What is an NFT in Crypto? A Beginner’s Guide to Non-Fungible Tokens

NFT stands for non-fungible tokens – a cryptocurrency phenomenon that attained worldwide recognition because of the jaw-dropping sale of a collage of images by artist Beeple (sold for $69.3 million). But what is a non-fungible token? Should you invest in it? Or is it a passing cloud? Below is an unbiased explanation to help you decide.

Quick take: are NFTs legit?

  • Ownership history, popularity, and utility determine NFT value.
  • Liquidizing NFT’s is not as easy as other cryptocurrencies.
  • When buying NFT’s check for proof of provenance/ownership.

What is a Non-Fungible Token?

In the simplest of terms -an NFT is a digital asset that is easy to trade on the blockchain. The asset may represent everyday real-world objects, in-game characters/objects, videos, tweets, and so on.

One of the earliest examples of an NFT is 2011’s Nyan cat (see the image below). Uploaded on YouTube in the mentioned year, Nyan Cat was a video that merged a popular Japanese pop song and an animated cat that had a pop tart torso flying through space leaving a rainbow trail. To some people, the Nyan Cat is no different from internet memes, but to others, it is worth $600,000 (Sold in February 2021). The question is why?

“Disaster girl”, see the meme below, sold for $500,000.

Is NFT Fine art?

NFT art is a branch of fine art that exists in the digital universe. Consequently, owners of Non-Fungible Tokens cannot physically touch their assets. Instead, NFT exist in the form of articles, music, tweets, images, or memes. What adds value to NFT?

Popularity!

As mentioned, NFT stands for Non-Fungible Token. The dictionary definition of fungible is quote “an asset, commodity, or good whose units are essentially interchangeable and each of whose parts is indistinguishable from another part.”

In the digital space, an NFT is a distinct non-interchangeable unit of data stored on a blockchain. A blockchain is a digital ledger that records data in a way that is -difficult or impossible to hack, cheat, or change. If you think of it in terms of money, a good scenario would be exchanging a 20-dollar bill for a five-dollar bill. In this exchange, the 20-dollar bill will hold its value even when exchanged for a lesser denomination. However, if the five-dollar bill has something unique about it, say it was signed by a popular artist, celebrity, sportsperson, or a manufacturer’s flaw.

Determining the value of the five would be much harder.

What makes an NFT a non-fungible asset is that you cannot swap it with something else that has an equivalent value. Therefore, the digital asset is unique, and the value may increase depending on how sought-after the asset is.

How do creators’ profit from Non-Fungible Tokens?

To sell an NFT you must have legal ownership over the digital assets. That means “minting” or “tokenizing” the asset. Do not worry, this step does not require coding skills. What you need do is (short version):

  1. Setup a crypto account where you can buy or exchange cryptocurrencies. The majority of creators prefer Ethereum although Solana has been rising in popularity.
  2. Pay a one-time minting fee usually -between $50 to $250+.
  3. Buy blockchain such as Ethereum and send it to your crypto wallet.
  4. Create an NFT and mint it on sites such as Opensea, Rarible, foundation, superRare, or a site of your choosing.

Side note: you may convert the asset to another crypto.

Want to learn more, check out our comprehensive guides on:

How do you make money off Non-Fungible Tokens?

A popular feature in NFT’s are that the creator or owner can be paid a percentage every time the asset changes hands. This makes creating NFT’s a potentially great source of passive revenue for all types of artists. What is in it for the buyer?

That depends on who you ask. For some, it is an investment that may bring handsome returns in the future, to others, Non-Fungible Token are internet trophies, and some see it as fine art. Some go as far as calling it an avenue for money laundering. However, whatever your views are on the subject, what remains is trading in Non-Fungible Tokens can be profitable.

That said.

It all boils down to personal discretion, meaning it is about deciding whether you are willing to spend $1000 or more on unique pixels.

What is the difference between Non-Fungible Tokens and cryptocurrencies?

One bitcoin is the equivalent of one bitcoin, the same is true with two five-dollar bills. This quality makes cryptocurrencies and physical money fungible assets. Non-Fungible Tokens, on the other hand, are different from cash and cryptocurrencies because they are non-fungible, meaning, One Non-Fungible Token cannot be equal to another. Thus, each asset is unique.

