What are NFTs? Everything you need to know about crypto collectibles


A virtual artwork titled “Every Day: The First 5000 Days.” Created by digital artist Beeple, it is the first NFT-based artwork to be auctioned at Christie’s.

Christie

From art to sports stickers, people are spending millions of dollars on digital collectibles.

These crypto collectibles, known as NFTs, have exploded in popularity lately. A video clip created by digital artist Beeple, whose real name is Mike Winkelmann, was released for a record $ 6.6 million last week. It had originally been purchased for around $ 67,000.

Meanwhile, one of thousands of computer-generated avatars called CryptoPunks recently sold for $ 2 million. And a crypto version of the 2011 Nyan Cat meme sold for around $ 590,000 at an online auction.

At the same time, critics see the NFT craze as another potential speculative frenzy in cryptocurrencies that is sure to eventually fade.

So what are NFTs? And why are they suddenly selling in the millions? CNBC reviews what you need to know.

What are NFTs?

NFTs, or non-fungible tokens, are a new type of digital asset. Ownership of these assets is recorded on a blockchain, a digital ledger similar to the networks that support bitcoin and other cryptocurrencies.

But unlike most virtual currencies, you cannot exchange one NFT for another in the same way as you would with dollars or gold bars. Each NFT is unique and acts as a collectible item that cannot be duplicated, making them rare by design.

You can think of them as the crypto alternative to rare Pokémon or baseball cards.

The rise of the internet meant that anyone could view images, videos, and songs online for free. People buy NFT because they believe they will be able to prove ownership of a virtual item thanks to the blockchain.

NBA Top Shot, an NFT platform based on the US basketball league, allows users to buy and sell short clips showing the highlights of star player matches. The NBA licenses the reels to Dapper Labs, a startup that digitizes the footage, generating a limited amount to create a shortage. NBA Top Shot has facilitated more than $ 277 million in sales to date, according to the CryptoSlam website. Dapper Labs earns a cut on each transaction while the NBA receives royalty payments.

Basketball is not the only sport that is dedicated to cryptocurrencies. The French company Sorare allows users to collect and play officially licensed football cards in fantasy games. According to NFT data tracker NonFungible, Sorare’s marketplace has generated more than $ 21 million in sales to date. Sorare announced last week that he had raised $ 50 million from investors, including Benchmark, Accel, and Reddit co-founder Alexis Ohanion.

“It’s an obvious industry use case for NFTs,” said Lars Rensing, CEO of blockchain firm Protokol. “Business cards and collectibles have always been a profitable source of income for clubs.”

Meanwhile, art dealers are also getting in on the action, with auction house Christie’s hosting an auction for a virtual artwork by Beeple. The auction has not yet closed, but the work has already been offered up to $ 3 million.

NFTs are not a new phenomenon. CryptoKitties, one of the earliest examples, was once so popular that it clogged the ether digital currency network. To date, CryptoKitties has generated sales of more than $ 40 million, according to NonFungible.

Why are they so popular?

The coronavirus pandemic played a major role in the rise of NFT. Last year, the total value of NFT transactions quadrupled to $ 250 million, according to a study by research firm L’Atelier, affiliated with NonFungible and BNP Paribas.

That’s largely due to stay-at-home restrictions that caused people to spend much more time on the Internet and save cash due to the lack of commuting. It is similar to the rise of retailers betting GameStop on other historically neglected stocks touted on the Reddit WallStreetBets board.

Meanwhile, it also comes at a time when bitcoin, ether, and other digital currencies have risen in value, with bitcoin briefly surpassing $ 1 trillion in market value last month.

“Right now we are living in a point in the world where the majority of the population spends 50% of their time online and a significant amount of their time on a PC,” said Whale Shark, a pseudonymous NFT collector who He claims to have amassed a collection worth more than $ 2.7 million, he told CNBC.

Skepticism

Many investors buy NFT as a speculative investment in the hope that they can sell it at a much higher price than they originally paid. But a growing number of people also keep them long-term as collectibles.

“Like any tech hype cycle, we start with speculative activity, and usually that gives way to more fundamental value,” Nadya Ivanova, L’Atelier’s chief operating officer, told CNBC.

“NFTs started in 2017. A lot of this was due to speculation. What we saw in 2020 is that the market is maturing.”

NFTs have attracted celebrities like Mark Cuban, Lindsay Lohan, and Gary Vaynerchuk, while major brands are getting involved as well. And people are finding other use cases for NFT, like virtual real estate and gaming.

However, the NFT space has been greeted with skepticism by some artists and investors. Critics see it as another crypto fad similar to the initial coin offerings of 2017 that will eventually become irrelevant. Unsurprisingly, the companies behind such tokens disagree.

“I think 99% of the projects that are in space today might not exist two or three years later, very similar to the ICO boom,” WhaleShark said.

Many NFTs are priced in ether, the digital token on the Ethereum blockchain. The digital asset briefly touched a record price of over $ 2,000 last month before dropping to around $ 600 in a matter of days, reminding investors of the wild volatility of cryptocurrencies.

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