Source: The Verge
Ever seen this GIF of this Nyan Cat that was trending years ago?
Well, this iconic GIF had since resurfaced and auctioned as a one-of-a-kind NFT for over half a million dollars.
You may be wondering, how can this animated cat picture that is easily downloadable sell for so much money?
Heck, there was even an NFT art exhibition that kicked off in Singapore a few months ago.
Are NFTs the in-thing now? What are NFTs? Are they a surefire way to make money? Are they notable investments? What are the risks involved?
Stick around to find out.
What are NFTs?
NFTs, also known as non-fungible tokens, represent ownership of a one-of-a-kind digital asset – from digital art to images – that can be traded and verified via a secure and distributed blockchain.
There are also various blockchains available, but the Ethereum blockchain is currently the most prominent.
The word fungible simply refers to how items can be exchanged for one another. As such, non-fungible means that something cannot be exchanged for another because they are different.
So, in simpler terms, NFTs are mutually unexchangeable and irreplaceable digital items of value.
How do NFTs work?
NFTs are minted by digital creators on a blockchain-driven NFT marketplace, which can then be bought and traded by others for a price listed.
The prices are listed in cryptocurrencies, which are digital currencies such as Ethereum (ETH).
The process of minting essentially refers to how the NFT is created, where a smart contract is drawn and stored on the blockchain.
If you’re interested to mint NFTs, we have a guide on how to create NFTs here.
Like all contracts, it provides documentation displaying the originator of the NFT. This provides the NFT with a unique digital signature and authentication certificate indicating so.
Here’s a simple analogy to help you understand better.
Think of it as an image you took on your phone, which you had minted into an NFT.
The NFT representing your image now contains valuable technical information such as an identification number (ID) or a name that shows you as its creator.
Regardless of whether it had been posted on social media or sent to others who now have a copy, everyone knows that you are the creator because of the unique ID.
Although it may appear as if everyone can own or view the NFT, the status of the original creator remains the same.
Now, what happens when someone wishes to purchase your image NFT on the marketplace?
Source: Simply Explained
With reference to the picture above, let’s assume that Token “EV90” represents the image NFT that you had minted previously, and you are User X.
If “EV90” gets sold to User Y, this transaction will be recorded on the blockchain as an individual ‘block’ – listing the price it has been sold for and the current owner (User Y).
Keep in mind, this does not erase you as the original creator on the blockchain.
Each ‘block’ of information ensures that it can never be tampered with, which effectively provides an accessible ledger of ownership and price history.
Despite those who may have a copy, User Y will be recognised as the official and formal owner of ‘EV90”.
At times, this is why owning NFTs can be compared to having digital bragging rights.
Types of NFTs
Now let’s talk about other forms of NFTs besides images.
The various types of NFTs include, but are not limited to:
- Artwork NFTs,
- Profile Pictures (PFPs)/Avatars NFTs,
- Generative Art NFTs,
- Collectibles NFTs,
- Photography NFTs,
- Music NFTs,
- Gamified NFTs,
- Domain Names NFTs,
- Tickets/Receipt NFTs
Artwork NFTs
Artwork NFTs are NFTs that are released randomly or in-small batch collections that follow a particular theme.
These types of NFTs are usually illustrated by digital artists, showcasing their creativity and imagination.
Source: Robb Report Singapore
Below are some examples of artwork NFTs:
- Digital Artist, Beeple’s $69 million NFT – “Everdays – The First 5000 Days”
- Love Bonito’s ‘Tiger Bloom’ NFT
Profile Pictures (PFPs) / Avatar NFTs
Profile Pictures (PFPs) / Avatar NFTs are a collection of avatars, consisting as many as 10,000, with a base avatar having a combination of unique attributes that are randomly generated and combined.
People who own an avatar NFT also typically use it as their profile picture, and to be part of the community that owns the same collection of avatar NFTs.
Sort of like a similar concept to Club Penguin, where penguin avatars can be dressed in various clothing styles to display a certain vibe.
Source: Straits Times
Popular PFP / Avatar NFTs include:
Generative Art NFTs
Just like it sounds, generative art NFTs are art that has been generated by a computer code in some way.
While often created by a generative algorithm or Artificial Intelligence (AI), some works created by physical robots would fall into this category as well.
Source: Open Sea
Some examples of generative art NFTs:
Collectibles NFTs
As the digital equivalent of trading cards or limited-edition comic books, collectible NFTs consist of differing levels of rarity and are coveted by enthusiasts from various fields.
