Beginner’s Guide to NFTs
Bitcoin took center stage on the web for many years. With no central authority, it appealed to the outliers. As blockchain development increased, more cryptos emerged, though Bitcoin retained the top spot, and then NFTs sprung into our world. You can now use your computer to Google non-fungible tokens, find data about digital art blocks, and buy Ethereum based NFTs. In addition, you can set up a crypto wallet and create a unique asset of your own.
NFTs began to make headline news when the digital artist, Mike Winkelmann, known as “Beeple,” sold his digital art “Everyday, the first 5000 days” at Christie’s auction house for $69,346,250. The completed art resulted from 13.5 years of Winkelmann posting a digital picture every day. Christie’s was the first auction house to sell an NFT, which assured the authenticity of the digital art. Sotheby’s is one of many auction houses now getting in on the non-fungible token space.
NFT is an abbreviation for non-fungible tokens, a form of digital art that can be bought and sold. Some NFTs have sold for millions of dollars, which seems baffling because they aren’t a physical product. Instead, they are a relatively new introduction to the crypto market. But, in a surprisingly short period, digital assets have taken the crypto market by storm. And, yes, some have sold for millions, but most NFTS won’t reach such lofty prices.
In this beginner’s guide to non-fungible tokens, you’ll learn about the NFT world and how to mint NFTs on the Ethereum blockchain.
What Does Fungible Mean?
“Fungibility is the ability of a good or asset to be interchanged with other individual goods or assets of the same type. Fungible assets simplify the exchange and trade processes, as fungibility implies equal value between the assets.”
In layman’s terms, your friend can give you a dollar, and you can exchange it for another dollar. Likewise, you can exchange one ETH for another ETH.
Therefore, if an NFT is non-fungible, there is no possible mutual exchange for another NFT. Each one is unique, one of a kind. You can’t trade one NFT for another. What often baffles people is the range of digital assets. It could be a gif, photo, video, meme, an audio file, tweet, and even a piece of writing that can become a sellable non-fungible token.
How Do NFTs Work?
Most non-fungible tokens (NFTs) use the Ethereum network, but increasingly more blockchains are joining the NFT gold rush. NFTs are bits of software code stored via smart contracts. Each NFT is unique, with individual identifying information meaning it is easy to verify and trace, and when someone buys an NFT, ownership is indisputable.
Why Are Non-Fungible Tokens So valuable?
Indeed, why would someone pay $69 million for a digital asset? To the logical mind, it seems crazy, especially when non-fungible tokens are downloadable or can be watched or copied, and some are in the public domain. For instance, Jack Dorsey, the founder of Twitter, sold his first-ever tweet for $2.9 million to Sina Estavi, the CEO of Bridge Oracle, a technology firm. You can copy that tweet right now, so how can it be worth almost $3 million?
The truth is that an NFT can only have one owner, much like an art collector buying a rare physical art piece. It’s all about ownership. Sina Estavi has exclusive rights to Jack Dorsey’s tweet, although the latter retains the intellectual rights.
Increasingly, gaming projects use NFTs to create entire realities in one game for virtual gaming. Before NFTs emerged on the gaming scene, developers had sole ownership of in-game items, but not so now. Gamers can profit from selling their in-game items if they wish. The scope is incredible. NFT technology is advancing at great speeds, and developers are jumping on the NFT bandwagon.
The risk of digital artwork forgery is low because the blockchain can quickly identify the authenticity, which is excellent for you because there’s a super low risk of wasting money on a fake.
Today, top NFTs are close to the price of some of the most expensive paintings ever sold, ranging from $92 million to $450 million. It may seem crazy to compare ownership of virtual art to a tangible asset like a rare painting hanging in your hall.
Why Are Some NFTs More Expensive Than Others?
If you’re familiar with trading, you’ll understand the concept of supply and demand. The rarer an NFT, the more likely it is to fetch a high price, especially those in high demand from those wanting to build an NFT collection and gamers and investors. They’re all bidding for ownership, and that leads to inflated prices.
On the NFT market, the seller sets a starting price for their non-fungible tokens. NFT marketplaces increase herd mentality, which drives people to increase their bidding. Demand rises, and virtual art ends up selling for a crazy high price. Who decided the value? Value is only equal to market demand.
One-of-a-kind NFTs fetch the highest prices. Today, Beeple has millions of followers, watching and waiting for his next creation. Unknown digital artists are less likely to attract attention, so their NFTs will sell for lower prices. However, one of these artists could be the next big thing for NFTs.
