Non-fungible tokens, or NFTs, have taken the world by storm. Internet meme creators are selling their original memes for hundreds of thousands of dollars and a collage of artistic works by digital artist Beeple recently sold for $69.3 million.
However, it’s not just the one percent who are throwing money at these mysterious digital tokens. Mattel now offers NFTs of the most iconic Hot Wheels models and the NBA has already made more than $230 million selling play highlight NFTs since it launched its Top Shot program in 2019. CNBC reports that some American households are willing to gift each other tens of thousands of dollars’ worth of NFTs this holiday season.
Yet, many consumers are still in the dark about what NFTs are or why they are worth so much money. Here is what you need to know about NFTs before you buy…or sell.
WHAT ARE NFTs?
In order to understand NFTs, one must first understand each part of the concept. “Non-Fungible” is an economic phrase that means “not replaceable.” “Token” simply refers to a record, something that indicates proof of purchase.
Therefore, an NFT is a public record of sale for an original digital item, NOT the item itself. Think of them as an electronic certificate of ownership. The other component of NFTs is that they represent one-off or limited-edition digital assets, which promotes scarcity and in turn raises the value. People value NFTs because NFTs give them the “bragging rights” to say the purchaser is the legitimate, provable owner of a rare or single digital asset.
“Let’s say that someone had a facsimile of a pink slip of a car that won a big race or a car that was particularly valuable and the car no longer exists but they preserved the original pink slip from that car,” said Aaron Brown, a veteran crypto investor and writer for Bloomberg Opinion. “Yeah somebody would pay money for that and frame it and put it up on the wall.”
Instead of hanging on the wall however, NFTs are stored in a digital database called a blockchain, which differs from a standard database in that the data can be recorded and viewed but cannot be edited. They are a secure way to store cryptocurrency and other valuable digital assets because they cannot be changed and the databases are decentralized so if one server is destroyed, the data won’t be lost.
“You don’t have a physical certificate that might burn up, it’s not just in one database that might go down or get corrupted or get hacked, ” Brown said. “It’s immutable, it’s public and it’s distributed all over the globe.”
WHY ARE NFTs SELLING FOR MILLIONS?
Simply put, NFTs are only as valuable as people want them to be. Collectors are paying what they want for these items because they believe the monetary value of the NFT equals the emotional value they place on the item that NFT represents. Someone paid almost $3 million for the first tweet because they thought owning that tweet was worth $3 million. NFT values are driven by psychological factors, emotions, and, in many cases, nostalgia.
“There’s nothing unusual or novel about people paying money to own something that has no obvious tangible value,” Brown said. “If you get an autograph from a major league player, if they put your name on a college building, all of these things people pay money for and in some cases millions of dollars for.”
NFT collectability is no different from other collecting niches, such as cars or art. The rarer the item is, the higher its quality is, the more history it has and the more prominent its previous owner was, the more valuable it tends to be.
“To an extent, an NFT gives you a psychic link to a celebrity or to an event or an artist,” he said. “It’s perfectly reasonable that people value that and will pay for it and will buy and sell it.”
However, Brown believes that the seven-figure NFT sales will not continue for much longer, and the market is in a bubble that will soon burst. The problem is that anyone can make an NFT, which has already saturated the market with low-quality art and unimportant digital assets marketed as NFTs. While NFTs first made the news when affluent collectors began trading millions of dollars’ worth of digital items to each other, they are unlikely to continue that trend in the years to come.
“The chance of you coming up with an NFT that Elon Musk will buy for $100 million, I think those days are done,” he said. “The NFTs we’re seeing now are much cheaper and much more conventional.”
Instead, more financially attainable NFTs from larger brands, celebrities, and prominent artists are set to dominate the NFT market moving forward. Affordable NFTs will give the majority of consumers a chance to break into the market and purchase their own tokens from their favorite businesses, people, and creators.
“There’s obviously a frenzy over NFTs, and some people are buying them because they must have value because of security, other people are buying them because they think the price will go up,” Brown said. “I think that’s froth. It’s a new idea, it’s kind of fun, people are buying them for fun and because they don’t understand them.”
HOW DO YOU BUY NFTs?
In order to purchase an NFT, consumers have to buy cryptocurrency (typically Ethereum) through a dedicated brokerage or exchange firm and then find a marketplace that has the NFT they desire. From there they are free to buy what they want and can rest easy knowing their NFTs are safe in a blockchain.
However, there are a few items to know before buying an NFT, which have to do with why you want to buy in the first place. First, it is important to reiterate that these digital collector’s items are likely not going to be profitable for most people and investing in NFTs to make money may not be wise. Instead, most consumers purchase NFTs to support creators or businesses they enjoy and have an emotional connection to.
“If your favorite sports team or your favorite actor or rapper issues one and you like that person and you want to give them money and feel good at owning something they created, then that’s great,” Brown said.
It is also important to understand who exactly your money will benefit. Buying an NFT to support a smaller business or artist you enjoy makes sense, but buying one to give money to a large corporation may not have as much impact. Furthermore, the ease of NFT creation has resulted in a flood of scams and sellers pretending to be authentic businesses and artists while selling copies of digital assets disguised as NFTs.
“A lot of NFTs are issued by people who have absolutely no connection to the thing they’re presumably selling you an NFT of,” he said. “Do a little research and find out where the cash is going.”
WHAT ARE THE POTENTIAL OF NFTs FOR BRAND MARKETING?
NFTs provide a way for brands to craft limited edition digital goods and create hype around those assets. Ad Age has a constantly updated list of companies that now offer NFTs, including Kelly Blue Book, Taco Bell, Adidas, and Marriott.
Each brand has created their NFT differently, but every NFT shares the philosophy that plays to the strengths of the company or takes advantage of a notable event in that business’ history. For instance, White Castle released an NFT collection of 5,001 digital sliders for its 100th birthday and Budweiser released a “Heritage Collection” of digital art that displayed its original beer cans.
In order to create an NFT for your business, you need to identify what aspects of your company best appeal to your target audience’s psychological needs. If your brand has a long history or rich heritage, you can create NFTs that depict nostalgic products you once offered. If your company is newer, Forbes recommends creating digital tokens that let buyers interact with your company in a unique way.
You can also package NFTs you create with a limited run of products you offer. For instance, Robert Mondavi Winery created NFTsthat could help verify the legitimacy and year of its wine bottles by binding tokens to specific wine bottles so collectors could check their vintage via blockchain.
Some companies even offer NFTs with the promise to donate a portion of the proceeds to particular charities, which can help brands advertise their NFTs when they cannot find another incentive for people to purchase them.
These tips and strategies can help your brand take advantage of the growing significance of the crypto market and stay on top of the ever-evolving roles of digital commodities.