NFTs: What are Non Fungible Tokens and how do they work? How to get NFTs
What are NFTs? How do they work at all? Where does their value come from? Is it worth buying or trading NFTs? If so, what to look out for when trading NFTs?
This ultimate guide shows what you need to know about NFTs.
What is meant by "Non fungible Tokens (NFT)"?
NFT-buy tokensThe abbreviation NFT stands for non-fungible token, a type of unique digital asset whose ownership is managed on a blockchain. Although most NFTs are digital in nature, NFTs can also be used to represent physical assets.
Typical examples of NFTs are:
in-game items in video games,
unique collectibles and even
their own blockchain domain names.
The essential characteristic of each NFT is that it is unique. Although an originator may choose to have nearly multiple identical copies of an NFT, each must be distinguishable in some way. Other properties through use of the blockchain are non-counterfeitability and permanent nature - as long as the blockchain exists.
The original NFTs were managed on the Ethereum blockchain. However, there are now several blockchain standards that can be used by those who want to mine (create) NFTs. Basically, an NFT is just a digital representation of something unique that uses a smart contract platform to prove that it is real.
Attention: Not all tokens recorded on a blockchain are unique! NF, i.e. non-fungible, means not exchangeable. By far the most common use of tokens are cryptocurrencies, i.e. fungible tokens that are the same and exchangeable, e.g. one Bitcoin is the same as another Bitcoin. A classic fiat currency is also fungible - each €5 note is the same as the next in function and value.
We have actually known about non-fungible tokens in the digital world for years, even though we may not have called them that before. For example, domain names can be understood as NFTs; every domain name is different. When one buys a domain name, one acquires ownership of that specific URL. If one buys a concert ticket, one acquires the right to a specific seat at a specific time. A popular example is also in-game purchases in smartphone games, such as certain skins in the popular Fortnite game.
Until now, it was a big problem to sell these digital assets because there were only a few, hard-to-use trading places on the internet. NFTs are literally a game changer here because tokens issued via the blockchain digitally securitise property rights and transfer the tokens via marketplaces as easily as child's play and within seconds.
Blockchain-based NFTs also ensure the uniqueness of each NFT, which gives it its value: the digital information contained in one NFT will always be different from that of another, even if the two NFTs look similar from the outside.
Important milestones since the introduction of NFTs
The history of Non-Fungible Tokens on the Blockchain begins in 2012, but it is only since the mid-2020 that development has accelerated rapidly.
2012: The concept of Colored Coins is introduced on the Bitcoin blockchain. This made it possible to add special attributes to certain Bitcoin shares through a scripting language, but this possibility was very limited.
June 2017: LarvaLabs launch the first digital art project "Digital Punks" on the Ethereum blockchain in early 2017 and stimulate the creation of the ERC-721 token standard. The Larvalabs team created 10,000 unique ERC-20 tokens, each looking different from the other - the "digital punks" were free to obtain and thus allocated in a very short time.
September 2017: Ethereum publishes the Non Fungible Token standard (ERC-721) on 23.12.2017, which has served as the basis for virtually all NFTs issued to date.
October 2017: The fabulous "CryptoKitties" are issued on the Ethereum blockchain and cause a scandalous success with over 100,000 USD for some digital kitties, at the same time the Ethereum blockchain is completely overloaded by the transaction volume.
January 2021: NBA Top Shot, a trading card platform specialising in the NBA, starts issuing NFTs and turns over more than USD 500 million in Q1 alone.
February 2021: The traditional auction house Christie's holds an auction of a collection of digital works by digital artist Beeple, achieving record proceeds of USD 69 million, paid for in Ethereum.
March 2021: Jack Dorsey sells the first tweet as NFT, the highest bid is over USD 2.9 million.
What does the NFT crypto sector mean for the crypto market?
For the crypto market as a whole, the NFT hype and the rapidly emerging NFT sector is a momentous and promising development that could strengthen the entire crypto scene.
