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Non-Fungible Tokens (NFTs) Definition – Should You Invest in Digital Art?


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Technology has changed the world in many ways. Today, illnesses that once had few to no treatment options are being cured, vehicles are able to run on battery power rather than fossil fuels, and video chats take place between people on different sides of the planet.

But how far will technology go when it comes to changing the way consumers see the world?

Recently, blockchain technology — the same technology that led to the cryptocurrency craze that sent Bitcoin to values in the tens of thousands of dollars range — has enabled a new trend. Collectors and investors are paying hundreds of thousands or even millions of dollars to own digital collectibles known as non-fungible tokens, or simply NFTs.

What Are NFTs?

NFTs are pieces of digital art that live on the blockchain network, which can come in several forms. Some of the most popular types of this digital artwork include memes, video clips, pictures, music, and even tweets.

Yes, you read that right — tweets published on Twitter can be turned into NFTs and sold, but we’ll get to that a bit later.

An important aspect of NFTs is that they’re non-fungible. Fungibility simply means that the commodity has more than one unit, all of which are the same and interchangeable, with each of its parts being indistinguishable from the other.

For example, the United States dollar is a highly fungible asset. According to TitleMax, there are currently 11.7 billion $1 bills in circulation in the U.S., all of which are worth the same $1. Due to their fungibility, you can lend a few of these dollar bills to a friend, and when you’re paid back, the value of the bills you receive will be indistinguishable from the bills you lent out.

Non-fungible assets are essentially one-of-a-kind. Think of the Mona Lisa, one of the most famous paintings in the world. The Mona Lisa is non-fungible. If something were to happen to the Mona Lisa, it could be replaced, but the painting put in its spot would never fill the void left behind by the unique original piece of art.

Of course, you can’t tokenize a physical piece of art, but the idea of NFTs is to create digital artwork that can be owned by a single person and be just as irreplaceable as the Mona Lisa.


How Were NFTs Created?

The non-fungible token concept started on the Ethereum blockchain, home to the Ethereum (ETH) cryptocurrency. Unlike the Bitcoin blockchain, the Ethereum blockchain was developed as a network of smart contracts, a platform on which developers can create assets of value through a verified, interconnected ledger of communication and ownership.

Essentially, the ETH blockchain was developed to take digital assets to the next level, and it has done just that.

NFTs came into existence when two digital artists, Matt Hall and John Watkinson, developed Crypto Punks, which became publicly available in 2017. These highly pixelated digital images are one-of-a-kind — at least, as one-of-a-kind as digital images can be — and they fetch a pretty penny. In fact, CryptoPunk #3100 sold in March 2021 for a whopping $7.58 million.

That’s not the only NFT on the blockchain network that’s fetched millions of dollars either. There are tons of NFTs that have sold for some astonishing prices.


Largest NFT Transactions

Some in-demand NFTs come with premium prices. Some of the most jaw-dropping NFT transactions that have taken place thus far include:

  • The First Tweet. Twitter co-founder Jack Dorsey recently held an auction to sell the first tweet ever published on the Twitter platform. According to CNBC, a collector paid a whopping $2.9 million to own that tweet.
  • Grimes Digital Images. The musician Grimes has recently jumped into the NFT game, creating tokens of her own. The most expensive token she’s sold to date fetched nearly $400,000, according to The Independent.
  • Lebron James. According to NPR, an NFT basketball card of Lebron James attracted a $200,000 price tag.
  • Dragon. A “cryptocollectible” called CryptoCat #896775 from CryptoKitties, also known as Dragon, has a price tag of more than $1.2 million.
  • Beeple Artwork. The most expensive NFT sold to date is a piece of artwork known as “EVERYDAYS: THE FIRST 5000 DAYS.” The token was sold at Christie’s Auction House for an eye-popping $69.3 million, according to Decrypt. The token was created by Mike “Beeple” Winkelmann, an artist who has become famous as a pioneer in the non-fungible token space. The token is essentially a collage of 5,000 of Beeple’s artworks from early in his career, which show how his art has progressed over time. The NFT was the first piece of digital work that has ever been sold at the world-renowned auction house.