Just like the boom of Pokémon and sports trading cards in Singapore, these cards can also be listed as NFTs on the marketplace.
One instance of such collectible NFTs would be the collectibles from One Championship, a Singapore-based mixed martial arts (MMA) association.
These NFTs can also come in various forms such as superfan badges, iconic sports moments, athlete portraits’, signed accessories, and iconic moves during fights.
Photography NFTs
Photography NFTs essentially have the same literal meaning, where they exist as a series of photographs captured of a subject placed in front of a camera.
It could even be a simple selfie, or even professional shots.
You might have heard about this Singaporean fashion model and influencer, Irene Zhao, who had generated about S$7.5 million – just by selling her photos as NFTs.
Check out another popular example of Photography NFTs:
Music NFTs
Music NFTs exist in short vocal or audio clips and can even range to hit singles released by popular artists.
They are often paired with digital art in jpeg. or gifs. formats, to create a better impact as an NFT.
To better illustrate, think of it as an album cover you see on Spotify or Apple Music.
Gamified NFTs
Gamified NFTs refer to NFTs that can be played in a game to earn digital assets. While some NFTs are part of the in-game experience, a game could also be built around an NFT collection.
Gamified NFTs allow the owner to earn on a Play-to-Earn basis, where they play to earn rewards and money in specific games.
Some games even allow the players to level up their NFT characters and engage in battles, where they can eventually trade and sell them with others to generate income.
Domain Names NFTs
Just like the address you typically type into your web browser, domain names NFTs are exactly that.
For instance, ‘www.google.com’ can also be listed as a domain name NFT on the marketplace.
Tickets/Receipts NFTs
Tickets/Receipts NFTs can range from a sale of a spot in an artist or performer’s event or even tickets of memorable events.
Often or not, these ticket NFTs hold much extrinsic value such as access to future events, exclusive fan clubs or special perks related to the artist.
One example of such NFTs can be seen in the launch of Jack Neo’s latest movie ‘Ah Girls Go Army (AGGA)’, where the launch of AGGA ticket NFTs guarantees owners to future AGGA movie-related events and merchandise.
What are the fees involved in NFTs?
The fees involved in NFTs are usually gas fees, conversion fees, minting fees, selling and purchasing fees, and cash-out fees.
Whether you’re buying, selling, or minting an NFT on different NFT marketplaces, you need to understand the fees involved.
You must not forget that there are many NFT marketplaces available with differing fees, with popular ones being OpenSea and SuperRare to local-based ones such as Metaviva.
Gas Fees
Source: Business Insider
Gas fees are basically the fixed costs involved in the purchase of NFTs.
Just like how transaction fees are involved in credit cards, any transaction made through the blockchain introduces a blockchain transaction fee called gas fees.
Gas fees have been known to fluctuate depending on the time of day. There have also been instances of gas fees exceeding the cost of an NFT, so this is something to be mindful of.
Conversion Fees
To trade on any NFT marketplace, setting up cryptocurrency wallets are a must.
This is where you will convert local Singapore Dollars into the cryptocurrency that your chosen marketplace uses. The fee that is imposed is thus called the conversion fee.
Minting Fees
Remember the smart contract that is created when you mint or create an NFT on a marketplace? That also requires a fee!
Considering the different platforms and blockchains available, creators may be required to pay anywhere starting from $0 to $500 to do so.
However, minting an NFT on OpenSea is free-of-charge, though they charge a fee on every sale or purchase transaction you make.
So, it really depends on which NFT platforms you are minting on.
Selling and Purchasing Fees
Source: NFT’s Street
For the purchase of an NFT, you can simply refer to the price listed for the NFT in the marketplace.
When a creator sells his NFT, certain platforms like OpenSea charge a percentage of their seller earnings which ranges from approximately 2.5% to 15%.
However, should someone decide to resell NFTs that they purchased previously, they are required to pay a royalty fee – which is typically up to 10% of the amount they earn from the sale of the NFT – depending on how much they set when they minted it.
Cash Out Fees
Let’s say you have successfully earned cryptocurrency that is now stored in your crypto wallet and wish to transfer it into your own bank or savings account.
This process involves the conversion of the cryptocurrency into Fiat currency (government-issued currency) through a crypto exchange – which thus imposes cash-out fees on the blockchain.
Now that you have read an extensive amount of information regarding NFTs, let’s talk about their advantages and disadvantages, and whether they are notable investments.
Advantages of NFTs
1. NFTs are scarce in nature
Copyright owners or minters have the ability to limit availability.
