What Are NFTs And Why Are Some Worth Millions?

Last Updated October 14th 2021
16 Min Read

NFT is an abbreviation for non-fungible tokens, a form of digital art that can be bought and sold. Some NFTs have sold for millions of dollars, which seems a baffling concept because NFTs are not a physical product. So why are NFTs so expensive, and are NFTs a good investment?

We'll find out more about NFTs in this guide to non-fungible-tokens.

NFTs are a relatively new introduction to the crypto market. But, in a surprisingly short period, NFTs have taken the crypto market by storm. And, yes, some NFTs have sold for millions, and momentum is growing to invest in NFTs to make a profit.

But how easy is it to buy NFTs, and how do you know what NFTs are likely to reach a high price?

The problem is that wannabee artists launch an NFT thinking they'll make millions, and newbies buy NFTs without understanding what drives the price of NFTs and then find they have no resale value.

NFTs could be a fad, of course. Prominent art collector, Pablo Rodriguez-Fraile, said about NFTs:

"A few years from now, this could just be how people own art… People have long used art to store value. Crypto extends easily into digital art. This is just a more modern approach to investing in art and using it like someone would use gold or Bitcoin."

Is this true? Will NFTs be the future of modern art? 2021 saw a considerable growth surge for NFTs but can that growth continue?

Read on to find out how NFTs gain value and learn how to recognise an NFT that might skyrocket in price.

Contents

What Does Fungible Mean?

In finance, fungibility is the right to exchange a product or asset with other individual products or assets of the same kind. Fungible assets simplify the processes of exchange and trade, as fungibility implies equal value among assets (https://cleartax.in).

So, switch that meaning to non-fungible, which means there are no mutually exchangeable goods for NFTs. Non-fungible-tokens are one of a kind, have no identical substitutes and are genuinely unique. You can exchange $5 for $5 and even 1 BTC for another 1 BTC because they are fungible assets. But you can't trade one NFT for another because no two NFTs are the same, hence the term non-fungible.

And, to confuse matters even more, NFTs can be a photo, gif, video, memes, audio files and oddly, even a tweet can become a publicly-traded NFT.

How Do NFTs Work?

NFTs work similarly to other crypto tokens on a blockchain, but you cannot exchange directly with another NFT as you can with crypto tokens.

NFTs use the Ethereum network, but other blockchains are adopting NFTs primarily because of the apparent potential for profits. NFTs are pieces of software code stored via smart contracts. They all contain individual identifying information, which means they are easily verifiable and traceable.

Read More: What are NFTs? Non Fungible Tokens Explained

Why Do NFTs Have Value?

Many people wonder why someone would pay so much money for something they can copy, watch, or download for free.

Well, NFTs only have one owner. Artwork remains the intellectual property of the author. But, as with traditional art, the owner has the exclusive right to use the artwork in any way they choose.

NFTs are also used to develop characters, buildings, spaces etc., for virtual gaming. Traditionally, game developers were sole owners of in-game items. But with NFTs, users can legally resell their gaming assets if they wish.

There's a low risk of forgery because blockchain auditing mechanisms can quickly check the authenticity of an NFT, which means there's less likelihood of buying a fake NFT. Not impossible, but it's harder to replicate an original without discovery.

In trading, supply and demand determine prices, and NFTs are the same. Because of the scarcity of NFTs and the high demand from gamers, investors and collectors, supply is less than demand, equating to higher prices.

NFTs have gained more visibility since 2017. Over the last year, investors generated a lot of hype about NFTs, and now the momentum is growing exponentially.

Image: The most famous NFT is EVERYDAY by the digital artist Mike Winkelmann.

On 1st May 2007, Winkelmann, known as 'Beeple', posted his first work of art online. For 13.5 years, Beeple posted a new digital picture every single day. When he then brought all 5,000 pictures together into one image. "Everyday, the first 5000 days" was born.

So what, you might say. Well, Everyday was minted exclusively for Christie's auction house, and in a single lot sale, the digital artwork sold for $69,346,250.

Christie's was the first major auction house to sell digital art with a unique Non-fungible-token (NFT), which guaranteed authenticity and accepted Ether as a form of payment.

Today, top NFTs are close to the price of some of the most expensive paintings ever sold, ranging from $92 million to $450 million. It may seem a challenge to accept that ownership of virtual art can compare to a tangible asset such as a painting to hang in your hall.

Check Out: Top 5 NFT Trends to Watch

Why Are Some NFTs More Expensive Than Others?

As we mentioned earlier, NFT prices depend on supply and demand.

