With the advent of NFTs, it is possible to own a piece of the internet. For example, the first tweet from Twitter’s boss, Jack Dorsey, was sold for more than 2.9 million dollars. The first Wikipedia page cost the new proud owner a whopping $750,000. There are now NFTs of various digital items such as memes, music, games and valuable artwork. The media attention given to NFTs, the large sums for which they cross the virtual counter and the even steeper price increases that popular NFTs subsequently experienced indicate that 2021 was the year the technology broke through to the general public. Even American stars are now trading in abundance. But what exactly is an NFT and how do you buy one?
An NFT is a Non-Fungible Token: a non-fungible and irreplaceable digital certificate of ownership. This certificate contains a link to a digital object, such as a meme, digital art, or a tweet. However, as the owner of an NFT, you do not own the object or its copyrights. You only own the certificate. You can create this certificate digitally, but it only gains value if you add it to the blockchain, a public database. What makes blockchain so special is that this database shared by a network of computers is immutable and you cannot delete anything from it. This makes the NFTs unique and scarce and therefore attractive to investors and collectors; thanks to NFTs, in a digital world where everything can be copied, suddenly there is a way to shout to the outside world that you have the ‘original’.
1. How do you buy an NFT?
Everyone who buys an NFT goes through the same three steps: you collect information about the NFT, make practical preparations such as filling your crypto wallet and press the pay button. In its online manual How to buy an NFT technology expert Jarno Duursma explains each step in more detail.
Step 1. Inform yourself well. After all, you don’t want to get scammed or make a worthless purchase. “To start with, you go to an NFT marketplace,” Duursma explains over the phone. There are several marketplaces, for example OpenSea.io, Rarible.com and Foundation.app. There you can see the most popular NFT projects and find NFTs that appeal to you. An NFT project consists of a collection of NFTs.
“Let’s say you’re interested in Sushiverse, a fun series of sushi cartoon NFTs,” Duursma continues. “Then it’s good to check the reliability of the project and the seller in advance.” You can do this in the marketplace itself. For example, look at the price increase or decrease within the last 24 hours or 7 days. A sharp drop is not a good sign and may mean you should wait to buy. There are other indicators as well. If you look at the trading volume, you can see if there is enough demand for NFT. This information is important if you intend to resell NFT. Because before you know it, you’ve bought a worthless piece of digital sushi.
As with many types of resource research, Google is your best friend here. Do your research and examine what is being said about NFT on websites. Visit the official Twitter profile. “Does it have many followers and does the NFT project get a lot of attention? But be careful: if you see many anonymous accounts on Twitter, the risk is greater”, warns Duursma. Because the seller may have created fake accounts to make his project appear more popular than it actually is. NFT fans also gather in droves on the chat platform Discord. Here you can also check the popularity of the collection. You also have to be careful here: “There are a lot of people on Discord who seem helpful but are actually after the contents of your crypto wallet,” says Duursma.
Also read: ‘NFTs are a digital revolution in the art world’
Step 2. Take care of the practical. Create a crypto wallet. It is a program in your browser that you store your NFTs and cryptocurrency with. “MetaMask is the most widely used ‘NFT wallet’ and works in most modern browsers, such as Chrome or Firefox,” advises Duursma. Then you still have to fill the digital wallet with digital money. The cryptocurrency Ether is a widely used means of payment when purchasing NFTs. The vast majority of NFTs are on the popular Ethereum blockchain, and transactions on this blockchain are mainly paid with cryptocurrency Ether. You can simply buy Ether with iDeal on a website like Litebit.eu. Your final practical preparation is to create a profile on an NFT marketplace. This is where you link your crypto wallet to your profile.
Step 3. The purchase. You do this by pressing the ‘buy now’ button. But then you still have to pay for the transaction itself by registering your purchase in the blockchain. “You pay money to miners, computers responsible for processing transactions. But because the network is so busy, it can go from $50 to $500 or $600 per transaction.”
2. How is the value of an NFT determined?
The value of an NFT is comparable to the value of Pokémon cards. Like the paper ticket, the digital NFT is not worth much on its own. External factors determine the price, such as cultural value and nostalgia. For example, one of the most indulgent memes of all time, ‘Doge’, was auctioned as an NFT for around $4 million. The meme is an iconic photo of an enthusiastic looking Shiba Inu dog and thus has a high nostalgia value for meme lovers. In addition to the intuitive valuation, the expected increase in value can be the decisive factor. A common motive in NFT trading is simply to make money, to speculate. Scarcity arises because an NFT is a unique and immutable certificate of ownership. And that creates value.
Australian software developer Geoffrey Huntley doubts whether NFT is really that unique. He is the founder of The NFT Bay, an online art project that pokes fun at the NFT hype. The website resembles the infamous The Pirate Bay, where you can illegally download movies, series, programs and games. On NFT Bay you can find 15 terabytes of NFTs. It is not the images associated with the NFTs, but the NFTs themselves. Huntley describes NFTs as “instructions for finding a picture”. In this sense, an NFT is a proof of ownership with a link to an image. “You buy a digital receipt in the blockchain, but you don’t get any intellectual property rights. It’s fun,” laughs Huntley.
With his NFT Bay, Huntley disputes the value of NFTs: “I can make a meme, put it on a website and turn it into an NFT. Then I try to sell it for a thousand dollars. But then someone else can come and make a ten dollar NFT that leads to the same website with the same meme. There are then two digital receipts referencing the same meme, and then there is no longer a scarcity.”
Also read: ‘NFTs Bring Possession and Scarcity Back to Music’
Huntley dismissively calls what NFT buyers are doing “trades in digital status symbols.” But despite his skepticism, enough people are willing to pay for a status symbol or nostalgic value. If the buyer knows he has the original NFT, it doesn’t matter if there is a counterfeit on the way. He knows that he has the original in his hands. And it feels good because he can brag about it to his friends, or because the object his NFT refers to has intrinsic value to him.
3. What are the dangers of buying an NFT?
Huntley warns, “When you buy an NFT, you have to do a ridiculous amount of research or you’re just getting ripped off.” While it is illegal on the original Pirate Bay site to obtain files that do not belong to you, it is completely legal on Huntley’s website. That’s because the NFT market is a lawless place. “Everything that is completely illegal on the regular market is allowed on the NFT market. Anyone can do anything, anonymously,” says Huntley. And that’s why the scammers have free rein.
Within the NFT world, fraudsters are active who manipulate the market by collectively increasing the popularity of an NFT. They do this by selling them to each other, which creates trading volume and increases the price. After pumping up the price and popularity of an NFT, they sell it to an unwitting outsider.
Thus, the NFT market remains a wild west for crypto cowboys. But anyone who dares to enter this trading world, preferably with money he or she can spare, acquires the right to present a receipt on the blockchain.
A version of this article is also published in NRC Handelsblad on 24 January 2022