Although no token has come to be thought of as priceless as the Mona Lisa has, these digital collectibles are becoming overwhelmingly popular. And because there’s only one of each token available, the law of supply and demand is sending the price of these digital masterpieces through the roof.


Pros and Cons of NFTs

As with any other purchase of artwork, when you purchase an NFT, you’re making an investment. After all, there’s a massive secondary market for art, whether the work is physical or digital.

As with any investment, there are pros and cons to consider before trading your hard-earned money for a digital masterpiece.

NFT Pros

Some of the benefits collectors focus on when buying non-fungible digitized artwork include:

1. Value Growth

As with any other investment, there’s always the potential for growth in the value of your investment when you buy these tokens.

For example, CryptoPunk #3100 first sold for $2,127 on July 6, 2017. The collector who owned the artwork refused to sell until March 2021, although whoever it was received plenty of offers.

Nonetheless, that collector is probably doing backflips considering the more than $7.5 million return on investment they earned when they sold.

2. Ownership of Something Unique

These digital collectibles are non-fungible, which essentially means they’re irreplaceable. There’s a good feeling when you know you own a one-of-a-kind piece, whether it be a painting, a piece of furniture, or a digital image, audio clip, or other digital asset.

3. Excitement

There’s a ton of excitement centered around blockchain technology at the moment. Some believe the technology could lead to as significant a shift in consumer behavior as the invention of the Internet did.

That’s an exciting notion, and by purchasing an NFT, you’re actively taking part in that technological evolution.

4. Data Record

Records of authenticity and chain-of-ownership for valuable artwork is sometimes tough to maintain. This is where NFTs shine.

Existing on the blockchain allows clear ownership records of all NFTs, meaning your digital artwork should theoretically never be subject to theft or having its authenticity questioned.

Some believe the technology will not only shine as a way to manage digital collectibles, but eventually could evolve as a better way to manage and control sensitive data and records.

NFT Cons

NFTs are interesting, there’s no doubt about it. But there are some serious drawbacks to sinking your money into them. Some of the most significant drawbacks include:

1. Physical Art Can’t Be Digitized

The reasons to own physical art and the reasons to own digital art are often different. You can’t digitize physical art. There’s an allure to seeing a one-of-a-kind painting with your own eyes that these tokens simply can’t provide.

2. Uncertain Value

Even for experts, NFTs are confusing assets. When you purchase one of these non-fungibles, you’re not necessarily purchasing the copyright to the art.

People are still able to find copies on the Internet of the art for which you own the token, and there’s nothing stopping them from copying and pasting these files on social media, essentially showing off and sharing what you may have paid millions of dollars for.

Essentially, when you buy these assets, all you really own is a record saying you own the token behind the original asset. The real question here is, “How much value is there in owning an asset you don’t actually control?”

Depending on how collectors answer this question in the future, those who invested all that scratch into these tokens may be left holding a digital record that’s not worth much.

3. Environmental Cost

The environment is a hot topic of debate as of late. Any record entered into the Ethereum blockchain takes significant computing, which requires the use of significant amounts of energy.

So, widespread trading in NFTs and other blockchain-based assets isn’t necessarily an environmentally friendly process.

In fact, a recent Cambridge University study suggests just about everything having to do with the blockchain is highly unsustainable from an environmental standpoint because of the amount of energy used.


Where to Buy NFTs

If you’re interested in buying NFTs, you’re not alone. Regardless of the drawbacks, the rising demand for these assets is why some of them have sold for millions of dollars.

So, what if you want to get your hands on one of these digital pieces of artwork?

