What Are NFTs? How Do They Work?

Non-fungible tokens, or NFTs, can be a bit confusing.... which is why we've broken down everything you need to know about NFTs.

January 11, 2022
PB Team

If you're reading this article, we bet you've heard about non-fungible tokens, or NFTs, and are wondering what the heck they are. 

They're all over the news these days. But how do they work? And how can you make money from them?

In this quick guide, we'll cover the basics of NFTs so you can decide whether you'd like to get into the game.

If you're an audible learner, you can also check out our YouTube video on the topic here.

What Are NFTs?

NFTs, or non-fungible tokens, are blockchain-based assets that are one-of-a-kind and verifiable. Each NFT represents a digital asset - for example, an artwork or a GIF.

The super-important thing here is that NFTs are one-of-a-kind. When you buy an NFT, you can rest assured that you own the only one exactly like it.

And therein lies the value of NFTs.

Anyone who collects anything — from ancient coins to Pokemon cards — knows that scarcity is the key to value. The rarer something is, the more valuable it becomes.

It's the same story with digital artwork.

NFTs vs. Cryptocurrencies: How Are They Different?

OK, so we know that NFTs are one-of-a-kind and thus "non-fungible." That's how they're different from cryptocurrencies like Bitcoin and Ethereum.

Each cryptocurrency is fungible, or equal in value. That means you can trade one Bitcoin for one Bitcoin, one Dogecoin for another Dogecoin, and even one Tiger King for another Tiger King. 

That's not the case with NFTs. Each one is unique and has a unique value.

However, typically, NFTs are bought and sold using cryptocurrencies. 

Which brings us to this big question...

How Do NFTs Work?

NFTs are held on a blockchain. A blockchain is a publicly distributed digital ledger that uses cryptography (think: codes) to protect sensitive information.

Most NFTs exist on the Ethereum blockchain, so you'll see most NFT transactions reported in ETH values.

Because NFTs use blockchain technology, it's easy to verify their ownership and certify their authenticity.

The act of creating an NFT is called minting. Anyone can mint an NFT as long as they have a crypto wallet and access to an NFT marketplace (more on that in a minute).

When you own an NFT artwork, object, etc., you have exclusive ownership rights. Each NFT can have only one owner at a time. 

And just as stocks are bought and sold on the stock marketplace and cryptocurrencies are bought and sold on crypto platforms like Coinbase, NFTs are bought and sold on specialized marketplaces.

What Can Be an NFT?

Any digital file can become an NFT.

Many NFTs represent internet memes or pieces of digital art. But we've also seen NFTs in the form of video game skins and accessories, as well as virtual real estate. 

Musicians are also hopping into the NFT market. The Weeknd recently made $2 million by selling unreleased tracks as tokens. And rapper Nas is selling royalties to songs in the form of NFTs.

As tech companies continue to build out the metaverse — an interactive digital universe where users can attend virtual concerts, buy products, and hang out with friends — we'll see that practically everything can become an NFT.

What's the Most Valuable NFT?

So far, the most expensive non-fungible token ever sold was a digital collage called Everydays — The First 5,000 Days. Created by American artist Beeple, the artwork fetched $69 million at a March 2021 sale at the prestigious Christie's Auction House.

Not all NFTs are fine art, though. Remember the video "Charlie Bit My Finger" that went mega-viral on YouTube back in 2007? An NFT representing the video's ownership sold for $761,000.

Other notable NFT sales have included Twitter founder Jack Dorsey's first tweet, which sold for nearly $3 million, and the original source code for the world wide web, which sold at a Sotheby's auction for $5.4 million.

That said, there are plenty of NFTs currently for sale for as little as $1.

How to Buy an NFT

If you've decided to start owning NFTs for yourself, you'll need to get set up with both a funded digital wallet and an NFT marketplace account.

You can easily get a digital wallet through Apple Pay, Google Pay, PayPal, Venmo, or even your bank. Chances are, you probably already have one on your phone.

Because most NFT marketplaces use the Ethereum blockchain, you'll probably want to load up on some ETH. However, check the NFT marketplace you're interested in using to make sure you're using the right cryptocurrency. 

You can buy cryptocurrencies through a platform like Coinbase or Kraken. But even PayPal and Robinhood offer cryptocurrency trades. 

Once you've put some crypto in your digital wallet, it's time to get started on a marketplace.

What Are the Top NFT Marketplaces?

There are loads of NFT marketplaces on the internet these days.

As a beginner, you're probably best off starting with one of the tried-and-true most popular platforms. These include:

  • OpenSea: This is currently the biggest NFT marketplace. It's free to sign up and check out different NFTs on offer. It's also easy to use OpenSea for minting your own NFTs.
  • Rarible: Some of the biggest brands (such as Taco Bell and Twitter) partner with this platform to issue NFTs. You'll find all sorts of digital assets here, from art to music.
  • NBA Top Shot: NBA NFTs are big with basketball fans. You can buy "collectible moments" (video clips) from basketball's history and other B-ball-themed tokens on this platform.
  • Foundation: This one feels like a fine art gallery. You'll be able to browse and bid on serious NFT art here. (In other words, it's a bit pricey but really fun to look at!)

Frequently Asked Questions

Are NFTs safe to buy?

No investment is 100% risk-free. That said, NFTs are riskier than trading, say, stocks. That's because the market for these digital art assets is unregulated. Anyone can make or sell an NFT, and there are plenty of scams around. And keep in mind that each NFT asset's true value is equal to whatever someone else would want to spend for it.

While it wouldn't be wise to put all of your investment money in NFTs, they can be a fun speculation and a great way to support your favorite artists.

Are NFT transactions taxed?

Yep. If you sell an NFT asset at a profit, you may be subject to capital gains taxes - just as you would if you sold a stock. Although the IRS hasn't made it exactly clear how it will consider NFTs for tax purposes, it's possible you might be taxed at a higher collectibles tax rate than the rate that's applied to stocks.

The Bottom Line

Browsing NFT marketplaces and investing in a favorite artwork or two can be a fun way to spend the time. 

But if you're serious about building an NFT collection and making money, you should join the official Titan Alerts Discord server. You'll receive real-time trades, exclusive NFT offers, and more.

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