Still Not Sure What an NFT Is? 10 Things to Know

Non-fungible tokens (NFTs) are unique crypto assets. Unlike cryptocurrencies, they are not exchangeable for another token of the same value. NFTs are authenticated through the blockchain and are often used to denote ownership of digital artwork or collectibles. The owner might purchase these because they like the item, they think it's a good investment, or for the social cachet. Like real-world works of art or collectibles like baseball cards or comic books, NFTs have value because a critical mass of people believe that they do.

At this time a year ago, NFTs were virtually unheard of. While they have existed for years, their popularity surged in 2021 as major auction houses held blockbuster sales for items such as Beeple's Everydays: The First 5000 Days, which fetched $69 million.

Whether NFTs are a lasting trend or just a bubble isn't clear yet, though there are good arguments for both sides. If you're looking to learn the basics of NFTs, keep reading to see 10 things you should know.

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Ethereum, the second most valuable cryptocurrency, has become the one most closely associated with NFTs. Many are secured to the Ethereum blockchain through other cryptocurrencies that are also used for transactions, such as Solana.

Because they exist in the Ethereum blockchain, Ether tokens -- the currency of Ethereum -- are often the preferred way to buy and sell NFTs.

NFT adoption began to accelerate in January 2018 when Ethereum added support for them with a standard called ERC-721, which led to a boom in collectible sets like CryptoKitties, a set of virtual animated cats based on a video game.

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Because NFTs are closely tied to internet culture, memes are also central to them. Memes are images that are repeated and shared often enough on the internet that they became readily recognizable. They're a form of social currency on the internet.

Some of the better-known meme NFTs are CryptoPunks, a set of 10,000 8-bit characters that are all unique but belong to the same set. The Bored Ape Yacht Club, similarly, is 10,000 unique images of apes that also look alike. The recognizability of these caricatures helps make them familiar to internet users and has driven an increase in value of CryptoPunks and Bored Apes. A single CryptoPunk, for example, typically sells for $350,000 to $500,000.

NFTs may be most closely associated with digital art and collectibles like CryptoPunks, but they're also crucial to how the metaverse functions. The metaverse refers to a 3D internet or an "embodied internet," as explained by Mark Zuckerberg, co-founder of Meta Platforms, formerly known as Facebook.

NFTs are crucial to authenticating ownership of virtual real estate and the tokens that are displayed in the metaverse. Part of the interest in owning NFT art is to show it off in virtual ecosystems. For instance, NBA star Steph Curry and Under Armour just released $333 NFT sneakers that sold out almost immediately. Owners of those NFTs can wear those shoes in the metaverse.

NFTs are best known for the role they play in virtual worlds like crypto and the metaverse, but they also have real-world applications.

For example, NFTs can take the place of a real estate deed. Currently, homeowners must pay up to thousands of dollars, at times, for title insurance to verify that they're buying the home from the rightful owner. An NFT would eliminate the need for and the cost of doing this.

Because an NFT authenticates ownership in an immutable and easily verifiable way, it could also be used for purposes like verifying ownership of a car or concert tickets. This application of NFTs is often known as smart contracts since they are self-enforcing.

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If you're interested in buying NFTs, or at least seeing the marketplaces where they're sold, check out a site like Zora, OpenSea, or Rarible. These marketplaces function much in the way as eBay, Etsy, or any other e-commerce site does, with sellers listing their wares for sale.

If you're curious about NFTs, it's worth taking a look a these sites as it will give you a sense of the kinds of NFTs on the market and the prices associated with them.

If you want to buy an NFT, you will likely need a crypto wallet, which you can get from an exchange like Binance, Coinbase or Robinhood, or go to MetaMask, a crypto wallet designed to be used with Ethereum.

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In less than a year, NFTs have gone from an obscure crypto product to mainstream to the point where big brands are getting involved. Among the national and global brands that have launched their own non-fungible tokens are Yum! Brands' Taco Bell, Campbell Soup, Adidas, and Nike.

