The popularity of non-fungible tokens (NFTs) is surging higher. As reported by Reuters, DappRadar data shows that sales of NFTs reached $25 billion in 2021. This was a stunning 260-fold year-over-year increase from the $94.9 million in NFT sales in 2020.
With some already selling for millions of real dollars, NFTs are understandably very high on some people's radars. If you're just starting your NFT journey, here are five terms that you'll want to understand.
1. What is an NFT?
It's not enough to know what the letters stand for; you must understand their meaning as well. Fungible means something that can be replaced with an exact copy. By being non-fungible, each NFT is necessarily unique. Cryptocurrencies, by contrast, are fungible. For example, each Bitcoin is the same as the other.
You've probably seen a lot of NFTs that were images -- primates are particularly prevalent. But technically speaking, NFTs aren't pictures, music, video game elements, or anything like this. Rather, NFTs are like certificates (receipts) associated with whatever the digital goods are.
Therefore, when you buy a NFT, you're buying the blockchain data. For example, I personally own a NFT. I've duplicated (the fungible part) the associated picture and have it on both my phone and computer. But there's only one copy (the non-fungible part) of the "certificate of authenticity," and it lives in a cryptocurrency wallet that I control.
2. What does "mint" mean?
Ownership of NFTs is verifiable because they're attached to blockchains. Ethereum and Solana are the two most common blockchains for NFTs. But creators don't use blockchains to create digital items -- that's not what blockchains do. Rather, items are created elsewhere and later uploaded. This is where "mint" comes in.
If you hang out by the NFT watercooler, you'll hear people using this term in different ways. Some people say that creators mint a NFT when they upload it to the blockchain. However, you'll also hear NFT buyers say they minted a NFT if they were the first-ever buyer.
Typically, creators don't create just one NFT; rather, they create collections. For example, there are 10,000 NFTs in the CryptoPunk collection.
When creators go through the process of minting, there's often a very publicized event. At a specified time and price, NFTs become available for sale on a marketplace launchpad. This event is also sometimes referred to as "the mint."
3. Why do people flip NFTs?
Let's say you want to buy an NFT from a 10,000-piece NFT collection on the day it launches. As mentioned, the time, place, and price is publicized. You'll connect your cryptocurrency wallet ahead of time. And as soon as it's time, you'll click the "buy" button and hope it doesn't sell out before your transaction processes. Some NFT collections sell out in a matter of seconds.
But here's the thing: You don't actually know which NFT from the collection you're buying. That's random. Maybe you'll get the one you wanted, but probably not.
After their launch, NFTs become available on secondary marketplaces like OpenSea or Magic Eden. If you own a NFT, you can list it on one of these secondary marketplaces for the price of your choosing.
Many people quickly offload their NFTs. This practice is called "flipping." This can be an effective strategy to make a quick profit. If the collection sold out in seconds, for example, many people likely missed out and will gladly pay more than the mint price on a secondary marketplace.
If flipping sounds appealing to you, keep in mind that blockchains have transaction fees (called gas fees). These can quickly eat into potential profits. Therefore, make sure you're taking this into consideration.
4. Why is an NFT's floor price important?
An NFT collection's floor price is the cheapest NFT from the collection currently for sale. For example, the cheapest CryptoPunk as of this writing is listed for almost 67 Ether, the token native to the Ethereum blockchain -- just over $200,000.
In my opinion, many NFT enthusiasts aren't planning to buy and hold for the long term; rather, they're hoping to make a quick gain by buying NFTs from new collections and then selling once they gain popularity.
One way to gauge popularity is by watching the floor price. A steadily rising floor price suggests demand is rising. By contrast, a steadily declining floor price could set off a domino effect of sellers -- each listing for slightly cheaper than the seller before them in a mad dash for the exit.
5. Beware of the rug pull
Not all NFT buyers are in it to make a quick buck. Many NFT collections come with a roadmap -- the creator has a long-term vision for how the profits will be used to build other things. This roadmap could include more NFT collections, video games, or projects in the metaverse. Some people intend to hold their NFTs so they can participate in the ongoing project.
Unfortunately, there are some bad actors in the NFT space. On Feb. 6, one NFT project called Balloonsville admitted on social media that it was a rug pull. "Y'all really believe anything nowadays," the account wrote before disappearing.
Balloonsville reportedly made around $2 million from minting 5,000 NFTs. Many buyers were there for the roadmap. However, a rug pull means that the project's creator(s) took the money and ran -- they aren't actually going to do what they said they would. Tragically, this happens all too often and easily because many NFT creators remain anonymous.
Marketplaces and launchpads are trying to solve this problem by improving the verification process. And Magic Eden is trying to make things right for Balloonsville NFT holders.
However, the rug-pull issue highlights the takeaway for this article: The NFT space can be wild and speculative. If you decide to buy your first NFT (like I recently did), make sure you only put in a relatively small amount of money -- funds you're OK losing in a worst-case scenario. Don't be lured into spending an exorbitant amount on NFTs in hopes of quickly striking it rich. As we've seen, there are many ways for things to go south.