The NFT owner may set a starting price, but many marketplaces allow tokens to go to auction, which means that as herd buying mentality increases, NFT prices can quickly ramp up. If demand increases, buyers become more competitive. Who knows if one of the NFTs could one day turn out to sell for millions, which keeps buyers hungry to buy the popular tokens.

A collectable token minted once is more likely to capture the most interest from buyers due to low supply. Some NFT tokens are minted for the same collectable card. So, they don't have the rarity of a single minted token and, as a result, are unlikely to raise higher prices.

The most expensive NFTs tend to be one of a kind digital images. And, another important factor is author popularity. Beeple has over 2.5 million followers across social media channels. Unknown artists with no influence are less likely to raise higher prices for their digital art. But, much like obscure cryptocurrencies, that doesn't mean that a random artist cannot raise their status to create a token with high demand.

Popular NFTs Sold For Crazy Prices

This year, in August, Lionel Messi, the Argentine football legend, launched a four-series digital artwork collection called 'Messiverse', which he offered for sale on Ethernity Chain, a blockchain platform. Messi said, "Art, like football, is eternal. Art is also evolving, and digital Art (NFT) is another way to connect with the fans."

Australian artist, BossLogic designed the collection. He is known for his work with Disney and Marvel and sold one of the pieces, called, The Golden One, for over $1 million.

In 2014, NFTs first emerged at a live demonstration at the Museum of Contemporary Art in New York City. U.S. Tech entrepreneurs Kevin McCoy and Anil Dash presented their 'monetised graphics' with the mission to help artists gain some control over their work and make more money.

But it didn't garner any attention from the public until added to Ethereum.

In 2017, the first recorded sale of NFTs was CryptoKitties, a game developed by Dapper Labs for selling and collecting digital cats. Prices skyrocketed, with a few of the avatars reaching over $100,000. It started a buying frenzy that resulted in clogging the Ethereum network.

NFTs were finally on the map

More crazy NFT sales:

  • Early this year, a GIF of a 2011 meme of a pop-tart cat, called Nyan Cat, sold for around $ 600,000 (which was 300 Eth at that time).
  • A slam dunk video of LeBron Jones, the basketball legend, went up for sale at $208,000.
  • In March, Grimes, a Canadian musician, raised $6 million from selling ten of her digital artworks.
  • Twitter founder Jack Dorsey sold his first tweet for over $ 2.9 million to Sina Estavi, CEO of a technology firm, Bridge Oracle.

As history demonstrates repeatedly, value is subjective. An NFT is worth only as much as someone is willing to pay. Buying a Tweet that was, and still is, publicly available seems like the definition of madness, but it happened.

We anticipate that NFT prices will continue to rise because it seems to be a source of interest for many prominent people jumping onto the NFT bandwagon.

Finally, in this section, as we know, the value of traditional works of art appreciates over time, and so do rare NFTs.

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How To Create, Buy And Sell NFTs

If you have digital art, it's easy to create an NFT. First, you must choose a suitable blockchain, and Ethereum is the most typical marketplace for NFTs. The listing process is variable for each NFT marketplace, but for the Ethereum network, you require Ether because there is a fee to pay.

After creating the token, you can choose a set price or put it up for auction. Before doing so, you require a digital wallet and establish your conditions for royalties or reselling.

NFTs prices are speculative, so the highest bid wins, and the buyer must also have access to a digital wallet to store NFTs and the preferred cryptocurrency to pay for the NFT.

Exchanges may charge a transaction fee or request a percentage of the sale, which the buyer pays.

Where To Buy And Sell NFTs - NFT Marketplaces

You've created your NFT, and you're ready to list, or you decide you want to buy NFTs, so where do you go?

Make sure you thoroughly research an NFT sales platform before listing your digital art or spending your money on NFTs.

The following are the most established marketplaces for buying and selling NFTs.

  • OpenSea – the world's largest NFT marketplace with free listing
  • Foundation – by invite only or if you have received enough upvotes from artists on the platform
  • CryptoPunks -10,000 unique collectable characters stored on the Ethereum blockchain
  • Sorare – global fantasy football, buy, play and trade digital football cards
  • Axie Infinity – a cute pet, play to earn infinity game that rewards players

NFT Checklist

There's a lot of hype around NFTs, but it's very easy to lose money. You may hear about people making thousands of dollars over a few weeks or even days. But, equally, you can make significant losses, even if you've done the checks and are confident of your choices.

Never buy NFTs on a whim. Always do your research. Founders may make promises to their investors, but they cannot guarantee those promises if they're early in the game or even if established.

There's no excuse for poor investing. Successful NFT investors work to a checklist and stick with it, knowing it's a more educated way to invest in NFTs.

