What Are Non-Fungible Tokens and How Do They Work?

Non-fungible tokens, or NFTs, could be the next big thing in crypto. Here's everything you need to know about this new type of digital asset.

What Are Non-Fungible Tokens and How Do They Work?

The first rule of blockchain and cryptocurrencies is that there always seems to be something new happening. The second rule of blockchain and cryptocurrencies is that the new happening makes little sense to anyone not involved in the scene.

That's what's happening in the world of non-fungible tokens (NFTs), a weird and fascinating way that people are buying and trading digital collectibles such as GIFs, art, music, videos, even sports highlights.

Want to know what NFTs are and how they work? And also what some of the most popular NFT marketplaces are and the expensive NFTs being sold on them? Read on.

What Does Non-Fungible Token Mean?

A fungible good is something that is identical and interchangeable. That means whether I give you $1 in a dollar bill, four quarters, or a Venmo transfer, you still have $1. That $1 is the same as every other dollar. Ditto with one bitcoin. You can interchangeably trade them because they're all the same.

A non-fungible item is unique. And a non-fungible token (NFT) is a new type of digital asset that represents something unique. Think of NFTs like trading cards, except every single trading card is different and created by someone else. Most of them are made up of artwork, and some of them move or play music. Others are full of cats. Some of them are randomly generated faces. There's no inherent value to any of them.

But in the world of NFTs, there is a market for a rainbow cat valued at $460,740.

If They're Not Worth Anything, Why Are People Paying So Much for This Stuff?

A painting isn't really worth anything, either, but if enough people want it, then it becomes valuable.

Which is really just a way of saying that an NFTs worth is determined by however much someone wants to spend on it.

And people are willing to spend a lot.

But Can't I Just Copy the File to My Computer for Free?

Yes. But people are buying NFTs because they believe they will be able to prove ownership of a virtual item with blockchain.

Wouldn't Copies Make the Value of the NFT Go Down?

Not necessarily. How many millions of prints are there of Van Gogh's "Starry Night"? It doesn't make the original painting any less valuable.

Of course, there is a physical copy of "Starry Night." Which is why intangible art seems so strange. Instead of getting to hang the art on your wall, it's a file saved on your computer (or wherever you choose).

But there is, technically, only one "true" copy of the file ... if the creator makes it so there is only one real copy. If they choose to, the creator can make 100 copies. There doesn't seem to be any rules on that, but generally, the rarer the better. Manufactured scarcity is all the rage these days.

Are There Any Benefits for Owning the True Copy?

In some cases, the file might be extremely large and at such a high resolution that only the original copy could be viewed correctly.

That's the case with a piece of digital art by artist Mike Winklemann — better known as Beeple — called "The First 5000 Days." It's an artwork consisting of thousands of pieces of art and is 300 megabytes. It's up for auction at Christie's, and the current bid is $3.5 million.

And, of course, you get to sell the thing and make money. Or lose money, if you overpaid.

$3.5 Million? What Else Are People Spending Their Money On?

Here are some of the most expensive NFTs sold to date:

Cryptopunk No. 6965 (pictured), a randomly generated piece of pixel art, which sold for $2 million.
A 10-second digital art piece by Beeple, which sold for $6.6 million.
A 13-second NBA Top Shots highlight clip of Zion Williamson, which sold for $100,000.
A digital trading card of Kylian Mbappe, which sold for $73,000.
Founder Cat No. 18, a digital cat that's part of the CryptoKitty universe/digital trading card game, which sold for $164,000.

So NFTs Aren't Just Art? What Else Are They?

Any piece of digital media can be considered an NFT. And some celebrities are cashing in on it.

Canadian musician Grimes, for example, sold a 56-second snippet of digital art that was set to a demo of her unreleased song, Anhedonia, for $389,000.

NBA Top Shot is a company where users can buy NBA highlight clips, which they call "moments." These clips are sold in various forms, according to a manufactured scarcity which the company creates.

Common clips have over 1,000 copies and are sold for $9 in packs of nine. Rare packs have one rare moment, of which only 150 to 999 copies exist. Legendary packs come with one "legendary'' moment, of which only 25 to 99 copies exist.

Rare packs begin at $22, and legendary packs begin at $230. Then there are copies so rare that only one or three copies exist, and those only sell at auction — like the aforementioned clip of Zion Williamson.

The NBA and National Basketball Players Association have a revenue-sharing agreement with Top Shot, so they make money, too.

