The popularity of non-fungible tokens (NFTs) continues to grow. As reported by Reuters, data from DappRadar shows that NFT sales reached $25 billion in 2021. This is an astonishing 260x year-over-year increase from 94.9 million in NFT sales in 2020.
With some already selling for real millions of dollars, NFTs are understandably high on some people’s radars. If you’re just starting your NFT journey, here are five terms you’ll want to understand.
1. What is an NFT?
It is not enough to know what the letters correspond to; you also need to understand their meaning. Fungible means something that can be replaced by an exact copy. By being non-fungible, each NFT is necessarily unique. Cryptocurrencies, on the other hand, 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 especially prevalent. But technically speaking, NFTs aren’t images, music, video game stuff, or anything like that. On the contrary, NFTs are like certificates (receipts) associated with all digital goods.
Therefore, when you buy an NFT, you are buying the blockchain data. For example, I personally own an NFT. I duplicated (the expendable part) the associated image and have it on my phone and computer. But there is 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 as they are attached to blockchains. Ethereum and Solana are the two most common blockchains for NFTs. But creators don’t use blockchains to to create digital elements – that’s not what blockchains do. Instead, items are created elsewhere and downloaded later. This is where the “mint” comes in.
If you hang around the NFT water cooler, you’ll hear people use this term in different ways. Some people say that creators create an NFT when they upload it to the blockchain. However, you will also hear NFT buyers say they created an NFT if they were the first buyer.
Typically, creators don’t create a single NFT; rather, they create collections. For example, there are 10,000 NFTs in the CryptoPunk collection.
When creators go through the minting process, there is often a high-profile event. At a specified time and price, NFTs become available for sale on a market launch pad. This event is also sometimes called “the mint”.
3. Why do people flip NFTs?
Suppose you want to buy an NFT from an NFT collection of 10,000 coins on the day of its launch. As mentioned, the time, place and price are made public. You will connect your cryptocurrency wallet in advance. And when the time is right, you’ll hit the “buy” button and hope it doesn’t sell out before your trade is processed. Some NFT collections sell out in seconds.
But here’s the thing: you don’t really know Who NFT of the collection you are buying. Is random. You might 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 an NFT, you can list it on any of these secondary markets at a price of your choice.
Many people quickly unload their NFTs. This practice is called “turning over”. This can be an effective strategy for making a quick profit. If the collection sold out in seconds, for example, many people probably missed out and will gladly pay more than mint price on a secondary market.
If flipping sounds appealing to you, keep in mind that blockchains have transaction fees (called gas fees). These can quickly reduce potential profits. Therefore, be sure to take this into consideration.
4. Why is the floor price of an NFT important?
The floor price of an NFT collection is the lowest priced NFT in the collection currently on sale. For example, the cheapest CryptoPunk to date is listed for almost 67 Ether, the native token of the Ethereum blockchain – just over $200,000.
In my opinion, many NFT enthusiasts don’t plan to buy and hold for the long term; instead, they hope to make a quick buck by buying NFTs from new collections and then reselling them once they gain popularity.
One way to gauge popularity is to look at the floor price. A constantly rising price floor suggests that demand is increasing. In contrast, a steadily falling floor price could trigger a domino effect of sellers – each listing for a little cheaper than the seller before them in a mad dash for the exit.
5. Beware of carpet pulling
Not all NFT buyers are out to make a quick buck. Many NFT collections come with a roadmap – the creator has a long-term vision of how the proceeds 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 that they can participate in the ongoing project.
Unfortunately, there are bad actors in the NFT space. On February 6, an NFT project called Balloonsville admitted on social media that it was a raffle. “You really believe anything these days,” the account wrote before disappearing.
Balloonsville reportedly earned around $2 million by hitting 5,000 NFTs. Many buyers were there for the roadmap. However, a coin toss means the creator(s) of the project took the money and ran away – they’re not actually going to do what they said they would. Tragically, this happens 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 takeaways from this article: NFT space can be wild and speculative. If you decide to buy your first NFT (as I did recently), make sure you only put down a relatively small amount of money – funds that you risk losing in the worst case. Don’t get tricked into spending an exorbitant amount of money on NFTs in hopes of getting rich quick. As we have seen, there are many ways for things to go wrong.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.