However, it is important that there is no tulip mania similar to the ICO hype at the end of 2017, which could cause irreparable damage to the entire scene.
Episode 1: NFTs bring crypto a lot of attention and new entrants.
First of all, the NFT sector is a headline-worthy trend to be presented in crisp reports, which has made millions of people aware of the crypto scene, which may still be unknown to them.
When Kings of Leon sell their album as NFT, Christie's sells digital art or LeBron James sells a video for $208,000, it creates a buzz. This attention can bring millions of new investors and investors into the crypto market, who have to buy cryptocurrencies like Ethereum to even buy a desired NFT.
Episode 2: Reaching and sustainably changing new industries to fulfil long-made promises of the crypto scene.
Another potential for the crypto scene is that one can contribute to the sustainable change of entire industries. The art and music industries in particular could truly be turned upside down if more and more artists decide to sell their artwork or music pieces as digital art in the form of individual NFTs, instead of releasing them through art institutions or record labels as before.
On the one hand, this gives artists more control and opportunity to monetise their art and generate increased income, while at the same time art lovers can fulfil their desire in a new way, directly supporting their beloved artist while the influential intermediaries - art and record labels - are seen through the fingers and eliminated by the blockchain.
Something similar can be seen in the sports industry, where individual athletes or sports teams have already jumped on the NFT bandwagon and are publishing, for example, historical sports moments or recordings in the form of digital videos as NFTs. Invitations to a meet & greet with sports teams have also already been issued as NFTs. Athletes and teams are given new opportunities to monetise their media impact, thus competing directly with previously almost omnipotent media companies. Individual athletes can work new media and marketing rights into their contracts with sponsors and clubs.
Ultimately, these examples show that NFTs are helping the crypto scene to finally realise some of the promises made from the beginning: With NFTs, creators can finally get more control and a bigger share of the proceeds from their art. Bloated intermediaries are eliminated, a peer-to-peer connection between art fans and artists or even athletes is created. Decentralisation at its best.
Episode 3: The demand for Ethereum continues to rise.
Of course, the topic of NFT affects the entire crypto scene, but so far virtually the entire NFT scene is based on Ethereum because almost all NFTs are issued as ERC-721 tokens - the explicit NFT token standard on the Ethereum blockchain.
Consequently, the NFT hype strengthens Ethereum in two ways: the Ethereum blockchain is used for transactions, which is why the transaction fee is paid in ETH, and the NFTs themselves are paid for in ETH.
However, several other blockchains are also working diligently to end Ethereum's dominance in the field of NFTs. The now smart contract-enabled Cardano blockchain has also seen its first NFTs, while the rapidly emerging THETA blockchain has exclusive rights to issue NFTs for the world-famous World Poker Tour.
Episode 4: The NFT hype risks damaging the reputation of the crypto scene.
However, all the potential behind NFTs also carries a certain danger for the crypto scene. No sooner have we emerged from the reputational damage and clutches of the ICO hype and its disastrous end in early 2018 than seemingly the entire public discussion about cryptocurrencies is dominated by a new hype that could once again lead to a bubble and ultimately a painful, financially disastrous end.
Simply put: The NFT hype is enormous, the danger of an NFT bubble exists or possibly we are already in the middle of one. If millions of people invest their hard-earned money with euphoria, but the NFT bubble bursts a little later, this can mean financial losses and enormous reputational damage for the entire crypto scene.
Yes, the effects could be so far-reaching that the NFT bubble could drag cryptocurrencies down with it - at least in the short to medium term, before one recovers from the bubble.
What can be traded with NFTs?
There are practically no limits to the variety and applicability of NFTs; many types of objects, events or items are now traded as NFTs. An extensive, but far from exhaustive list, includes works of art,
Virtual items in video games such as skins, virtual currency, weapons and avatars, music, collectibles (e.g. digital trading cards), blockchain domains, virtual land or video footage of legendary sports moments.
