- NFT stands for Non-Fungible Token. It is a digital certificate that refers to a mostly virtual, specific object. For example, on the original of a digital work of art.
- These certificates, a kind of receipt, are entered on a global data list, the blockchain.
- You can buy and sell NFTs and even create some yourself, for example on a vacation photo you took. As an investment, however, they are highly speculative because you cannot estimate future performance.
- The NFT market is unregulated. In this guide we explain the most important basics.
This is how you do it
- Only buy an NFT if you understand the concept and know the characteristics of the specific NFT.
- As a rule, you become the owner of the NFT. However, this does not say whether you also become the owner of the file or the art object.
- You should have a good plan for all of your investing.
For decades, artists have not only used canvas, rolls of film or records to capture their works. Art has long been able to be created in purely digital form – as a pixel image, digitally stored film or as a music file. The problem: This digital form of a work of art can be reproduced with a simple mouse click. Original and copy are indistinguishable. However, certificates that refer to the original – so-called NFTs – cannot be reproduced. Instead of trading with the actual work of art, the associated NFT is traded. In 2021, for example, an NFT changed hands for almost 70 million dollars.
What are NFTs?
An NFT is not the artwork itself, but a type of digital certificate or signature. You can think of the NFT as a clear statement of who owns a particular thing. This thing can be, for example, a small pixel image like the now famous Cryptopunks, but also the very first Twitter tweet or digital music. The NFT serves as a certificate that states: Person X currently owns file Y, located at Internet address Z.
The abbreviation NFT stands for a non-fungible token. Without foreign words: a non-exchangeable token. A token is an asset, more simply put, a token. A counter-example to the NFT, i.e. a fungible, exchangeable token, would be a ten-euro note. You can exchange this banknote for any other ten-euro banknote. The value and function of the banknote remain the same. (The serial number of the banknotes is different – but that doesn’t matter for the purpose.) A bitcoin or a beer brand at the fair would also be fungible tokens.
Such a token is now non-exchangeable because it is part of a blockchain . All transactions are publicly recorded in such a digital register. The blockchain is also distributed decentrally in different places and represents sophisticated accounting. It is therefore not possible to transfer an NFT to someone else without authorization without this transaction being visibly stored in the blockchain. The history of origin is therefore always clear – unlike in the case of analogue works of art, where provenance is often a problem. At the same time, the NFT records the object to which it refers. Therefore, an NFT referring to the image of a cryptopunk is different than an NFT referring to a musical group’s album.
An object can have multiple NFTs . This can be created when the NFTs are created. One use case would be “limited editions” of artworks, i.e. maybe 1,000 copies of a graphic or a piece of music. It is also conceivable that an NFT refers to a part of an object, for example a tenth of a picture or a third of a property. One problem: unauthorized NFTs can also be created for an object . The NFT Thefts initiative calls plagiarism, i.e. pirated art, a growing problem in the NFT cosmos.
Copyright or reproduction rights are usually not associated with the purchase of an NFT. As the owner of an NFT, you cannot simply use the associated image to print it on t-shirts or posters, for example. That remains reserved for the original creator, the author. Even ownership of the object to which the NFT relates is not always automatically linked to the purchase of the NFT. To stay with the previous example: Whether an NFT that promises co-ownership of a (real or virtual) property can actually redeem this with legal certainty is absolutely not guaranteed.
So what are you actually buying when you purchase an NFT? First of all, only the NFT itself. You have to take a close look at what else is attached to it or promised .
How much do NFTs cost?
It follows that there is not one current market price for a typical NFT, like there is a market price for a bitcoin, a Swiss franc or other exchangeable tokens. The NFT market has more in common here with the market for analog art. There are world-famous paintings for which millions are offered, but also a lot of amateur art that does have price tags, but in a specific case it may not find a buyer who is willing to pay this price. The same can happen with NFT.
In March 2021, an NFT was auctioned for the first time at the famous auction house Christie’s and it fetched a record price of 69.3 million US dollars. The accompanying work “Everydays: the First 5000 Days” by the American artist Beeple is a huge collage of 5,000 individual digital images. Several NFTs on the much smaller images in the Cryptopunks series brought in well over a million dollars each, and the first tweet by Twitter founder Jack Dorsey brought in just under three million. Football trading cards on the Sorare platform have already netted over $50,000, such as the trading card featuring French star Kylian Mbappé. Virtual items in computer games, such as special weapons or ornaments, are also sold as NFT.