Well, that depends on the type of NFT you’re interested in owning. Some of the most common marketplaces among investors in these tokens include:

  • CryptoKitties. If you’re interested in buying your own member of a breed of digitized cartoon cats, you can do so by going to CryptoKitties.co. These digital cats range in price from $10 each to millions of dollars, with the oldest CryptoKitties garnering the highest demand and fetching the biggest price tags.
  • CryptoPunks. If you’re interested in owning one of the digital assets that started it all, you can do so at LarvaLabs.com.There, you’ll find digital pieces ranging in price from around $35,000 to millions of dollars.
  • OpenSea. OpenSea.io is the world’s largest marketplace for digital art. On the platform, you’ll find the classics like CryptoPunks and CryptoKitties, alongside newer forms of crypto-related art ranging from digitized images to trading cards, sports tokens, virtual worlds, and other collectibles.
  • Decentraland. Decentraland is essentially an entire digital world that lives on the blockchain. At Decentraland, users can buy and sell pieces of digital land, avatars, artwork, games, and more. The platform also gives users the ability to test their creativity by creating their own digital artworks. So, not only can you buy works created by others, you can try your hand as a digital artist.
  • Nifty Gateway. Nifty Gateway is where you’ll want to go if you want GIF-style image assets. Instead of static assets that don’t move when you load them, these assets feature animations that move, depicting a scene. The prices of “Nifties” generally range from a few hundred dollars to tens of thousands of dollars.
  • NBA Top Shot. Are you a basketball fan looking to take your ownership of game-related collectibles to the next level? If so, you may find just what you’re looking for at NBA Top Shot. NBA Top Shot offers fans the ability to buy and sell officially licensed video highlights as sports collectibles, which act as digital trading cards. As is the case with physical trading cards, these digital cards can be purchased by the pack or on a card-by-card basis. The prices of these trading cards range from a couple hundred bucks to tens or even hundreds of thousands of dollars.

Will This Transformation of Art Collection Last?

This is the million-dollar question. From an investment standpoint, NFTs should be looked at as highly speculative bets. The interest we’re seeing surrounding digitized art may be nothing more than a fad as the masses pile into this new, mysterious collection opportunity.

Art is only worth the value placed on it by collectors. Historically, the most popular artists didn’t achieve popularity until long after they died. Think of the most expensive paintings on earth today: Leonardo da Vinci’s “Mona Lisa,” Jackson Pollock’s “Number 17A,” and Paul Cézanne’s “The Card Players.”

If “EVERYDAYS: THE FIRST 5000 DAYS” is worth nearly $70 million today, what will it be worth a century from now? No one knows, but a realistic possibility is that the answer is: nothing.

It all depends on whether collectors will treasure and covet this artwork in the future the way we value the works of classic painters today.

While there are plenty of proponents of NFT art and the growing market circling around it, there are very real problems with these digital artworks that may lead to their demise.

Think about it this way:

Once the like-new shine of the blockchain begins to dull, it won’t be as exciting for the masses to take part in it. At this point, there’s a strong probability some collectors will look at what they own and ask themselves: “Why did I ever buy this?”

NFTs are digital tokens, but don’t give the owner the full rights to the image or artwork they represent. Beeple still owns the copyright to “EVERYDAYS: THE FIRST 500 DAYS.” The guy who bought it only owns a digital token that represents the art. Is there really long-term value in this digital, intangible asset that is only a store of value because the owner says it is?

That question is yet to be answered, but jumping in on frenzies like this has created market bubbles in the past and left many investors holding a bag of losses.

Although there’s a real possibility these digital tokens will maintain their value, there’s also a real possibility that investors are going to have a “slam on the brakes” moment, sending the values of these tokens to the bottom.

Pro tip: If you’re looking for other ways to invest in art, consider Masterworks. This platform is open to anyone and blue chip art has historically outperformed the S&P 500 since 1995.


Final Word

NFTs are fun. They offer you a way to own something on the blockchain that’s not a cryptocurrency. But as an investment, they should be looked at as highly speculative, extremely risky assets.

There’s real value in the blockchain and what it can do for humanity in the future, but the ability to sell relatively shaky “ownership” of digital assets to consumers isn’t where that long-term value lies.

If you want to take part in the blockchain and see these tokens as your opportunity to do so, by all means, go for it. But do so responsibly.

Buy low-cost NFTs with the mindset that you’re enjoying getting involved, not with the mindset that you’re going to get rich, because the floor could fall out of the market at any time.

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