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What Are NFTs? NFTs Explained

Collectors have long been willing to shell out huge sums of money on unique items such as paintings, baseball cards and vintage cars. But now, collectible items have moved into the digital space in the form of NFTs, or non-fungible tokens. So what exactly are NFTs? And why are they suddenly being sold for millions?

NFTs, known as “NFTies” by insiders, are a type of digital asset. Ownership of these tokens is recorded on a blockchain, a digital ledger using similar technology to the networks that underpin bitcoin and other cryptocurrencies. But unlike currencies, where every token is of equal value and could be swapped for any other, NFTs have unique qualities which stop them from being interchangeable, or ‘fungible’.

You can think of them like the crypto alternative to rare Pokémon or baseball cards. And just like the traditional art market, NFTs are often sold at auction, with prospective buyers bidding against each other until a price is reached. The rise of the internet meant that images, videos and songs could be reproduced and distributed infinitely online, often without any royalties being paid to their creators. And even tech giants such as YouTube and Spotify have faced criticism for not compensating artists sufficiently for their work.

Proponents of NFTs say they address this problem by allowing ownership to be recorded on the blockchain, preventing unlimited reproduction or piracy, and enabling creators to reap the financial rewards. Rock band Kings of Leon sold NFTs over two weeks in March 2021, which gave buyers access to a deluxe form of their album for $50, whilst also auctioning off an even more exclusive version limited to just 18 copies. In the same month, the NFT of Twitter CEO Jack Dorsey’s first tweet sold for nearly $3 million to Sina Estavi, a Malaysia-based crypto entrepreneur.

Meanwhile, art dealers are also getting in on the action, with auction house Christie’s running an auction for a virtual work from the artist Beeple which eventually sold for nearly $70M. But NFTs aren’t a totally new phenomenon. CryptoKitties, a virtual pet game based on the blockchain Ethereum, was so popular in 2017 that they clogged up the network of cryptocurrency Ether. To date, these colorful online cats have generated sales of over $40 million.

So, why are we hearing so much about NFTs now? The coronavirus pandemic played a big role in the NFT boom. In 2020, the total value of NFT transactions quadrupled to $250 million, and the market looks set to grow further in 2022. That’s in no small part because of stay-at-home restrictions that resulted in most people spending a lot more time on the internet and many having spare cash on hand as in-person spending opportunities were limited.

It’s a trend with parallels in the rise of retail traders betting on GameStop and other historically-unloved stocks promoted on the Reddit board WallStreetBets. The craze also arrives at a time when bitcoin and other cryptocurrencies have surged in value, with bitcoin briefly reaching a record high price of over $60,000 in March 2021. Many NFTs are priced in Ether, the digital token of the Ethereum blockchain. That currency hovered around $2,000 in February 2021 before losing nearly a third of its value in a matter of days, reminding investors of cryptocurrencies’ wild volatility.

Many investors are buying NFTs as a speculative investment, hoping to flip them at a much higher price than they originally paid. But a growing number of people are also holding NFTs long term as collectibles. Major brands including the NBA and Formula 1 have launched projects centered around NFTs which can be collected or traded. And people are also finding other uses for NFTs, such as virtual real estate and video games.

Nevertheless, the NFT space has been met with skepticism from some creators and investors. Critics view it as another crypto fad that will eventually drift into irrelevance, while there are also concerns about the carbon emissions needed to generate these tokens. But expect to hear more about NFTs so long as collectors are willing to buy them.

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