What Does NFT Mean? A Guide to Non-fungible Tokens

An NFT, or non-fungible token, allows buyers to say they own the original copy of a digital file.
Andy Rosen
By Andy Rosen 
Edited by Chris Davis

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The term NFT means "non-fungible token." NFTs are one-of-a-kind digital assets number that can convey ownership of digital content such as images, videos and music.

In some cases, NFTs have fetched staggering sums, like the collage created by artist Beeple that sold for $69 million in 2021. However, interest in NFTs has cooled significantly amid the overall market downturn for cryptocurrency and related investments.

Why would anyone spend hard-earned money on something that exists only online? It helps to understand how these digital assets work, what gives them value and some risk factors to consider if you’re thinking of buying one.

What an NFT is, and what it means to own one

An NFT allows its buyer to say that they own the original copy of a digital file, in the same way you might own the original copy of a piece of physical art or the master file of a music recording. 

It’s important to know that you don’t own exclusive rights to the content, as you would if you owned the rights to a book, for example. There are parallels in the physical world. You can take a picture of the Mona Lisa and print it on a coffee mug, much like someone could take a screenshot of an NFT image and print it on a mug. 

How an NFT works

Each NFT is unique. The NF in NFT — for non-fungible — best distills its most distinct feature. Something that is non-fungible is one of a kind. There can only ever be one version of any NFT. 

This makes NFTs different from cryptocurrencies or fiat currencies, which are fungible, which means one Bitcoin or dollar can be exchanged for any other. Dollars don’t just look alike, they are completely interchangeable. 

NFTs are stored on a blockchain. Understanding NFTs also requires at least a baseline understanding of how blockchain technology works. In short, a blockchain produces a record of activity, like transactions or a record of ownership, that is maintained by a distributed network of computers. You can add information to the blockchain, but you can’t remove or alter existing information.

Content creators can make NFTs through a process known as “minting,” in which they generate a representation of their file on a blockchain network. These distributed networks can keep immutable records tracking every time an asset is bought and sold, and who currently owns it.

The dominant network used for NFTs is Ethereum, though others including Solana and Cardano are also commonly used. Bitcoin’s network does not support NFTs.

NFT ownership can change. Once an NFT is minted, it can be bought, sold or traded. And even if someone makes a copy of the underlying file, the record of ownership can’t be changed without the permission of its current owner. The technology is complex, but broadly speaking the records are secured by the same mechanism that gives cryptocurrencies value by ensuring that a single token can’t be duplicated and used in multiple transactions at the same time.

» Keep learning: How to buy Bitcoin

What an NFT is used for

NFTs can theoretically be attached to pretty much any intellectual property, but activity so far has focused on a few sectors.

Art and music. Highly publicized examples of NFTs have been in visual art, especially videos and still images. Some owners use their NFTs as social media profile pictures, place them in online galleries or even use them as video conferencing backgrounds.

Collectibles. Traditional collectibles, like trading cards, have found an outlet in NFTs. Sports leagues including the NFL, MLB and NBA have all created digital collections memorializing things such as notable statistics and outstanding plays.

Gaming and virtual reality. NFTs can be attached to some unique in-game items such as weapons, outfits or special characters. NFTs could potentially make the sales of such items easier to execute and less dependent on central authorities such as the makers of games.

Longer-term, NFTs could play a role in virtual spaces known colloquially as the metaverse. Some forecasters project that people in coming years will spend more time immersed in virtual reality spaces they’ve created. And in these spaces, exclusive NFTs could take on a new level of status.

» Find out more:

What you can do with an NFT

You can sell or trade NFTs to others. If you’re interested in NFTs from an investing angle, this is important. You can transact directly with others, though some of the priciest NFTs are sold via extremely off-chain methods: at brick-and-mortar auction houses.

In addition to bragging rights, an NFT might be associated with real-world perks that are tied to ownership. Some owners of NFTs can get special rewards, admissions to events or other perks. For example, if you owned an NFT from the Bored Apes Yacht Club collection in 2021, you could have attended an owner-only event in New York City.

Ownership can offer different rights depending on the specifics of an NFT. In some cases, an owner might be able to control how a file is used, and under what circumstances it can be reproduced. 

Because the uses of NFTs can extend into everyday life, some say that NFTs are the kind of consumer product that can help get everyday people familiar with the concepts of cryptocurrency and blockchain technology.

An NFT, on its own, doesn't necessarily grant copyright ownership. Copyright protection is governed by U.S. laws that exist outside of the blockchain networks that track ownership of NFTs[1]. That doesn't mean a creator couldn't transfer a copyright upon the sale of NFT, but it's a good idea to read up on what you're getting before you make a purchase.

For instance, an NFT of a short music video by the artist Grimes sold on the online marketplace Nifty Gateway in February 2021, fetching about $389,000. But anybody can watch the video. It’s still on the website where it was sold. But only one owner can possess the actual NFT of the video, known as “Death of the Old.” 

It’s analogous, in a way, to physical art. You can post an Instagram of the Mona Lisa next time you visit Paris, or you can even buy a faithful real-world reproduction. But there’s only one version that’s commonly accepted to be the true copy, and that’s at the Louvre in Paris. It can be harder to discern the difference between an original and a copy of something when they are both digital — and often you can’t tell the difference — but the underlying idea is the same. The buyer can say they own the original.

Critics of NFTs question its value

Critics of NFTs often point to the squishy nature of what it means to "own" a digital file, and many people have pointed out that it's pretty easy to simply download a copy of an image linked to an NFT, even without paying for it. 

For those who are unconvinced by NFTs, these assets' prices are mostly a product of hype rather than true underlying value.

