NFTs are digital assets that use the technology behind cryptocurrencies to create unique tokens, each with its own identification that isn’t replicable. These tokens serve as a digital deed for original editions of online art, music, and memes.
NFTs — short for nonfungible tokens — are acquired by bidding online, then paying in U.S. dollars or cryptocurrency. These tokens have taken off in popularity in recent weeks following the sale of digital art for millions, and celebrities and business leaders jumping in.
The major risk of buying any cryptocurrency, including NFTs, is that value is largely based on speculation. Buyers are hoping their NFTs will be the future of collecting without guarantee.
If you’re thinking about purchasing an NFT, here are a few key things to know.
What is an NFT?
An NFT can be music, art, trading cards and even tweets.
The Kings of Leon released their latest album as an NFT collector’s item earlier this month. The token is the certificate that guarantees that the album is both authentic and original.
Mike Winkelmann, a graphic designer professionally known as Beeple, has taken to the online marketplace Nifty Gateway to sell millions of dollars of his digital art to wealthy collectors. On Thursday, he sold a digital collage at Christie’s for $69.3 million.
The artist and musician Claire Boucher, known as Grimes, has sold $6 million of NFTs, also on Nifty Gateway.
But not all NFTs are collectibles. They can also be items for in-game purchases, event tickets and domain names. For example, some of the Kings of Leon NFTs also serve as future concert tickets.
What do I get when I purchase an NFT?
When buyers purchase an NFT, they own the original rights of their digital asset, whether that is music or images. This is proven in two ways: The buyer gets the sole token bequeathing ownership, and each NFT is uploaded to a digital ledger (like cryptocurrencies) to track when it was created and sold as well as ownership.
Much of the value comes from pride and the ability for people to say they own an original work, said Dan Kelly, the president of Nonfungible.com. “The real key is the ownership itself,” said Mr. Kelly. “It’s the status that comes with owning that thing. It’s totally different owning the original versus the replica.”
One of the main hurdles for people thinking about purchasing NFTs is “for many folks there’s an assumption that having the physical version of a collectible is more valuable somehow than the digital,” said Andrei Brasoveanu, a partner at Accel that recently invested in Sorare, an NFT platform for soccer fans. He points out that NFTs are often more secure because of their authentication process. For NFTs on Sorare, this is on the ethereum network. Unlike bitcoin’s blockchain, ethereum is the platform on which many NFTs are created because of its flexibility for developers to store code for blockchain projects.
Do other versions exist? What makes an NFT an original?
Only the buyer of the NFT owns the rights to the original asset, though other copies could still be floating around the internet for free.
Mr. Kelly compares this to owning the original Mona Lisa and the number of reprints that are floating around. Only one person has the original, he said.
Each blockchain-based token is unique. NFTs have metadata that certifies when they were made, who created them and other descriptors. This information is combined with a cryptographic hash function — a technique that turns the data into a unique, 40-digit sequence of letters and numbers — that creates a unique identification. So even if there are thousands of NFTs being sold with digital images that look alike, the underlying information will all be different.
Ownership rights to NFTs are a detail that is still being ironed out in the U.S. Currently, when a person acquires an NFT, the underlying asset is owned, but not the copyright.
If the buyer wanted all rights to a collectible, the copyright holder would need to separately transfer the copyright by contract, said Ali Dhanani, an intellectual-property lawyer at Baker Botts. Otherwise, “the copyright creator could still separately use, display, distribute or create reprints of the work, including generating new NFTs for those reprints,” he said.
How much do they cost?
While some have sold for as little as a few dollars, other high-end digital art pieces have sold for millions at auction.
A meme called Nyan Cat, which depicts a cat with the body of a Pop-Tart, was purchased for almost $600,000. The Kings of Leon NFT albums were sold for $50.
NBA’s Top Shot enables sports fans to buy, sell and collect officially licensed video highlights of basketball players. One man spent over $175,000 on digital trading cards; they are now worth $20 million.
Where are legitimate places to buy NFTs?
Online marketplaces exist for buyers to take part in auctions, make purchases and sell NFTs. Some of the most popular include OpenSea, Nifty Gateway, Yellowheart and NBA Top Shot.
NFTs can be resold on the same online marketplaces.
Mr. Kelly recommends that newcomers stick to purchasing on primary market sites directly from the vendor. It gets trickier to verify authenticity on secondary sites if you are less familiar with the process of buying and selling NFTs.
Are there scams and risks to be aware of?
Even on the most reputable marketplace sites, there are scams. The best way to combat this is to purchase from verified sellers, said Mr. Kelly. He also recommends treating it as someone trading in the stock market would.
“If you’re not experienced, make sure you’re not spending more than you’re willing to lose, and stick to the common type of ‘blue-chip’ items,” he said.