Before buying NFTs, the following simple checklist can help with your decision.

  1. Research the NFT founder's team – a strong team behind the creator of the NFT, could mean the difference between success or failure of the project. You are handing over your money believing that, in the future, someone will be willing to buy your investment. It's essential that a team feels accountable for the success of a project because if there's no accountability, it means your money is at greater risk of disappearing.
  2. What is the cost of failure for the team? – when looking for an NFT project, seek out founders with a large social media following. Public figures with large audiences have less room for mistakes because they have a lot to lose. Failure in one NFT project could negatively affect their entire business. Starting from scratch is not a viable option as it is for a lesser-known, random artist.
  3. Can the team keep a high interest in the project? – Does the team have a social media presence and maintain high engagement from their followers? Are they on top of community announcements, and does their marketing build excitement in the project? A good marketing team can make or break an NFT project.
  4. How strong is the community? - In NFT, Twitter and Discord are the two main channels, so check these communities before investing. Discord provides a real-time picture of how "alive" an NFT community is. You can get a sense of the general vibe and demand for an NFT project by engaging with the community to measure the percentage of resellers and NFT newbies.

Discord Checklist

    • How many members
    • How many messages from unique users
    • How many emojis are in posts
    • How active are the founders with news announcements
  1. How comfortable are you if ETH prices drop significantly during your ownership of the NFT? – With any investment, the advice is not to risk money you cannot comfortably afford to lose, and it's no different with NFT investing.
    Currently, NFT payments require ETH, and, as you undoubtedly know, the price of ETH can vary. Earlier this year, cryptocurrencies dropped 50% or more and, had you bought your NFT at the high, your NFT would have lost significant value. Are you prepared to sit tight for the long-term if this situation occurs in the future? If the answer is no, NFT's may not be the best form of investment for your needs.  

Recap Of What Are NFTs And Why Are Some Worth Millions

Since Beeple's epic sale of digital art, interest in NFTs has grown exponentially. Much like the meteoric rise of Bitcoin, once investors, and the public, see an opportunity to make a lot of money, they start investing, and momentum begins.

Supply and demand determine the value of NFTs and also whether the digital artist is well known. For instance, keen investors will be closely monitoring digital art produced by Beeple, which means that if a new art piece comes to market, the price will likely quickly skyrocket.

Are NFTs a temporary bubble? There's no way of knowing, and it depends on many factors. Not least, because NFTs are on the blockchain, there are the same associated risks as any cryptocurrency token, such as contributing to global warming.

Before buying an NFT, ask yourself if you like it. Do you find the art attractive? If you are buying NFTs to resell, you must buy art that has appeal. Of course, that's subjective, but you can measure interest by looking at how many watchers or bidders there are for an NFT.

If you want to create an NFT, there's plenty of online information to show you how to make your digital art.

Do your research, find NFTs you like, follow the checklist guidelines, and have a more educated process for finding NFTs to make a profit from reselling.

Please note that the above information is not providing advice on tax, investment, or financial services. We provide the above information without consideration for risk tolerance and a specific investor's financial circumstances.

Trading or investing in financial instruments such as NFTs may not be suitable for all investors. It does involve risk and the possibility of a loss of capital. There are no guarantees for profiting from buying NFTs, and it's advisable only to risk what you can comfortably afford to lose.

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FAQs

Should I invest in NFTs? Is it a safe investment?

No investment can be defined as safe because all investments are speculative.

NFTs are still relatively new, and nobody can predict which way they may go in the future. Could the NFT bubble burst? Possibly. NFTs are on the blockchain, so they are a concern for global warming. Recently, Beeple commented to the BBC that the current levels of NFTs could already be in a bubble.

In the same way that cryptocurrencies suddenly gained rapid adoption and momentum, it's also true that governments are opposed to decentralised finance.

The other concern is the chance of buying stolen artwork. In April 2021, fraudsters created replica artwork by Quing Han, a deceased digital artist. Thankfully, social media users alerted the Twinci platform, and they removed it.

Artists always face the prospect of fraudulent copies of their work, and digital art is no different. DeviantArt, the American art community, introduced an A1 tool capable of detecting potentially stolen artwork on NFT platforms, hopefully reducing the chances of fraudulent copies coming to market.

NFT investing is a high risk for new investors. Make sure you do plenty of research before investing, ideally speak to an expert NFT investor.

As for the value of an NFT, it entirely depends on demand. If no one else other than you likes artwork you have bought, you have no chance at reselling it.

Do I have to pay tax if I sell NFTs?

Yes, NFTs are classed as capital gains because they are collectable assets. Check the taxation laws in your country to confirm what payments are due before you invest in NFTs.

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