Non-Fungible Asset is Fun to Say, But How Does NFT Crypto Work?

Cryptocurrencies have been getting a lot of attention, but they aren’t the only digital assets getting a lot of play recently. Non-fungible tokens (NFTs), another type of cryptographic asset, are starting to hit the mainstream as the latest investing trend.

So what is NFT crypto and why is this type of asset booming? Let’s take a look at what’s going in the world of crypto so you can decide whether these trending digital items are something you should add to your investment portfolio.

What is an NFT?

First, it’s important to understand that NFT stands for non-fungible token. When figuring out how to invest money, understanding different terms can help you make more informed decisions. In order to get an idea of what non-fungible even means, it’s good to understand the difference between a fungible vs. non-fungible asset.

Fungible vs. non-fungible

Something that is fungible is something of value that can be exchanged for another unit of the same value. For example, a dollar bill can be exchanged for another dollar bill. Each dollar is always equal to another dollar. The same is true of cryptocurrencies like Bitcoin. You can exchange one Bitcoin for another and the value is the same. Plus, you still have a Bitcoin. A Bitcoin is a Bitcoin.

With a non-fungible asset, however, you can’t simply exchange one for the other. It’s similar to how, for the most part, you can’t simply exchange one trading card for another. If I take my Consecrated Sphinx Magic the Gathering card and trade it with my ex-husband for his Eli Manning Topps rookie football card, I’m not getting the same thing. Not only are they completely different items, but they don’t have the same values. Even trading my Consecrated Sphinx for another type of Sphinx from Magic the Gathering won’t get me the exact same thing. These items aren’t fungible — they’re not completely interchangeable.

It’s similar to digital tokens. Cryptocurrencies are digital tokens that are interchangeable. You can exchange one for the other and still have the same thing. When you give someone Ether in exchange for Ether, you still have Ether. NFTs, on the other hand, are non-fungible cryptographic tokens. They are unique and you can’t exchange one NFT crypto for another and still have the same thing

How did NFT crypto start?

The first NFTs were CryptoKitties, which were launched in 2017 by Dapper Labs. Using Ethereum blockchain technology, Dapper Labs set it up as a game. You could get a unique CryptoKitty and then breed it with another unique CryptoKitty to get a third, unique CryptoKitty. In fact, before you buy a CryptoKitty, you can see the history of the NFT, including its “parents” and its “genetic characteristics.”

CryptoKitties soon became collectible for their uniqueness. You couldn’t just make a bunch of the same CryptoKitties and use them as currency. It’s different from mining cryptocurrencies. Indeed, CryptoKitties were designed to look at the concept of scarcity, and the Ethereum token standard ERC-721 was used to make the first CryptoKitties. These digital collectibles might seem like a strange thing to invest in, but CryptoKitties are reasonably popular.

With these particular NFTs, consumers can access them with Ether to feed, breed, and take care of them. The ownership arrangement is managed by Ethereum’s smart contract blockchain platform. The creation of a new digital token standard, ERC-1155 by Enjin, also now makes it possible to batch many different NFTs into a single contract so that storage and transaction costs are kept down. However, the Ethereum network isn’t the only blockchain platform with NFT standards now. EOS, TRON, and NEO all use NFT crypto standards.

And CryptoKitties aren’t the only NFTs out there now. It’s possible for artists to create and sign their own digital masterpieces and sell them directly to consumers as crypto-collectibles. Jack Dorsey, the founder of Twitter, recently turned the very first tweet into an NFT autographed by him. Other digital characters, like the CryptoPunks from Larva Labs are now available in the NFT ecosystem as well.

NFTs can also go beyond artwork or music. They could also be used as identifiers. For example, it’s possible to turn a passport into an NFT that could then be presented at various points during travel. You can also create digital representations of other assets, and use NFTs as part of financial transactions, including smart contracts for real estate sales.

The blockchain can verify NFTs by their unique identifiers, which allows for security in transactions while streamlining them. For example, with the help of NFTs, the escrow process and the clunkiness around using it for real estate contracts could become obsolete.

What sorts of assets are represented by NFTs?

There are a number of assets available as NFT crypto. In the blockchain-based virtual world of Decentraland, gamers can buy and sell land using non-fungible ERC-721 tokens. With platforms like Decentraland, you can even create game items like proprietary costumes and characters that are completely unique and can’t be copied.

Additionally, it’s now possible for world-class artists to sell their fine art directly to consumers in digital form, allowing them to keep more profit than going through a real-world auction house. There are even music NFTs available. Kings of Leon became the first band to issue an album as an NFT in March 2021.

With NFTs, creators are able to reach people without the expense and clutter of intermediaries. And, for the consumer, there is some degree of status in being able to own something that’s one of a kind.