There's even a site, Valuables, which is owned by Cent, that sells tweets as NFTs.

What? They're Selling Tweets Now?

Yeah. So the tweets are still on Twitter, and even if the user deletes them, they can be easily accessed via an archiving website like Twuko.

People just put their tweet on the site, someone offers money for it, and it's "minted" into an NFT.

Valuables calls the NFT tweets "autographed." Mark Cuban sold a tweet for $952.

It's absurd.

So What Do You Do With These Things?

You can own it forever and get to show it off to all your friends, who will either ridicule you or envy you. But most people are in to NFTs to resell them at a higher price. Of course, there's no way to tell whether or not these things will go up in value, other than instincts and market speculation and past sales.

For instance, Mintable notes that Cuban's first NFT was resold for $80,000, indicating that the aforementioned hype package will sell for quite a bit more. But sellers also have to factor in royalty sales — Cuban takes a 15 percent cut, for example.

Furthermore, copyright doesn't necessarily transfer from the NFT to its purchaser. Another interesting thing: NFTs can be viewed by anyone, no matter who owns it.

Where Did This All Come From?

Cryptocurrencies live and die on hype. If not enough people believe in them, the currency is useless. But drum up enough interest — say, by getting people to write articles about someone paying $208,000 for a LeBron James dunk — and it fuels the crypto hype machine.

That means more eyeballs on cryptocurrency and blockchain technology, which could lead to increasing crypto stock and other companies adopting blockchain technology in the future.

That's one theory, anyway. The other theory is, well, why not spend thousands of dollars on digital cats if you have more money than you know what to do with? People are already spending tons of money on digital objects in video games.

At least with NFTs, you have the option of reselling them for a profit.

What Other Celebrities are Getting in on the NFT Craze?

Deadmau5 released $100,000 worth of NFT "digital collectibles" — which look like animated trading cards set to some music — in December 2020.
Kings of Leon are releasing their album as an NFT for $50. The album releases on March 4 and will only be available for two weeks, after which no other copies will be created.
Lindsay Lohan is selling a digital art piece on Rarible
YouTuber Logan Paul sold clips of himself opening Pokemon packs for up to $20,000. He also sold animated, Pokemon-themed trading cards of himself, with one selling for $38,500. Why did we create this world for ourselves?
Mark Cuban is firmly in the NFT creation and selling game. He sold a hype package video for approximately $6,800.

OK, I've Decided to Withdraw My IRA Early and Invest it Into a Family of Extremely Cute Cats. Where and How Do I Buy NFTs?

First of all, don't do that. But if you want to get in on the craze of buying and selling NFTs, here's how you do it.

Most NFTs are traded with Ethereum (ETH). Ethereum is a cryptocurrency. Currently, one Ethereum coin, called ether, is worth about $1,500 — but you don't have to buy one whole ether, you can buy fractional shares. You can buy ether in several different ways.

When you have ether, you'll need to set up a digital wallet to store your cryptocurrency so you can buy and sell stuff with it. Many digital wallets, like Coinbase, allow you to buy and sell crypto on the app. When you have a small amount of ether in your wallet, you can connect your wallet to an NFT marketplace.

These are some popular NFT marketplaces:

Why Can't I Buy NFTs With Bitcoin?

NFTs exist on the blockchain and are secured by cryptography. That just means NFTs are able to be tracked, so we know they exist and who owns them (or more accurately, which anonymous account owns them). It also ensures they aren't duplicated or destroyed.

Ethereum's blockchain can support the extra data for tracking and transferring NFTs. Some other cryptocurrencies are adding NFT support.

And according to Investopedia, "while both the Bitcoin and Ethereum networks are powered by the principle of distributed ledgers and cryptography, the two differ technically in many ways. ... [and] the Bitcoin and Ethereum networks are different with respect to their overall aims. While bitcoin was created as an alternative to national currencies and thus aspires to be a medium of exchange and a store of value, Ethereum was intended as a platform to facilitate immutable, programmatic contracts, and applications via its own currency."

I Still Have a Copy of Word 2007 and Want to Make Clip Art and Sell it for Millions. How Can I Sell My Art As NFTs?

Most sites have a wait list or are invite-only for those wishing to sell their NFT art. If you get invited, you can sell your art on the marketplace. You should also have the option to take a percentage of sales every time the NFT is sold.

And if you think all of this sounds stupid, you might be turning into Principal Skinner. But whether you think it is stupid or cool, NFTs could lead to tangible benefits for digital property ownership in the future.

That's a good thing.