What to remember

  • NFTs are not mutually interchangeable, meaning no two assets hold the same value.
  • Non-Fungible Tokens may take the form of gifs, tweets, music, sneakers, cartoons, or other creative digital works.

How do I know if an NFT is legit?

According to Vice, investors have lost more than $2.7 million in scams related to Non-Fungible Tokens. That is not to say that all Non-Fungible Tokens creators are swindlers. Meaning there are legit creators in the industry. That raises the question, how do I know if NFT is legit?

“Rug pull” refers to a type of scam where the actor creates a website or project then abandons it after taking investor money.

For example, “Evolved Ape” was a project created by anonymous game developers that tricked investors and creators into creating or purchasing Non-Fungible Tokens. a week later, the site went down. The artists did not get paid, and the investors lost millions.

How do you avoid NFT scams?

How popular is the platform? Opensea is currently one of the most recognizable NFT platforms. Why is this important? Brand recognition. See the thing is, websites are created every day. The ones that last are trustworthy.

Therefore.

What you should look for in an NFT platform is a history in trading, good customer feedback, media coverage, and what forums such as Reddit are saying about the platform.

The community size is also a factor in that the bigger the community is, the higher the likelihood that the platform is legit. That said, it is not unheard of to get scammed on legit websites. The question is how do you avoid scams?

Is the creator a verified user?

Screenshot edited

On opensea and sites like it, creator profiles have a “verified badge.” Consequently, a creator not having a verified badge is a red flag. If you click on an NFT by the creator, the name of the owner should be the same as the name on the profile. There should also be a description.

Proof of provenance

When you click on an NFT on opensea or other sites you will notice “details.” Click on it, which should reveal the asset’s contract address. Contract address is how blockchain verifies fake Non-Fungible Tokens from real ones. If the address is not there, the project could be a scam.

The idea is to compare the contract address provided on the site with the one on the creator’s website. If they do not match, you are probably getting scammed.

Note that professional scammers may also forge proof of provenance.

We recommend reaching out to the creator directly or searching the item along with “scam” to be sure.

Is someone messaging you unsolicited? It’s probably a scam

You may receive a message on WhatsApp, Telegram, Gmail, or other platforms containing a link to a scam site. Scammers may also purchase ads for sites that have names similar to popular platforms. Consequently, it is good practice to not click on a link on suspicious emails and to verify that you are on the right site before sharing any sensitive data.

What to look for:

  • Misspellings in the domain name.
  • Messages sent from a public email domain
  • Poorly written emails or bad grammar.
  • Promises of free money or gifts.
  • Unusual sign-in attempts into your account (enable two-step verification)
  • Do not download attachments on suspicious emails.

If anyone can download NFT files, why would I buy the NFT?

As mentioned, he who owns an NFT is he who minted or tokenized the asset. Because of that, you can download, screenshot, duplicate or copy NFTs, but what remains is you technically do not own the rights to the asset. Or in other words, minted or tokenized NFTs belong to the artist.

That raises the question:

 can you use someone else’s art as NFT?

In the United States, all works of art, including music, books, paintings, and NFTS are protected under federal law. Under these laws, the owner of the asset has exclusive rights to prepare derivative works based upon the item, reproduce the item, display, or distribute copies of his work.

A copyright claim belongs to the individual who created the work, meaning you cannot legally use someone else’s art to create NFTs without permission.

What about public domain images or art?

Public domain images or artwork, as the name suggests, are free to use for anyone. Consequently, using images from creative commons or sites such as Unsplash and pixabay to create NFTs is not a violation of copyright laws. But it is in your best interest to verify image ownership.

How does an image get into the public domain?

The creator may upload the image on stock image sites. What about copyrighted images?

In the US and Canada. Image copyrights expire between fifty to seventy years after the creator’s death. If no one claims ownership over the image after the period has expired, the image or art is in the public domain, and thus you may use it to create NFTs. However, NFT is a new market, and laws in many countries are yet to catch up. Therefore, it is safer to only use original work when creating NFTs.

How do I set up NFT Royalties?