This generally means that they can decide to release limited drops of identical NFTs that follow a certain theme, although they will still be considered individually unique on the blockchain.
Therefore, this makes NFTs high in scarcity. This could potentially raise the prices of NFTs which may lead to higher returns since NFTs rely heavily on demand.
2. Digital Bragging Rights
When you buy an NFT, everyone on the blockchain acknowledges that you are its original owner.
It’s sort of how you own what everyone is interested in, building a huge following amongst the NFT community, especially in a specialised field of interest.
3. NFTs may give you perks and exclusive access
If you are an avid collector or are extremely passionate about an artiste for example, the perks that come with the ownership of NFT may motivate you in that sense.
As mentioned previously, NFTs like music NFTs for instance, may provide exclusive access to future events, exclusive fan clubs, or special perks.
4. Royalties
If you are an NFT minter, you receive royalties each time your NFT creation is sold on a marketplace.
Royalties are generally associated with a percentage of the sale price, and they are usually perpetual and effected by the smart contracts instantaneously.
Unlike traditional royalty payments, this removes the need for an additional intermediary which may sometimes lead to discrepancies and/or additional fees.
However, do take note that not all NFTs receives royalties, unless it is has been specifically coded and written into the terms of the smart contract.
5. Diversification to investment portfolios
As the saying goes, it is always unwise to put all your eggs into one basket.
As NFTs provides another alternative to traditional investments, such as stocks and bonds, this may help to diversify your portfolio with asset classes of various risk profiles – making it easier to achieve a better balance between risk and return.
Risks of NFTs
1. NFTs, just like cryptocurrencies, are unregulated and run on a decentralised network
Unlike regular currencies and fungible items, NFTs are not regulated by a governing authority.
Moreover, the Monetary Authority of Singapore (MAS) had even issued guidelines discouraging cryptocurrency trading amongst the general public.
2. Highly volatile nature
When it comes to selling and trading NFTs on the blockchain, it may have reached a point where there is seems to be high demand and valuation – so much that we do not know where exactly it is going to go in the future.
So, be aware that this market is likely going to swing quite dynamically.
An NFT could pivot to about a hundred times the price or even collapse the next day, making the nature of this investment class quite uncertain and volatile.
3. Little information available
Bear in mind, NFTs are essentially a brand-new market. There are not a lot of experts out there and the world is slowly learning more and more about NFTs.
With such differing opinions on NFTs, it may be difficult and complex to understand.
4. Security Issues
As NFTs rely solely on blockchain technology, which incidentally relies on the Internet, issues may arise when it comes to storing the cryptocurrencies used to trade NFTs.
There have been cases of hacks and thefts from cryptocurrency exchanges, so it is always best to tread carefully.
5. Many hidden costs involved
As you can tell from the numerous fees involved, trading of NFTs can be quite costly despite their somewhat lucrative nature.
What to look out for when choosing an NFT?
When choosing an NFT, it is important not to simply buy into the hype but to make sure you do proper research on its attributes.
This can mean referring to the previous price history and performance of the NFT, since it is readily available on the blockchain anyway.
Essentially, I believe in purchasing NFTs that are meaningful to you and whether it fits well into your investment portfolio.
It could be a great tool for diversification as mentioned, but you could fall into the wrong end of the spectrum if you are not careful.
You should also read up on the various NFT platforms available and their transaction fees, making sure that it aligns with your needs before you set up your cryptocurrency wallet.
Another tip – always look out for a seller’s verification which can be identified by a blue tick (just like Instagram or Twitter).
This acts as proof that these accounts are not impersonators and can be trusted to purchase from.
Conclusion
My verdict? I’m excited for what’s to come in the NFT landscape. I mean, it may seem like just hype and a quick “get-rich” scheme now, and the whole idea about digital bragging rights?
It’s insane – but that’s the whole point.
I mean, these speculations are indeed all about hype and market demand anyway, which ultimately drives the prices and value of investments up – albeit any new technology or digital breakthrough.
Thus, I believe that this new investment class has endless opportunities to grow and revolutionise the way we do things in the future.
After all, we’re moving towards a new wave of cryptocurrency and technology, and it certainly is a pity if we do not harness the knowledge that we’ve gained of NFTs.
Even if you are experienced in investing or a current crypto holder, you can certainly give NFT trading a try to see how you like it.
But, just like any investment, remember to do so responsibly and proceed with caution.
References
https://www.channelnewsasia.com/business/explainer-what-are-nfts-2320241
https://www.dbs.com.sg/personal/articles/nav/investing/nfts-explained
