The NFT space is growing at an astonishing pace with early NFT collections changing hands for eye-watering sums. For newcomers buying a first NFT can be a really tricky decision without understanding what it is that gives an NFT value. We’ll try and lay out the basics with our guide to buying NFTs.
This guide is aimed at people who are curious about NFTs but know very little about them, so let’s start with a simple definition of what an NFT is.
An NFT is a digital record, like a receipt, proving ownership of a collectible item, showing when you bought the item and how much you paid for it. ERC721 is the technical standard for creating NFTs via smart contracts on platforms like Ethereum.
NFT stands for non fungible token. Fungibility is a fancy word that means one thing is replaceable by an identical item. So money is fungible because notes and coins are interchangeable, which is fundamental for a frictionless economy where people want to exchange money for buying goods and services.
Cryptocurrencies - as new forms of money - are designed to be fungible in the same way.
Given its name, an NFT isn’t fungible, it cannot be exchanged for an identical item, it is designed to reflect ownership of a unique item for which there isn’t an interchangeable equivalent.
That last part is important because an NFT is a record of ownership of a unique item but doesn’t represent the item itself. It will indicate where the item exists, so the url of a piece of digital art, photo or the location of a physical asset. This is the same with analogue receipts or deeds which prove ownership.
You might ask why this is so revolutionary, given digital receipts are now quite commonplace and that traditional collectibles - like an autographed album - come with certificates of authenticity.
What is different about NFTs is that they are considered immutable records because they are created by decentralised blockchains. In other words, because of how decentralisation works, no one can amend the information associated with an NFT, it is a unique unchangeable record.
A lot of the hype surrounding NFTs, which is translating into crazy valuations, is because the idea of decentralisation itself is new, so owning an early example of an NFT - which can be proven by the digital information associated with it - is like owning a piece of history.
A Penny Black, one of the first ever stamps, had negligible face value at the time it was issued and used. You can buy stamps today that achieve the same function, but the provenance and historical significance give Penny Black’s - and other examples of early and rare stamps - enormous value.
Just like money and stamps, NFTs are ‘minted’. This describes the process by which the record of ownership is established on the associated blockchain. This is a crucial dimension to valuation as the item itself may just be a simple jpeg which can easily be copied but it representative of a specific moment in time which cannot be replicated.
You should now have an understanding of what an NFT is, in a general sense. You can now make that knowledge a bit more tangible by applying it to specific types of NFT.
The most common type of NFT is a collectible piece of art which can subdivide into a few different categories.
Profile Pictures (PFPs) - You are most likely to have encountered these as collections of apes, cats, penguins, rocks, punks etc.
Generative Art - This is unique art generated by an algorithm but based on a specific style e.g Art Blocks
Original Pieces - This has the most in common with analogue art in that artists create one-off pieces that are minted as NFTs. Beeple’s Everydays: The First 5,000 Days is the most famous example.
Photography - Shouldn’t need much explanation
If you collect pokemon cards, baseball cards or panini stickers then NFTs should seem like a logical progression. NBA Topshots is one of the most popular projects out there selling video clips of iconic moments in NBA games.
In-game items are another form of tradable collectible that naturally suits NFTs. Sorare is a fantasy football game where you can buy player card NFTs. There are a growing number of blockchain based games and metaverses where you can buy characters, items or real estate, such as Decentraland and Axie Infinity.
If you are lucky enough to own a property you will have a deed - a physical piece of paper - that proves you are the owner. That kind of proof of ownership may well become a thing of the past as NFTs can provide that function.
In the days of vinyl, discs were pressed in batches and given unique references to indicate this. Music has iterated via tapes, discs and MP3, and now NFTs can represent music and/or video with the content being the same but the reference different, just like the original vinyl approach.
If you want to own an NFT you can either create one yourself and ‘mint’ it (which we run through below) or you can buy one from an NFT marketplace.
In order to buy an NFT you’ll need:
If you are new to buying NFTs then you should tread carefully trying to understand what the maximum price (ceiling) for an item within a collection is, compared to the minimum (floor). Best start at the floor rather than paying an often inflated price.
If you are buying to trade you should also check to see how many similar items have sold and how often, to give a sense of how liquid the market for a particular NFT is.
Be aware that the NFT space is very speculative which means you should be very cautious of fake trading and approaches outside of official NFT marketplaces.
Once you are set-up to buy an NFT the big question is how to choose from the huge array of available NFTs? The sheer number of categories and styles can be overwhelming so here are some pointers.
Think about scarcity - scarcity is a big contributor to value, though alone it won’t make an NFT valuable.
Originality - You'll notice that a lot of NFTs on offer are copying existing collections that are valuable, which misses the point. Try and find NFTs that are doing something original, clever or just funny. You'll see a lot of NFTs that amount to blockchain versions of Clip Art Images or worse. These are low-value attempts to get on the bandwagon and their sale history will illustrate that.
Aesthetics - In classic art painters and styles come in and out of fashion, driving valuations up and down. The same trends are true of NFT art even though it is in its infancy, so try and pre-empt new trends, rather than jumping on the Ape bandwagon.
Traits - NFTs are often created as part of collections based on a theme expressed by certain traits. Each individual NFT will possess a unique combination of these traits. This is similar to how Pokemon characters work, MGTM, baseball cards or Top Trumps.
Buy what you like - One of the best pieces of advice is to go with your interest and buy what you enjoy. As a novice you are as likely to buy a potentially valuable NFT as you are to choose a winning lottery ticket so just buy something that will at least give you enjoyment and allow you to understand the process.
Set a budget - It is important to set a clear budget in advance, otherwise you may find yourself slowly edging into the more expensive brackets of NFTs simply because you haven’t set yourself any parameters.
Understand speculation - The fact that an NFT has a sale history shows someone else thought it had value, but doesn't mean that you can buy it for slightly more then flip it for a profit. That is the definition of the 'greater fool' idea and essentially what created the Tulip Bubble in 1637. Try and buy for enjoyment rather than speculation as NFT valuations could collapse leaving you nursing a heavy loss.
If you are an artist and want to create an NFT from some of your existing art rather than paying for one the process is quite simple and is called 'minting'.
As above, you’ll need an Ethereum Wallet like Meta Mask and some ETH. Choose the marketplace where you want to mint your NFT and create an account. You'll normally have to pay a one-off fee in order to be start listing.
Once you’ve created an account you’ll need to create and name a Collection, this is normally a theme that runs through each piece. You are then ready to upload your art, providing details of your creation which are particularly relevant if it is one of a series that has specific levels, attributes or characteristics. Once all the details are added you can then hit the Mint/Create button and your creation has been added to the blockchain.
You have to then specify whether you want to sell your newly minted NFT, which will require a Gas fee, and the relevant details of the sale process (auction or buy now). Once this is confirmed you’ll see your NFT listed and can sit back and wait to see if you attract a buyer.
Be aware of additional Gas fees for things like accepting offers, adding NFTs minted elsewhere, gifting NFTs, cancelling bids or cancelling listings.
Once you’ve purchased your NFT you should focus on getting enjoyment from owning it in the same way that you would enjoy any other piece of art that you have purchased. You can put it in a digital frame, use it as a personal avatar or contribute to an online gallery.
Yes someone can simply copy/paste a copy of your NFT but the blockchain proves your ownership which is what counts.