How do you buy and sell NFTs?
NFTs are traded on dedicated NFT platforms. A well-known NFT platform is Opensea. Other major providers are Nifty Gateway or Rarible. You can roughly compare the purchase process with Ebay. However, the NFTs are not paid in euros, but mostly with the cryptocurrency ether. You also need a suitable wallet , i.e. a digital wallet that you can connect to Opensea or another NFT portal. This is the only way your purchase or sale can be recorded on the blockchain.
Metamask, Coinbase and a number of other wallets are compatible with Opensea and the other major NFT platforms. For example, you connect your wallet to the Opensea account and you can now buy. After you have found an NFT that you like, you can place a buy order.
How to emboss or mint NFTs?
If you want to create a new NFT, you can use special websites. Such a service is, for example, Rarible, well-known others are Nifty Gateway, Zora and Superrare. The platform adds a new dataset – the NFT’s programming code – to the decentralized data list, the blockchain. The central component of the NFT is the metadata , i.e. the stored name of the token, a description and the Internet address with the object to which the NFT refers. The process is called embossing or, with English origin, minting.
Minting an NFT is not free. Inserting it into the blockchain costs computing power because the encryption has to be calculated. In NFT jargon one speaks of gas fees , which are incurred for minting, i.e. petrol money. The gas fees are usually paid in ether, which is the cryptocurrency of the Ethereum blockchain.
When embossing, you can specify whether you want to associate an individual NFT with the object or a series, i.e. a limited edition. In addition, you decide whether the NFT should be for sale directly, you can set a minimum price for the purchase bids or activate a Buy It Now option (similar to Ebay).
In addition to this embossing process, there is a variant that initially does not incur any fees, lazy minting. With this you prepare an NFT, but do not add it to the blockchain yet. That only happens when there is a buyer. This area in particular attracts a lot of plagiarism.
For advanced users: The data standard used for NFTs on the Ethereum blockchain is called ERC-721. An important role is played by the fact that Ethereum allows so-called smart contracts, i.e. digital contracts that work like software and can process data. Anyone who programs their own smart contract can therefore also mint NFTs on their own. In addition to the Ethereum blockchain, there are also other blockchains used for NFTs, such as Tezos or Flow.
How risky is trading NFTs?
The market for NFTs is largely unregulated . Problems can arise in two main areas. Something can go wrong with the purchase if a dubious trading platform has been chosen. Under the term NFT Scam (NFT rip-off) there are many reports of fraud on the net. The backers of the Evolved Apes project fled in 2021 with $2.7 million in investor money. An announced computer game in which customers should use their auctioned monkeys was never realized.
There can also be problems due to unclear auction conditions. At an NFT auction of the German influencer Fynn Kliemann , according to research by the ARD magazine Kontraste, some bidders went away empty-handed because the auction was surprisingly extended by an hour and some of the highest bidders did not get a chance. As Kontraste reports , almost a third of the proceeds came about because Kliemann did not comply with the auction conditions he had set himself in these cases.
But even if the NFT purchase worked out, there is a big question mark behind the future value of an NFT. As with other collectibles, the price is determined by supply and demand . It is far from unrealistic that many an NFT object would be like the stamp or sports card collection before the blockchain was invented. Or many “analogue” paintings that have been waiting for buyers in a gallery for years.
You should not underestimate one aspect of NFTs: Not only does the specific NFT itself fluctuate in value, but also the amount of cryptocurrency that you pay or get for it. Because the exchange ratio of ether and euro is anything but constant and changes significantly in short periods of time, the same applies to the ether alternatives. NFTs are therefore, so to speak, a two-stage speculation.
Where can you find more information about your investment?
Finanztip recommends a mixture of global equity ETFs and an account for call money or time deposits for the focus of your financial investments . This offers you a sensible combination of return opportunities and security components over many years and decades. You can find out how to tackle the first steps of a self-determined strategy in our investment guide . We also have specific recommendations for good checking accounts and securities accounts .