NFT creators

Anyone can create an NFT. The process of making an NFT is as simple as registering a record of ownership on a blockchain network. This is known as minting. It is a somewhat technical process, but there are a number of software solutions that do the dirty work.

Some NFT marketplaces will mint an NFT for you and list it without the need to register it on a blockchain unless it actually sells. This keeps network fees low, which can be costly. 

Keep in mind, though, that just because you made an NFT doesn't mean anyone's going to want to buy it. Successful NFTs usually require a lot of work promoting the project and building a community around it. Minting an NFT of a quick sketch and throwing it on an exchange probably won't get you rich.

How NFTs are valued

The value of NFTs is usually determined by what the market will bear. If you buy one as an investment, you’re betting that someone will eventually be willing to buy it for more than what you paid.

There are other ways that an NFT can carry value, however. Beyond the innovation of digital scarcity, some believe NFTs have the potential to change the relationship between content creators and consumers.

NFTs are built on digital “smart contracts,” which execute automatically when certain conditions are met. An artist could create a provision that gives them a cut of the proceeds any time their NFT changed hands beyond the initial sale. Similarly, a buyer who supports a struggling creator with an NFT purchase could potentially secure a share of future earnings from other projects via a provision written into a smart contract.

Creators have experimented with building other value propositions into NFTs. For instance, entrepreneur Gary Vaynerchuk’s VeeFriends NFTs come with free passage into his VeeCon business conference. Some restaurants have created NFTs that give transferable rights, like reservations, to whoever owns a token, similar to how season tickets work for sports teams.

Is an NFT a smart investment?

Because every NFT is unique, it’s impossible to make any kind of blanket judgment on their value. Some may rise in value. Others will surely fall, and some may never sell at all.

Generally, digital assets such as cryptocurrency are considered risky investments, which should comprise only a small portion of your portfolio. One common rule of thumb is no more than 10%. Additionally, buying and selling and NFT is a taxable event, and using crypto to buy an NFT is an additional taxable event. While this isn’t a negative or positive, it is important to remember.

Treyton DeVore, an investment advisor based in Kansas City, Missouri, who advises clients on digital assets, said you can consider NFTs an especially unpredictable part of your crypto portfolio.

In a 2021 interview, DeVore said that even if you hope an NFT will rise in value, the most important thing is to buy things you like from creators you want to support. That way, you still have something you can enjoy if you don’t make money.

“People like collecting things and putting them on shelves in their house so they can show people,” he says. “But with NFTs, if that becomes like your digital collectible, that becomes so much more visible.”

How to buy an NFT

The technology powering NFTs is similar to what’s used in cryptocurrency. If you already understand that, you’re a step ahead. Otherwise, you may have to get up to speed on a few basics. In general, if you want to purchase an NFT, you have four things to decide:

1. Where to buy an NFT

NFTs are sold in many ways, including through private sales, traditional auction houses and online marketplaces.

For most beginners, DeVore said it’s a good idea to start with a reputable online marketplace. Some well-known examples for art include OpenSea and Nifty Gateway. But there may be others depending on what you’re looking to buy. NBA Top Shot, which makes licensed NFTs based on basketball games and players, has its own marketplace, for instance.

2. How to select an NFT

Online shops allow users to search for NFTs based on the kind of art, the creator, the price and other filters. If you’re interested in buying one that has more cachet, look at famous collections such as CryptoPunks and Bored Ape Yacht Club.

Wherever you shop, be cautious. In a fast-growing and loosely regulated space, imitators and scammers can crop up quickly. Platforms often have verified accounts for notable creators, which can help you choose.

For lesser-known creators (whose NFTs are likely to be far more affordable), DeVore suggested looking at information such as what they’ve sold previously and how many of a given type of NFT they intend to make. If they haven’t set up an external website to provide information about their art, for instance, that could be a red flag.

3. How to pay for an NFT

Some marketplaces accept payment in fiat currencies such as U.S. dollars, but in other cases, you can’t use cash or credit cards to pay directly for an NFT. Prices are often set in the cryptocurrency used by the network on which the NFTs are registered. If a creator minted your NFT on the Ethereum blockchain, for example, you’d use Ether (ETH), the native token on the Ethereum network, to pay for it. If the blockchain is Solana, you’d use Solana (SOL), the native token on the Solana network. If you don’t already own crypto, the easiest way to get it for cash is on a centralized exchange.

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4. How to store an NFT

Before you buy, you may have to set up a cryptocurrency wallet that also stores NFTs. MetaMask is one wallet commonly used to buy and store NFTs and cryptocurrency.

Before you buy anything, though, make sure you have access to a wallet (or multiple wallets) able to store both the currency that you’re using and the NFT you want to hold.

Some services, such as Nifty Gateway, will hold your NFT for you, which can simplify the process if you’re willing to entrust your purchase to a third party.

Whatever you decide, you’re not alone if you’re feeling unsure about how to value digital ownership. People have argued for centuries about how to place a monetary price on art. NFTs may be just another round in that debate.

“With art, it is subjective value,” DeVore said. Whatever someone would pay, he says, "that’s what the value is at that time."

Frequently asked questions

No. NFTs use blockchain technology, just like cryptocurrencies. But cryptocurrencies are fungible, or interchangeable, while each NFT is unique, or non-fungible. In that sense, an NFT is more like buying a piece of art.

No. An NFT can be an image, a video, a sound, an object used in a videogame — anything that can be digital.

No. An NFT is always digital. However, some NFTs entitle the owner to certain real-world perks.

Different platforms have different specialties. For example, OpenSea is a popular option for art, while Top Shot is the go-to place for NBA NFTs.

Not necessarily. The ones you see on the news are usually expensive, but there are plenty of options that cost less than $20.

Yes. If you sell an NFT, you’ll owe taxes on your profit.

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