NFT 101 - The Basics

What is an NFT?

Every NFT article starts by saying an NFT is a Non-Fungible Token.

For a while this put me off straight away, I had never heard the word fungible before, let alone non-fungible ??

Knowing what it means doesn't make any difference to whether you can enjoy or purchase an NFT. I have no idea how a car engine works but I still buy a car...but I will explain it anyway. (P.S. I barely know how the radio in the car works!)

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Fungible: Fungible items are things like gold ??

If you have 1 gold block you can exchange it for another gold block of the same size - they both have the same value. Similarly, two 1/2 gold blocks are the same as 1 gold block so you could exchange them.

e.g. 1 Gold = 1 Gold

and

1/2 Gold + 1/2 Gold = 1 Gold

Non-fungible: Therefore non-fungible means the opposite. One Non-Fungible item doesn't intrinsically have the same value as another. If we take the Mona Lisa painting, that doesn't have the same value as a painting my 5-year-old son does. You also can't divide the Mona Lisa into smaller parts and it still be worth a whole Mona Lisa.

e.g. 1 NFT ?≠? 1 NFT

Token: The token part of NFT is what you're actually buying when you're buying an NFT. It's like a certificate of authenticity for digital assets, be it a video, music file or a simple JPEG.

Like I said, you don't need to know this stuff, all you need to know is you're buying a unique piece of digital work with a certificate to prove it.

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What types of NFT are there?

In their most basic form, they are a JPEG. And yes you can right-click and save them!

But more and more NFT creators are building a community around their collections with other benefits for owners.

Let's start with the basic JPEG NFT.

Why would you buy a JPEG?

With a JPEG NFT the classic argument is that you don't actually own anything physical you're just buying code.

But hang on, if you're buying the Mona Lisa you're just buying a canvas with paint on in the shape of an unimpressed woman. So is there that much difference?

It's not what the 'thing' is made from, or how it's made, it's the value people attach to it.

Why is the Mona Lisa worth millions?

Because Da Vinci painted it and people say he's good! (I'm more of a Van Gogh fan myself) If Da Vinci came back today and created an NFT collection it would be worth millions because it's by Da Vinci.

To go back to the 'Right-Click Save' thing - If you had a poster of the Mona Lisa it's not the same as owning the actual Mona Lisa even though they look exactly the same.

Ok, so owning a unique bit of art is cool, but why else would people buy a JPEG?

1. ??Make money: Some people are jumping on the gold rush, hoping they can flip them and make money. Many people do, many don't. With most things, you need to do research to see which NFTs are popular and could be in high demand. To carry old the gold analogy because I seem to like it today: It's like prospecting where you put your gold mine. You might strike gold, you might get tin.
2. ???Display in the Metaverse: With Metaverses (Plural, because there are many right now) they are in their infancy, but many people are expecting they will be able to show off their NFTs in their future Metaverse home.
3. ??Support a creator: You might buy an NFT to support your favourite creator. Maybe a band you like has released tracks as NFTs. You might want to support them by purchasing one. But it's more than just slinging them a few quid/euros/dollars - you're now part of an exclusive community...which leads to my next point.
4. ??Be part of a community: More and more NFT projects are trying to create a community or club around their collections - let's look at this more next.

NFT Communities

To give more value to owners of their NFTs many creators are building up communities for owners, with exciting benefits.

These benefits can be things like:

• Invites to parties and holidays
• Financial rewards
• Access to private groups
• A share in a property
• As a ticket to concerts
• Use the NFTs in online games

There are many other examples but, you can see this is where a simple JPEG can become so much more.

What's in it for the creators?

Surely holidays and giving people free cash just for owning your art is expensive?

Well... it can be.

The reason creators do it is that every time an NFT is sold the original creator gets a percentage of that sale.

For example, Cryptopunk NFTs regularly sell for over $200k, if the creators get 2.5% of that sale (2.5% is typical could be more or less) that's $5k. looking at the sales for the last 24hrs they made $65k.

So creators are motivated to keep the demand there so they keep making money.

?Warning - Just because an NFT project says they will do these things doesn't mean they will. There are cases of creators building up huge hype for a project, selling the initial NFTs for millions than just disappearing (called a rug pull - you get them with cryptocurrency as well). That's why you see the more famous NFT projects going up in value more and more because they have built up trust. So people are happy to part with their money.

Summary

That's the basics! I didn't talk about blockchain, cryptocurrency or anything like that on purpose, it just confuses things. You can buy an NFT without ever having to go near crypto or know what a blockchain is.

In my last newsletter, I suggested downloading the VeVe app to your phone. This is a great app for beginners. You can purchase NFTs using their in-app Gems which you can buy using a credit card - no cryptowallet needed.

1 Gem is worth $1 so really easy to work out how much something costs

Plus they have NFTs from some huge brands (Disney, Marvel, DC) and have releases (or drops as they are called) almost daily.

One drawback...as it stands once you buy those Gems you can't convert them back again. This functionality is meant to be coming early this year. So for now any profits you make are stuck on the app. But with NFTs being launched from as little as $6.99 it's perfect to give it a go!

Final Tip!

The rule I follow when looking at NFTs is-> If this NFT I'm buying ends up being worthless would I:

A. Be happy owning it still - do I actually like it?

B. Be ok losing the money invested

If the answer to both of these is no, I won't buy.

*As always none of this is financial advice - I'm an idiot remember*