But there are also hotly sought-after tokenised real goods, from real estate and cars to racehorses and designer sneakers.
Fact check - did you already know?
Unique value: NFTs are unique tokens of which there is only one. An NFT is a digital asset that is permanent, non-replicable and non-counterfeitable. These characteristics also give rise to its value - a unique collector's item.
Well-known entrants: The NFT boom since the beginning of 2021 was mainly created by well-known names such as the auction house Christie's, stock index NASDAQ, or celebrities such as Shawn Mendes and LeBron James, who issued their first NFT.
Numerous industries: NFTs can be used in many industries, especially by artists, musicians and athletes who securitise unique moments, videos or artworks via NFT.
ERC-721 token standard: most NFTs are based on the Ethereum token standard ERC-721, which was introduced for non-fungible tokens in January 2018. This allows unique tokens to be issued on the Ethereum blockchain.
Ethereum dominance: Due to the ERC-721 token standard, almost all NFTs are currently issued on the Ethereum blockchain, which means you need ETH to buy an NFT.
What platforms are there for NFTs?
The NFT boom has led to oodles of NFT marketplaces springing up like mushrooms. Unfortunately, these NFT platforms are becoming more numerous by the day, making it difficult to filter out the truly valuable platforms.
We have therefore filtered out the most proven, original and most used NFT platforms:
The first fully decentralised virtual world where users can create things and earn money from the things they build and own. Decentraland's marketplace offers a range of digital assets including wearables, plots and land, and names.
Users can buy and sell virtual properties in Decentraland and personalise them with properties built on them. The assets one owns are stored in an Ethereum-based smart contract.
OpenSea is the largest marketplace for digital items, including collectibles, gaming items, digital art and other digital assets, whose trades are conducted via smart contracts on the Ethereum blockchain.
With over 4 million products in its portal, OpenSea enables the buying and selling of crypto-collectibles, gaming items, digital art and other blockchain-based digital items, offering over 700 different projects and the ability for artists to mine their own NFT with just a few clicks.
NiftyGateway is a leading marketplace for NFTs, colloquially known as Nifties, and was founded with the aim of making them accessible to everyone.
In collaboration with top artists and brands such as Steve Aoki, deadmau5, beeple and many more, the platform offers limited edition Nifties in drops that happen every three weeks.
Anyone can apply to create with the platform. Tokens that one buys here are listed under one's profile and one can have them paid out to one's wallet or an external account. At the same time, you can also import Nifties from external wallets into your Nifty Gateway account.
Rarible is an NFT marketplace, similar to OpenSea for example. It is also a platform for creating NFTs. So users can go to Rarible with their own content, such as a digital image or motion graphic, and create an NFT.
Sellers can create multiple NFTs for a single image and sell it multiple times. Or instead, sell only one piece, which is then considered rarer. In addition, artists can set a percentage they will receive on resales for life.
Buyers can purchase NFTs and build a portfolio. Some build a personal portfolio, others see it as an art collection and store of value for the future.
Advantages and disadvantages of NFT Cryptos
Advantages: Wider adoption of crypto, More decentralisation, Many use cases.
The triumphal march of NFTs brings with it advantages and disadvantages of which investors in particular should be aware who are considering buying or investing in an NFT. Only those who have an overview of all the facts can engage in the purchase of an NFT with prudence and care.
From the perspective of the crypto scene and blockchain technology, the strong demand for NFTs is a positive development because, on the one hand, it brings more attention and critical debate around the potential of blockchain technology and crypto tokens. In particular, the Ethereum Foundation and the Ethereum community can rejoice around the hype surrounding the ERC-721 token standard and its adoption.
Ultimately, however, the NFT trend across the industry is leading to increased adoption and accelerated development of innovative token standards and marketplaces to meet the demand for NFTs. Although there may be some defects or misguided developments, there is a massive push for development in the blockchain space.