Brands naturally want to be where the eyeballs are, and with interest exploding in NFTs and the metaverse, it's not surprising that they would seek to capitalize on it. The tidal wave of money flowing into NFTs has also made selling them a no-brainer for big brands.

For example, Anheuser-Busch InBev's Budweiser sold a collection of 1,936 unique digital cans in just a few minutes. On resale sites, some of the cans are selling for upward of $20,000.

Similarly, Nike just bought a virtual sneaker company, showing its intention to dominate the virtual sneaker market much like it does the sneaker market in the real world.

NFTs aren't the only crypto asset that have boomed this year. Cryptocurrencies have gone from an afterthought before the pandemic to around a $2 trillion asset class. Year to date, Ethereum is up more than 400%, and other cryptocurrencies like Dogecoin, Solana, and Shiba Inu have exploded in value, gaining 10,000% or more.

That boom has made thousands of crypto bulls into millionaires and led to a huge windfalls for those who were early into those currencies. NFTs have become so expensive in part because many of the people buying them are flush with cash from their crypto winnings. For some of these investors, NFTs are a way of diversifying from other crypto assets while staying in crypto.

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The huge sums of money being forked over for NFTs have a lot in common with history's bubbles and classic bubble psychology. Many NFT buyers believe that somebody will be willing to pay more for the token than they paid, known as the greater fool theory. So far, that theory has proven true with NFTs like CryptoPunks, but markets can be fickle and investors should be wary of paying hundreds of thousands of dollars for a nonproductive asset. Unlike a share of a stock, an NFT for a piece of digital art doesn't give you any claim to a business or cash flow.

In many ways, the rise of NFTs is reminiscent of the original tulip bulb bubble in Holland, or more recently, Beanie Babies, a collector's item that soared in value in the late '90s, though some of the plush toys are still listed in the thousand-dollar range on resale sites.

NFTs could very well be in a bubble, but that doesn't mean that the underlying technology isn't useful. The dot-com bubble, for example, led to hundreds of internet companies going bankrupt and nearly every other one falling sharply on the stock market, but the internet itself remained transformative. The cause of the bubble was the dislocation between the valuation of internet companies and their viability as businesses.

A similar relationship could be true for NFTs. Eventually, the pipeline for digital collectible demand is likely to slow, but there are a number of useful applications for non-fungible tokens that should ensure that the technology remains, even if the multimillion-dollar prices for some of these tokens prove to be more of a fad.

Along with cryptocurrencies, NFTs, and the metaverse, Web3 has become another buzzword that you need to understand if you're interested in this space.

Web3 refers to the next frontier of the internet, a decentralized internet where power rests in the hands of individuals on the blockchain rather than big tech companies like Apple, Facebook, and Alphabet's Google.

If cryptocurrencies like Bitcoin and Ethereum are the tools for buying and selling items on Web3, NFTs are necessary for conveying ownership of digital objects.

In other words, if you're bullish an Web3, you should also be bullish on NFTs. If the internet is going to move past its current state where control is siloed among a few big companies, NFTs will play a central role in that process.

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NFTs and the rest of the crypto ecosystem represent a new frontier in technology. Like many new technologies, it's not quite clear what will become of it. The internet today, for example, looks much different than it did 25 years ago, but technology isn't slowing down and developers will continue to push the boundaries of the blockchain, cryptocurrency ecosystems, and Web3.

Therefore, it's worth paying attention to what happens with NFTs as they are poised to play a major role in the next iteration of the internet. While some of the prices associated with NFTs may be unsustainable, the technology underlying them is valuable and will gain in adoption even if some forms of NFTs prove to be a bubble.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Jeremy Bowman owns Ethereum, Etsy, Meta Platforms, Inc., and Nike. The Motley Fool owns and recommends Alphabet (A shares), Alphabet (C shares), Apple, Bitcoin, Coinbase Global, Inc., Ethereum, Etsy, Meta Platforms, Inc., Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool recommends Anheuser-Busch InBev NV and eBay and recommends the following options: long March 2023 $120 calls on Apple, short January 2022 $82.50 calls on eBay, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.