It’s not just independent creators, either. NBA Top Shot is a website that allows people to buy and sell NFTs made from video clips of NBA players. For example, a clip of a dunking LeBron James recently sold for $200,000.

Just about anything can be turned into a digital asset and become an NFT.

Examples of valuable NFTs

Some NFT crypto assets are extremely valuable. Beyond the video of LeBron James, some of the most valuable assets include:

• Dragon the CryptoKitty, which is listed at 600 ETH — more than $1 million (as of March 16, 2021)
• Digital artwork from the artist known as Beeple, whose NFT sold for more than $6 million
• The car 1-1-1, the first released in the F1 Delta Time game is selling for a little more than 416 ETH — or more than $700,000.
• Parcels and estates in Decentraland are also quite expensive in some cases, with some land going for tens of thousands of dollars.

Key qualities of NFTs

Some of the main qualities of NFT crypto assets are what make them valuable:

• Indivisible: You can’t break down the NFT into smaller pieces. Although it’s possible to, for example, create a digital ownership asset related to real estate, that token itself can’t be divided into smaller pieces. A Bitcoin can be broken down into smaller bits for ownership. An NFT can’t.
• Indestructible: Smart contracts store the data and as a result, an NFT can’t be destroyed or even removed from the blockchain.
• Non-replicable: NFTs can’t be replicated. Each one is unique. Because of the nature of their storage, you can’t just copy one.
• Verifiable: An NFT must be verifiable. Ownership is verified through the smart contract process. When ownership is transferred, it’s truly owned by the person who bought it. For example, when you download something from Apple Music, you don’t actually “own” the song. Instead, you have a license to listen to it. With an NFT, you own the asset, not the creator, and can resell it. Provenance can also be assured by tracing the ownership chain through the blockchain.

Pros and cons of investing in NFTs

Pros

• Fakes are not possible, so you know what you have is original.
• They cannot be directly exchanged like regular cryptocurrency, as they are non-fungible, so you can hold the asset to see whether it increases in value.
• They act as an alternative investment that isn’t correlated to the stock market or other financial markets.
• Interoperability due to NFT standards means that this asset can be easily moved across various NFT marketplaces and ecosystems.

Cons

• Because they are non-fungible, they can be traded, bought, and sold, but can’t double as a medium of exchange.
• The prices are often volatile, changing quickly.
• There’s no guarantee an NFT will increase in value or demand.

Why NFTs are booming

Thanks to the decentralized finance movement (DeFi) and the popularity of cryptocurrencies, other crypto-assets like NFTs, are going mainstream. Additionally, famous entrepreneurs like Mark Cuban have these digital assets, and high-profile sales like that of Beeple’s artwork through famed auction house Christie's, are also fueling the boom.

Investing in NFTs is fairly straightforward — as long as you have a crypto wallet. You can go to websites like OpenSea, Rarible, and Nifty Gateway to purchase these assets. If you’re interested in games like CrytpoKitties and Decentraland, you can make purchases there.

Because NFT crypto assets are fairly new, it’s hard to say whether they will be sustainable in the future. However, they could become an alternative asset class, similar to art and collectible investing. For creators, particularly artists, NFTs could present new and interesting possibilities for direct sales to consumers, getting rid of costly intermediaries that are common in the physical art world.

Should you invest in NFTs?

As with any investment, it’s important to review your goals before deciding to add NFTs to your portfolio. If you have some extra cash and you want to try something different, then buying crypto assets could be one way to add diversity to your portfolio. If you want alternative assets for your portfolio, NFTs could be a good start.

However, one rule of thumb is to keep alternative assets to 15% to 20% of your portfolio. In my own portfolio, I keep alternative assets to about 10%, and my crypto assets are at right around 5% of my portfolio. Although I don’t have NFTs yet, I do have cryptocurrencies.

If NFTs aren’t the right fit for your situation, cryptocurrencies could be an alternative, especially because they’re fungible and can be used as a medium of exchange in addition to being a potential investment.

Robinhood is one popular app that helps you learn how to buy cryptocurrency and easily trade different cryptocurrencies. However, even before you start trading, it’s important to understand cryptocurrencies for beginners. In fact, it’s a good idea to understand any asset before you start investing in it.

FAQs

Bottom line

As with any other new asset class, crypto assets are gaining in popularity and there’s a lot of speculation around them. NFTs are more likely to be considered an alternative asset or a collectible, sort of like a digital version of investing in sneakers or art, rather than a mainstay of your retirement portfolio. NFTs can make for an interesting addition to your portfolio if owning them meets your goals and you have the risk tolerance.