The arts and sports sectors in particular will benefit from the NFT hype because artists and athletes will gain new opportunities and more control and better earning potential and will be able to control the monetisation of their persona or reputation and brand. Because bloated intermediaries are bypassed, the community as a whole becomes more efficient, which benefits consumers and producers.
Disadvantages: NFT hype as a bubble, often difficult to trade, numerous teething problems.
However, there are also some disadvantages associated with non-fungible tokens. First and foremost, there is the warning of an NFT bubble, which could have formed within a few months.
What started with crypto kitties and digital NBA collectibles has quickly degenerated into a hype that brings with it numerous free riders on the issuer and crypto side who want to profit from the trend with malicious and fraudulent intentions.
Moreover, the prices of even promising NFTs have skyrocketed to such an extent that it unfortunately looks likely that there will be a hard landing "at the bottom of the barrel". This bubble is not meant to detract from the potential of NFTs, but millions of disappointed investors or fans may blame not their own greed and FOMO feelings, but the crypto scene, so that NFTs may yet become the bane of the scene.
From a commercial point of view, there are two important drawbacks: NFTs are unfortunately only limitedly divisible, provided this is implemented on the blockchain; while NFTs make it easier to trade collectibles, depending on the NFT or NFT type, one can still acquire a very illiquid NFT and possibly be stuck with it unless one wants to take massive price cuts.
The NFT token sector has mushroomed in a matter of months and as impressive as this is, there is still a lot of industry experience missing and unfortunately the sector will still have to contend with numerous teething problems. Investors should always be aware of this and not pay excessive amounts of money for NFTs.
With which cryptocurrencies can you buy NFTs?
If you want to buy NFTs now, the question is of course how and with which currency. It is striking that buying NFTs has been much more difficult than trading with cryptocurrencies. The vast majority of NFTs can only be bought with the cryptocurrency ETH, because most of these NFTs were issued via the Ethereum blockchain.
Anyone who wants to trade NFTs should therefore set aside a good amount of ETH tokens, namely for two reasons: On the one hand, the transaction, i.e. the transfer of the NFT into one's own Ethereum wallet, must be paid for in ETH (including the so-called gas fees), and on the other hand, the payment of the NFT is also only accepted with ETH, because this is how the ERC-721 token can be sent via the Ethereum smart contract.
In the meantime, however, there are a few exceptions to this principle. Some NFT platforms are based on their own proprietary blockchain, so that you can also pay with the platform's own token.
Buying guide of cryptos at Etoro
As already mentioned, you need Ethereum to be able to buy NFTs. The best option to be able to buy Ethereum is our test winner eToro. The CySEC-regulated broker with legal deposit protection offers the purchase of Ethereum without commission with a minimal spread.
The ETH tokens can then be transferred directly to the eToro wallet and sent on from there to be used on an NFT platform. Buying Ethereum on eToro takes less than 10 minutes - with these 3 simple steps.
Step 1: Open an eToro account
The first step is to open an eToro account, which can be done simply by filling out the registration form. To do this, enter the desired username and a secure password.
Click on the "Trade now" button to transfer the data and complete the account registration.
Step 2: Make a deposit
Now the deposit can be made to the trading account at eToro, whereby users can choose from several deposit methods. Credit card, PayPal or Sofortüberweisung are particularly popular and there are no deposit fees.
The deposit menu can be opened by clicking on the "Deposit money" button below the navigation menu on the left-hand side of the screen.
In the deposit menu, select the desired deposit method, enter the deposit amount and complete the missing payment details.
Click on the "Send" button to initiate the transfer and the money will be credited immediately.
Step 3: Buy Ethereum
Finally, you can buy Ethereum. To do so, simply enter "Ethereum" in the search bar at the top of the screen and click on the search result that appears to go to Ethereum.
Click on the "Trade" button at the top right to open the purchase menu. Now enter the investment amount, then click "x1 leverage" to buy real ETH.