One-way NFTS makes money for creators is through a feature that pays royalties whenever the asset is resold or exchanged, how does it work?

When minting NFTs the creator codes NFT royalties into the smart contract on the blockchain. The result of that is whenever the NFT is resold, a cut of the profits goes to the creator. However, this only works if royalty is specified.

What to remember:

  • You must specify royalty terms in the NFT contract.
  • The royalty payment is automatic (no intermediaries) if specified in the contract.
  • Not all NFTs yield royalties.
  • Not all marketplaces offer royalties.

NFT legal issues for creators and investors

The legal issues surrounding NFTs do not end at copyright and royalties. Other potential legal landmines include money laundering, tax issues, and data protection regulations. Therefore, if you are planning to invest large amounts of funds in NFTs, we recommend consulting with an investment lawyer near you.

Are NFT files on pirate websites legit?

In an attempt to “show people what they were buying” an Australian developer created NFT BAY, the somewhat spiritual descendant of the pirate bay. On the website, you will find copies of NFTs on sale on sites such as Opensea.

The difference between pirated and legit NFTs is, the former does not contain digital tokens that prove ownership. Because of that, it is a copy.

The point is. It is about who owns the asset, meaning you may download high-quality versions of NFTs on pirate sites, but you cannot profit from it. However, one issue most people overlook is that some scammers create fake proof ownership.

Should creators buy NFT invitations?

Sites such as foundation offer creators the option to invite other creators resulting in some creators selling the invitations. The question is, should you purchase one?

I would say that is an issue of personal discretion, but what I can tell you is there is no guarantee that your artwork will make money after purchasing an invite. That said, here is how you get an invite.

Search NFT creator forums or look for someone on the inside. The reason for that is, on foundation, when a creator makes a sale, the site awards the creator with invites, the creator may offer the invites for free or at a fee. When you purchase an invite, the creator should send you an invite code.

As you can imagine, there is the possibility that you may get scammed. Therefore, if you find an insider on sites like Reddit, check the feedback or only purchase from trustworthy vendors.

You may also submit your work on discord, and hope that the site owners send you an invite.

In short, it is a gamble that may or may not work.

How to sell NFTs

There are two ways to sell NFTs. One, you may create NFTs from scratch and post them on sites like Opensea or Foundation. Two, you may buy then resell existing NFTs. Both options will cost you money.

On Opensea, you have the option to set a fixed price or auction your work. 

The general idea is to find a suitable marketplace, create a profile, then list your work. While doing this, it is advisable to read the user agreement.

Should you invest in NFT Stocks?

If you decide to invest in NFTs, there are a few factors you should consider:

Current trends and popularity of the item

Just like memes, NFTs are seasonal, meaning what is popular today could be irrelevant tomorrow. Therefore, if you are planning to resell, keep your eye on current trends. Remember, NFTs are not liquid, meaning you need someone willing to pay for the item to make a profit.

On Opensea, check the NFTs activity.

When you click on “activity” on a creator’s page, you will be redirected to the sales page. On the sales page, you will see the average transaction. This will give you an idea of what is selling and what is not. However, there is no guarantee that if you purchase an NFT you will sell it at a higher price point.

Another factor you should keep your eye on is popularity. Because the more popular an item is, the higher the likelihood of finding a willing buyer.

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Are NFTs worth investing in?

The issue with Non-Fungible Tokens is that they can be endlessly duplicated, and verifying if the item is original can be problematic. Consequently, there is a lot of room for scams. Furthermore, the value of a Non-Fungible Token is dependent on rarity, and utility, meaning an item may gain or lose value in a matter of minutes.

So, if you are looking for a stable investment, in my opinion, NFTs are not it. However, if you are a collector or connoisseur of fine arts, you should invest in Non-Fungible Tokens.

For artists and creators, creating Non-Fungible Tokens may or may not be profitable. Remember, to create one, you must mint or tokenize it, and that costs money.

The point is. The industry is highly volatile, the items are not easily liquifiable, and there are plenty of scammers in the industry. Also, some industry experts see it as a bubble that is just waiting to pop.

We need your opinion on this, so tell us your thoughts in the comments.

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