As the world warms up to the idea that cryptocurrencies are here to stay, many have started to think more deeply about the advantages these digital currencies offer over traditional money. Transactions are fast, security is guaranteed by design, and third-party verification is instantly and indefinitely possible. These characteristics of speed, security, and verifiability aren’t only useful for finance, and other sectors such as rare art and collectibles operate under the very same principles. NFTs are the hot new collectibles riding the cryptocurrency wave, and they’re making everyone but you unimaginably wealthy. So, what are they?
What is an NFT?
From a consumer perspective, an NFT (or a “non-fungible token”) is best described as a certificate of authenticity for an underlying digital file. Even if that underlying digital file is copied or already widely available, the current owner of the NFT can prove to others that they verifiably own the original copy of the file, as designated by its creator. In today’s collectible craze, digital art in the form of image files or video files is most commonly housed within NFTs, but this content can be anything that can be digitally encoded, including music, text documents, or even websites.
From a technical perspective, each NFT is a unique cryptocurrency token that is stored on the Ethereum blockchain. In practice, this means that the owner of an NFT actually owns a single token that’s stored in a cryptocurrency wallet, similar to how Ethereum or Bitcoin is stored. These cryptocurrency underpinnings may seem odd, but they directly fuel the current excitement around NFTs: unlike traditional collectibles, these digital certificates of authenticity can be bought, sold, and transferred from one owner to another using the same speed, security, and verifiability as monetary cryptocurrency assets.
Why are they valuable?
It’s not uncommon to initially dismiss NFTs as a fad. After all, the idea of a digital collectible is nothing new, and the thought of spending real money on a digital file that doesn’t necessarily have a physical component feels, well, odd. But when you consider that most real-world collectibles are purchased not for their utility, but for their rarity, digital collectibles that can be securely stored, instantly authenticated, and easily transferred become much more exciting in 2021. New and renowned artists alike have started to explore the digital art space by selling limited and exclusive digital files of their artwork instead of selling physical objects, the latter of which is slow and tedious to physically display, sell, and ultimately make a profit on. Forward-thinking collectors and speculators are rushing to scoop up popular NFTs, and they’re spending huge amounts of real money to do so.
Beeple, a Wisconsin-based digital artist, created a digital collage image that sold at Christie’s auction house for just under $69,400,000. The electronic music artist Grimes sold digital album artwork for $6,000,000. A group of artists created images of masks – yes, masks that cover your face – and sold them for over $17,000,000. And yet, hundreds of thousands of artists have created NFTs that have no market value whatsoever. Just like with real-world collectibles, rarity and desirability are the only two factors that give market value to NFTs. A Patek Phillipe 1591 wristwatch has little utility or intrinsic value since it’s an old watch made of steel; however, only one Patek 1591 was ever made and because of its prominence, this hunk of steel safely maintains a value of well over $2,000,000. The same is true for a painting by the late Jean-Michel Basquiat: the canvas and paint alone demand no value, while the rarity demands it. NFTs are no different from other collectibles and rely solely on the market to decide if they gain attention and value.
It may seem as though NFTs are a logical next step for collectibles because of the security and ease-of-use that they provide, but they also pose unique challenges that must be physically or mentally overcome before this movement fully takes root. For example, owners of various collectibles usually like to display them. After all, what’s the fun in paying for and owning a $69,000,000 piece of art if you can’t show it off to friends and foes alike? The idea of physically displaying and enjoying a digital asset that’s represented by an NFT is new and uncharted territory and is usually left up to the NFT owner to figure out. Additionally, collectors wishing to purchase an NFT must also assume at least minimal familiarity with cryptocurrency, digital wallets, and Ethereum, and the learning curve around these topics is unavoidably steep. Still, traditional high-value collectibles have their own real-world difficulties and learning curves, and unique solutions to real-world NFTs are being actively developed.
How are NFTs made?
An NFT is created by deploying a smart contract on the Ethereum blockchain that adheres to the NFT specification. Deploying a smart contract is a fairly straightforward process if you have familiarity with Ethereum development, but creators in the NFT realm don’t always have this skillset. As a result, web-based tools have arisen that pave over these complexities entirely, making NFT creation as simple as filling out an online form. These tools are typically paired with online NFT marketplaces that make it incredibly easy for creators and collectors to discover and to trade NFTs without any middlemen or escrow implications, as is typically required when transferring real-world collectibles.
It’s hard to say whether the current excitement (or the pricing) around popular NFTs is warranted, and some would argue that a free market always discovers the fair value of an asset based on what people are willing to pay. Regardless of the hype and cash flow around digital collectibles, they concretely represent a new iteration of collectability in an increasingly digital world. Time will tell just how much that collectability is worth.