Click on the "Open Trade" button to complete the Ethereum purchase. The trading position can be managed under the "Portfolio" menu item.
A look into the future: NFT token forecast
In the middle of 2021, we are currently in the midst of an unbroken NFT boom or NFT hype, which some critics would describe as an NFT bubble. Indeed, the prices and variety of NFTs on offer have exploded in a very short time, leading to inflated prices for some NFTs.
In all likelihood, the current boom will continue for a while until the inevitable point is reached at which the NFT bubble that has been created bursts. The prices of many NFTs will collapse dramatically, some sharply, as soon as it becomes clear that they are being sold at far inflated prices and that there are no repeat buyers with a corresponding willingness to pay.
With the bursting of the NFT bubble will surely come a plethora of negative coverage in the mainstream media. All the magazines and news outlets that are now sensationalising the hype to attract readers' attention will then report on the sheer insatiable greed of the market as if they had always known it.
Outside and after this bubble, a great future is ahead for NFTs. Industries, such as often mentioned art or sports industries will change for the better in favour of individual artists and athletes, a direct relationship between stars and fans will develop from the combination of social networks and own NFTs, while intermediaries will continue to lose importance.
Therefore, we can neither explicitly advise nor advise against buying NFTs at this point in time. It really depends on the NFT in question whether it has a future or probably not.
On the other hand, it is simply not possible to make a concrete NFT forecast as to whether its value will rise or fall, because this depends primarily on the characteristics of the respective NFT. When choosing an NFT, traders should definitely pay attention to the 4 characteristics of an NFT, which we will discuss in more detail in the next section.
Important tips for traders
Trading NFTs is a particularly delicate undertaking and is even more risky and special than trading cryptocurrencies, which is already associated with risks. That is why we have prepared 4 important tips for future NFT traders.
These are the characteristics that an NFT or the underlying issuer should have.
1. it is important that the NFT has a well-known issuer.
The issuer of an NFT is of great importance, after all, with the NFT you get an exclusive piece of that star or brand. Buyers should limit themselves exclusively to an NFT of a well-known company or brand, because this not only allows a better assessment of the market value of the NFT, but also guarantees better tradability if one wants to sell the NFT again. This also makes it more likely that the NFT will increase in value in the long run.
2. the NFT should be truly unique and novel.
Ideally, the NFT is the first of its kind - either the first NFT of a celebrity/brand, or even of that industry or niche. What is important are the unique selling points of the NFT, which make it unique and thus add more value.
3. the NFT must be tradable, i.e. it must meet current market demand.
It is possible to buy an NFT with the intention of holding it for a long time or even permanently, but this intention can change; then it is important to have a tradable NFT for which there is also active demand. Otherwise the token is virtually "illiquid" and you are stuck with it. This is particularly painful if you urgently need money.
4. the NFT should be on a physical good.
Even though some NFTs for digital artworks have sold for millions, we recommend readers to prefer NFTs on physical goods. Here, one can better assess the actual value or the future development of the value and also better present it. The more concrete, the better. It is better to have a unique work of art in your safe than to have access to it only in digital form on your PC.
Non-fungible tokens (NFTs) are all the rage on the crypto market. Since the beginning of 2021, over USD 500 million has already been turned over with the sale of NFTs, and the trend is rising sharply. Every day there are reports of more celebrities, athletes, institutions and companies wanting to issue their first NFTs.
For the crypto market, NFTs are extremely exciting and a blessing in that they attract many new crypto entrants and media attention. However, there are also risks, for example, an NFT bubble could bring reputational damage to the entire scene once it bursts. In fact, many NFTs have been sold at undoubtedly far inflated prices.
For those who want to buy NFTs, we recommend buying Ethereum at our test winner eToro. These ETH can then be transferred to the eToro wallet and from there taken to reputable NFT marketplaces where you can buy interesting and promising NFTs.