Anyone who cannot classify the term NFTs is not alone: according to a study by Bitkom Research, more than two-thirds (68 percent) of the population in Germany have never heard or read about them. At least 11 percent indicate that they know about the term NFT, but still don’t really know what it means. If you want to say something, just read on!
What exactly are NFTs?
The abbreviation NFT stands for Non Fungible Token, ie translated: “non-replaceable token”. They are sometimes called nifties and are digital certificates of authenticity – they certify ownership of a specific file.
An example for explanation is digital images that anyone can view and download on the Internet. Whoever acquires a certain digital image as an NFT can thus prove that he or she is the owner – even if others may continue to save the image. However, an NFT is not limited to images or videos, but can basically be anything that can be digitized: from tweets and memes to music and paintings to virtual properties, domain names or even real things! NFT is unique and verifiable – meaning it exists only once, as a single, individual painting by a single person.
What can you do with NTFs?
It doesn’t matter if you’re a musician or an artist – you can turn your work into money on digital marketplaces. A high degree of awareness is not absolutely necessary: many people buy NFTs in the hope that prices will rise.
NFTs also have potential in industry because they are not only unique but also traceable. For example, IBM’s Food Trust blockchain uses NFTs to make supply chains more transparent. This means that every production step can be digitally mapped very well – in this way, consumers can understand how the strawberries or avocados got to the supermarket shelf.
Why are NFTs so popular?
While NFTs have been around since 2014, it is only recently that it has entered the mainstream due to the increasing frequency of record auctions or sales figures. Finally, there is the potential for huge price gains because the right NFT can be worth millions of dollars in a short time, given high demand and rarity. However, if there is no demand, there is no interested party who would buy the NFT at the current price – this would lead to a falling price and the associated potential losses. Because the mere fact that there is an NFT does not guarantee, in case of doubt, that the claimed ownership really exists, nor that it must be valuable. In addition, the current boom naturally also attracts fraudsters and risky businessmen. For these reasons, buying non-fungible tokens is more suitable for risk-averse investors who have a little more financial leeway. But they should also obtain detailed information in advance – especially if they have little experience with such products. Because the risk with NFTs can be even higher than with cryptocurrencies, which are already volatile due to the extreme price swings.
What do NFTs have to do with cryptocurrencies and blockchain?
Like cryptocurrencies (e.g. bitcoin, ether), NFTs are based on so-called blockchain technology. The blockchain can be imagined as a kind of database where transactions of digital goods – such as cryptocurrencies – are stored in blocks and distributed to many computers around the world. Bitcoin, for example, is on a blockchain that is counterfeit-proof due to its architecture.
However, unlike cryptocurrencies, NFTs in a blockchain do not represent a fungible asset that is transferred from one person to the next, but rather a concrete asset – like a unique piece of digital art that is linked to both a value and an owner. Or to put it simply: by storing the non-fungible tokens in the blockchain, digital goods become things that truly belong to you.
Currently, the Ethereum open blockchain is the main one for trading NFTs. If you want to buy virtual goods, you usually need ether, which is the second most valuable cryptocurrency.
Where and how to buy NFTs?
If you want to buy an NFT, you must first register on an appropriate platform. There are several trading venues where you can buy and sell NFTs – examples are Binance, Rarible, FTX, Super Rare, Opensea or Nifty Gateway. A certain amount of prior knowledge is also required here – trading NFTs is likely to be complicated, especially for beginners on these platforms.
In any case, a crypto wallet with credit is required – Ether is currently the preferred payment method here. The cryptocurrency can be bought on platforms such as Coinbase, Etoro, Finanzen.net Zero, Justtrade, Binance or Scalable Capital. From there, Ether can be sent to the wallet. After purchase, the NFT is automatically stored in the wallet, which in turn is connected to the blockchain – so the NFT is always available. But be careful: When you buy, transaction fees for the blockchain entry accrue in addition to the purchase price.
You can also create your own NFT on the marketplaces, which is called “minting” and also incurs transaction fees. If the NFT is “stamped”, the file stored on the blockchain can no longer be edited. This then guarantees immutability and uniqueness.
Which NFTs are currently particularly valuable?
The NFTs from the “CryptoPunks” or “Bored Ape Yacht Club” collections have been very popular since last year. Both collections are limited to 10,000 unique digital collectibles – for example, US rapper Eminem bought a Bored Ape Yacht NFT called “EminApe” for the equivalent of around $450,000 earlier this year. Singer Justin Bieber upped the ante by purchasing a $1.2 million digital artwork from the Bored Ape Yacht Club collection. When such well-known stars are involved, it naturally increases the rarity of the NFT and thus the price.
So-called utility NFTs are also recommended, which assign the artwork a use – for example, access to an event, assets in a game, or even exclusive personal memberships. Because it should ensure that these NFTs will continue to increase in value for a long time to come.
Why do celebrities and companies even offer NFTs?
Selling digital disposables opens up completely new business models for manufacturers. British auction house Christie’s, for example, has discovered NFTs as art and auctioned the first purely digital NFT work by artist Mike Winkelmann for a whopping US$69.3 million. In addition, there seems to be great potential in virtual worlds and in the gaming sector. And it is precisely here that many young people in particular cavort, who often value brands and individuality these days. So it’s no surprise that sports manufacturer Nike is already selling digital shoes as NFTs.
Celebrities are also jumping on the bandwagon: Canadian artist and singer Grimes auctioned digital art on the Nifty Gateway platform in 2021, raising around $6 million in just 20 minutes. Meanwhile, American band Kings of Leon announced that they would be releasing their new album as a limited NFT edition.
For creators of crypto art, NFTs offer a new potential revenue stream. Because instead of selling their works in the classic way on the Internet, they attract collectors, speculators and fans with a shortage of few copies. There is also an opportunity to get involved in reselling NFTs. Artists in particular, who previously had a hard time in the traditional market, now have a new opportunity to sell their works.
criticism and tips
In addition to the large crypto price fluctuations, there are also other criticisms of NFTs in particular: one of these concerns possible copyright infringements, because it becomes problematic if it is not checked whether a seller on the blockchain really owns the rights to the corresponding NFT. Furthermore, the owner only owns the crypto object on the blockchain it was purchased on, which in most cases is the Ethereum blockchain. Theoretically, however, each object could also be offered on other blockchains that support NFT. Last but not least, NFTs are energy guzzlers – even a single transaction on the Ethereum blockchain requires the computing power of several computers.
If you still want to invest in NFTs, you should follow these tips:
- Only invest if you could theoretically do without the money
- Provide detailed information about NFT in advance (project website, investor discussion forums, media reports, statistics)
- Check NFT demand and rarity
- Choose well-known providers (e.g. European crypto exchanges have higher security standards than Asian providers, for example)
- Make sure there is enough Ether in the wallet and consider transaction fees
- Invest in utility NFTs that should continue to increase in value going forward
Extra tip: Investing through a financial product like an NFT ETF is a little less complicated. You can also indirectly participate in the development of NFTs by buying various shares.
The abbreviation NFT stands for “Non Fungible Token”. NFTs act as a form of digital proof of ownership or authenticity and are based on blockchain technology, similar to cryptocurrencies. Currently, NFTs are mostly images or videos, but they can depict almost anything and are therefore not limited to one area. In 2021, digital works of art in particular caused an international uproar due to their rapid price development, which also caused companies and celebrities to jump on the bandwagon. | Text: Vera Mergle