How To Create NFTs (Non-Fungible Tokens)
Who makes NFTs? Today, the space is opening up for digital collectibles creation for non-fungible token enthusiasts directly from their computer: –
- Choose the item – what digital asset do you want to turn into an NFT? Remember, it can be a photo, a unique painting, video, meme, writing, music or even a tweet. The proviso is that YOU own the intellectual rights. Do not ever try to replicate someone else’s work, as you could face copyright issues
- Choose the blockchain – the process of creating an NFT is “minting”, and you need a suitable blockchain for that. The Ethereum network is the most popular for creators. There’s also Polkadot, BSC (Binance Smart Chain) and Solana blockchain
- Set up a crypto wallet – there are crypto fees for creating an NFT. Check out Metamask, Trust Wallet or Coinbase Wallet. Most marketplaces accept ETH as payment
- Choose your NFT marketplace – Choose a platform that suits the style of your creation. For instance, if it’s basketball-inspired, the NBA Top Shot marketplace would give you the best chance of sales. OpenSea is the world’s largest NFT marketplace with the highest trading volume. In August 2021, OpenSea’s sales volume was $3.4 billion.
Other marketplaces are Larva Labs/CryptoPunks, Rarible, Mintable, NBA Top Shot Marketplace and SuperRare. Choose a marketplace with good trading volumes and then, connect it to your digital wallet so you can pay the minting fees required
- Upload your file to the marketplace – Find the instructions on the marketplace you’ve chosen, which will enable you to turn your digital file into an NFT
- Set up your sales process – Do you want to sell your NFT for a fixed price, a timed auction with an end date and time or an unlimited auction with no date and time limits. You can choose to end the auction at any time. You can also set up a royalty option, which will benefit you if the buyer resells your art
You’ll agree that minting an NFT sounds simple enough. However, you have to pay fees to mint and list your item, and these fees can be expensive and confusing. Gas fees can be prohibitively expensive, depending on the blockchain, so before minting your non-fungible token, calculate all the transactions for creating your art block, and then set your price to cover these fees and make a profit.
There’s no guarantee your NFT will sell. Many enthusiasts buy their first NFTs on a whim, study trending markets, and try to create something of value that will appeal to that market.
How To Avoid Buying a Non-Fungible Token That Loses Money
Buying NFTs for making money is appealing to beginners in the NFT space, but it’s essential to know you can lose money from impulse buying.
Before buying NFTs, we have a tried and trusted process for assessing potential value. This process will help you avoid buying dud art blocks with no resell value. It’s not a game. Yes, it can be fun, but if you are serious about making money from digital assets, you have to think the same way as any serious investor: –
- Research the Founding team – how much experience does the team have? How long has the project been established? What is the mission statement and vision? Do you get a sense of accountability from the team?
- What is the cost of failure? – choose a project with a large social media following. When a project is in the public eye, the team is more commited to making fewer mistakes. Because, if they want longevity for the project, a failure could bring the project crashing to its knees
- Does the project have an active marketing team? – look for a project that has a team engaging with and building excitement for its community of followers. How many social media channels does the project have, and are they active on all of them? A strong social media presence can drive higher prices.
- How strong is the NFT community? – Many projects use the Discord and Twitter channel to connect with their followers. Join these communities and check out the general vibe. Is the community behind the project? Are they eagerly awaiting the next product to come to the marketplace? Is the community growing daily?
When you’re excited about buying your first NFT, it’s tempting to rush in and buy the first one that catches your eye. Of course, everyone wants to buy NFTs for peanuts and sell for millions, but that’s unlikely. However, if you spend time researching a project, you can make a consistent profit from buying and selling NFTs.
If you are buying an NFT, buy something you like, not just what is trending. Popular NFTs may fetch higher prices, so shop around for what you can afford. For example, digital land is becoming popular. You can buy a virtual plot sometimes at the same value as buying actual real estate.
Spend time browsing the NFT marketplace. Observe how many people are watching an NFT, and see if you can work out a pattern for particular digital items that are popular. For example, cat lovers may love a kitten card collection, and there are a lot of trading cards in the art market.
Will the NFT Bubble Burst?
It’s unlikely. The future of NFTs looks set for exponential growth, but you can never say it can’t happen. As NFTs exist on the blockchain, ongoing success depends on multiple factors. Blockchain technology is developing game-changing, pioneering technology. Traditional gaming is turning virtual reality on its head with mind-boggling virtual worlds with potential earning power for users.
In 2021, Beeple commented to the BBC that he believed that NFTs could already be in a bubble, but that’s one man’s opinion and, since then, adoption by blockchain networks shows no sign of slowing down.
Do I Have To Pay Tax if I sell NFTs?
Unfortunately, governments class NFTs as capital gains simply because they are collectible assets, subject to the same rules even though they are intangible by definition. Therefore, we advise checking the taxation laws in your country to confirm taxes payable for NFT sales.
Should I invest in NFTs?
We cannot give investment advice, and no investment can be termed safe. Like the stock market, all investments are speculative and price reliant on supply and demand.
We mentioned earlier the difficulty of creating a fraudulent NFT, but it can still happen. For example, in April 2021, fraudsters recreated artwork from a deceased digital artist, Quing Han, perhaps thinking they’d get away with it due to the creator’s demise. Thankfully, the NFT community alerted the Twinci platform to report the fake and remove it.
The art world has always had to manage the risks of fraudulent art replication, and non-fungible token artists are no different. However, an American art community, DeviantArt, created an AI tool that can detect stolen artwork on NFT marketplaces, hopefully contributing to fewer incidents of fraudulent copies.