and apps have already made the process simpler.
Because they are built on top of already-successful cryptocurrencies, NFTs are extremely resistant to hacks and theft. An NFT is also impossible to forge because each token is verifiably unique. This is an important property because it means the token's origin can be traced back to the issuer. For example, you could simply check the records to see if the NFT was once held by the university's digital wallet to verify the authenticity of a tokenized degree. Similarly, these tokens represent a lucrative revenue source for artists, as they can earn royalties each time one of their works is sold. While you may think of NFTs as "tokens," a better way to think of them is as data stored on a blockchain network. This is an important distinction to make because today's NFTs cannot store raw music, art, or tweets. In reality, they can only hold a few lines of text.
Because storage space on blockchain networks is limited, it can be prohibitively expensive to occupy large amounts of it. Early developers devised a clever solution: NFTs simply linked to an external website containing the actual asset. Do you need a token to represent a work of art? Simply link to a copy of it.
Five years later, NFT developers continue to rely on this method to solve the limited space problem. However, this is an imperfect workaround that has sparked much debate, as we'll see in a later section.
Who sets NFT prices?
So far, we've concentrated on NFTs' practical potential and how they might prove disruptive in the long run. However, we've deviated from the technology's primary appeal today, which is buying and selling digital art online.
There are several examples of NFTs that have sold for hundreds of thousands, if not millions, of dollars. In March 2021, a digital artist auctioned off an NFT for a record $69 million. With this single transaction, he became one of the top three most valuable living artists. Elsewhere, the National Basketball Association (NBA) routinely auctions off video clips of memorable sporting moments as NFTs for tens of thousands, if not hundreds of thousands, of dollars.
NFTs are similar to trading cards in both cases, except that they are digital. People buy them almost entirely for their rarity, just like any other piece of art.
An NFT, like anything of value in the real world, is worth whatever someone else is willing to pay for it.
To be clear, purchasing an NBA-issued NFT does not grant you exclusive rights to a video clip. You simply own an officially licensed and numbered copy of it. Because the data is stored elsewhere, anyone can still view the clip. The NFT owner simply gains bragging rights to the virtual trading card, as well as the ability to sell it as a collector's item.
All of this means that an NFT is valued similarly to any other collectible item—it is worth exactly what someone else is willing to pay for it. There have been several instances where an NFT has been sold for significantly more than expected, as well as others where the opposite has occurred. Despite this, speculators continue to buy NFTs as an investment, hoping to sell them for a profit later.
An NFT, like anything of value in the real world, is worth whatever someone else is willing to pay for it.
To be clear, purchasing an NBA-issued NFT does not grant you exclusive rights to a video clip. You simply own an officially licensed and numbered copy of it. Because the data is stored elsewhere, anyone can still view the clip. The NFT owner simply gains bragging rights to the virtual trading card, as well as the ability to sell it as a collector's item.
All of this means that an NFT is valued similarly to any other collectible item—it is worth exactly what someone else is willing to pay for it. There have been several instances where an NFT has been sold for significantly more than expected, as well as others where the opposite has occurred. Despite this, speculators continue to buy NFTs as an investment, hoping to sell them for a profit later.
So far, we've concentrated on NFTs' practical potential and how they might prove disruptive in the long run. However, we've deviated from the technology's primary appeal today, which is buying and selling digital art online.
NFTs are similar to trading cards in both cases, except that they are digital. People buy them almost entirely for their rarity, just like any other piece of art.
Is it possible to make money by trading NFTs?
It’s clear by now that NFTs are not too difficult to create, but extremely difficult to value. To that end, it’s somewhat unlikely that most people will profit from buying and selling NFTs. As you’d expect, there are thousands of digital artists trying to sell their works, and very few have found much success so far. More importantly, there’s no guarantee that someone else will pay more than what you paid for an NFT.
Making money with NFT are difficult task, especially if you are unfamiliar with the market.
Consider Crypto Kitties, an online platform that allows you to collect and "breed" virtual, collectible cats. The value of a "Crypto Kitty" token can range from a dollar to well over a million dollars, depending on the digital cat's exclusivity, appearance, ID number, and a variety of other factors.
This may appear arbitrary, but this is how the collectible market has always worked. Remember that luxury brands such as Supreme, Gucci, and Louis Vuitton already rely on exclusivity to sell their products for thousands of dollars. That is not to say that NFT speculation is without merit; rather, there is plenty of precedent for it in the world.
Why are NFTs so divisive?
At least in their current form, NFTs are fraught with controversy. While few doubt the technology's long-term potential, the speculative nature of the market has enraged even some ardent cryptocurrency supporters. Indeed, the current NFT market is difficult to comprehend and even more difficult to predict. With copies of old tweets and low-effort art fetching millions of dollars, the trend is undeniably unsustainable.
Furthermore, the majority of NFTs simply point to an external source or website that hosts the image, tweet, or whatever else the token is supposed to represent. But what if the website ever goes offline or becomes inaccessible? There is a real danger of the NFT becoming worthless overnight. That is not a problem with physical collectibles.
Another significant argument against NFTs is that the current system does little to protect artists. As a result, anyone can create an NFT pointing to a legitimate piece of art—all without the artist's knowledge or consent. Worse, malicious actors may profit from this, leaving the original artist with no recourse.
Non-fungible tokens are chastised for their speculative nature and potential environmental impact.
Finally, some critics of NFTs will point out that several blockchain platforms, including Ethereum, rely on an energy-intensive process known as mining to validate new transactions. Cryptocurrency mining has long been chastised for its high carbon footprint, but Ethereum and other blockchain platforms are working to address this issue through the use of alternative mechanisms such as Proof of Stake.
There are no definitive solutions in sight for the remaining criticisms and problems. Either NFTs are completely incompatible with current applications such as digital art, or the industry requires a new breakthrough to address the limitations of the technology. Whatever perspective you take, it's clear that the NFT ecosystem has too many flaws right now and has a long way to go before it's ready for mass adoption.
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