The Beginners Guide to NFTs

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Contributor, Benzinga
December 5, 2022

What are NFTs? – this question puzzles many people. Even as non-fungible tokens (NFTs) provide increasingly more real-use cases and ways for investors to generate returns, many are still left scratching their heads. The following discussion will explain what NFTs are, how they work and what they are used for. Here is the best beginners guide to all things NFTs including, NFT trading, NFT collecting, creating NFTs and more.

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What Are NFTs, Actually?

NFTs are a type of cryptographic token. They represent a unique underlying asset and serve as verifiable proof of ownership and authenticity. NFTs can represent real-world items such as artwork, real estate, property rights and individuals’ identities. 

NFTs are not fungible, which means that they cannot be traded at equivalency with any other NFT. As opposed to cryptocurrencies and fiat currencies, NFTs are not perfectly interchangeable or indistinguishable from each other. Instead, they are perfectly scarce and 100% unique. 

Like most cryptocurrencies, NFTs exist on the blockchain. A blockchain is a digital ledger that records the provenance of an asset. Blockchains store and chain encrypted blocks of data together to form a chronological source of truth for a given data set that is available to all users.

As opposed to centralized databases, blockchains are decentralized, meaning that no central authority controls them. NFTs are traded from peer-to-peer, without the need for an intermediary.

The blockchain leverages cryptography and game theory to secure transactions. Incentives are created to make tampering extremely unprofitable for malicious users. The implication is that ownership is held probabilistically through trustless enforcement, as opposed to regulatory certainty. 

How Non-Fungible Tokens Work

NFTs are created through a process referred to as minting, in which the information of the NFT is published on a blockchain. Minting involves tokenizing a digital file with cryptography, allowing for an NFT to be stored, moved and recorded on the blockchain. 

When NFTs are minted, they are assigned a unique identifier directly linked to one blockchain address. In other words, each NFT minted has an owner, and the ownership information is publicly available.

Ownership and the transferability of NFTs are managed by smart contracts, which refer to algorithms on the blockchain that automatically execute when predetermined conditions are met. 

Why Does Digital Art Have Value?

While it is true that the majority of NFTs today will lose their value in the long run, massive untapped potential exists within the NFT market. 

While Web 2.0 introduced the participatory web, it allowed a handful of tech giants to control and monetize personal data. NFTs extend Web3 and have the ability to drive value by redistributing the power of ownership to creators and the community 

NFTs shift the power away from corporations to users by democratizing the monetization of intellectual property. This option provides countless opportunities for creators to make money by digitizing assets, whose authenticity and ownership are verified by the blockchain.

What Are Digital Art Pieces Used For?

NFTs are used to represent any asset in the form of a digital file. A few prominent use cases of NFTs include:

  • Gaming industry: NFTs can be integrated into the gaming world by allowing NFT cross-platform playability. Without intermediaries, gamers will be incentivized to keep playing if they own their characters and items within it — games like Axie Infinity are already implementing these principles.
  • Intellectual property and patents: NFT tokens allow users to prove their ownership of a piece of content, democratizing the monetization of digital assets. Crypto-art and entertainment applications are the primary drivers of this value proposition. Notable examples include Yuga Lab’s Bored Ape Yacht Club and NBA Top Shot’s Moments digital collectibles.
  • Medical records and identity verification: NFT ledgers can store an individual’s medical records without compromising confidentiality. Degrees, academic certificates, licenses and other qualifications can also be tokenized.
  • Real estate: The tokenization of real estate provides an opportunity for investors to steer clear of the illiquid, bureaucratic and inaccessible characteristics of the traditional system. Origin Protocol is one of the first web3 projects to sell NFT real estate via its marketplace with Roofstock onChain, cutting out middlemen and reducing the costs for buyers and sellers.

Overall, the value of each NFT is different and ultimately depends on the underlying asset that the NFT represents. The biggest obstacle to adoption is not the technology and value propositions of NFTs, but the usability and shift from centralized systems.

Is This Asset a Scam?

The NFT sector has faced both glory and criticism throughout its meteoric rise. Many individuals view NFTs as overpriced JPEG files at best and downright scams at worst. However, what’s missing is an understanding and appreciation of the wide range of utilities NFTs have to offer.

First and foremost, it is important to recognize that NFTs are inherently neither a digital bubble nor a scam. The underlying NFT technology is separate from the malicious individuals who orchestrate scams. 

To extend this idea, an understanding of decentralization is needed.  Like many cryptocurrencies, NFTs are based on blockchain technology. Blockchain technology allows for decentralized databases, implying that the network is not controlled by a governing authority. Decentralized networks transfer responsibility and power from intermediaries to users. 

Assuming the infrastructure that supports the NFTs is free of issues, if you lose your funds by mistake it is your fault. With freedom comes responsibility; however, many users are not used to not having a safety net.

How to Earn Money from Non-Fungible Tokens

In the past 48 months, NFTs have exploded in popularity and value, offering numerous ways for investors to generate returns. Here are a few ways you can earn money from NFTs:

  • Collecting: One of the best strategies to make money with an NFT is to invest in a high-quality project and hold on to dear life (HODL). The projects that survive the bear markets could yield astronomical gains when the bull market returns. 
  • Flipping NFTs: Flipping is a recently coined term that refers to buying an NFT and selling it quickly for a profit. In 2021 alone, more than $25 billion worth of NFT sales were generated. The best way to flip NFTs is by identifying undervalued projects that you believe will increase in demand in the near future. It is important to note that flipping is a high-risk activity.
  • Play-to-earn (P2E) games: P2E games use blockchain technology that enables you to receive payment in cryptocurrency from gameplay. The in-game assets such as avatars, weapons, tokens, virtual land, and other NFTs unlocked by the user can be used or traded on marketplaces and exchanges for money.
  • Create your own NFT: Monetizing your own intellectual property in the form of an NFT is another promising way to earn money from NFTs. This process can be difficult for beginners; here is a comprehensive guide for how to create your own NFT. 

How to Select Digital Art Assets

Reading this beginners guide to NFTs is enough to learn the basics of NFTs and how they work. However, picking the best NFTs successfully can be a difficult process that requires a boatload of experience in the NFT market as well as complex and expensive analytical tools. That is why Benzinga launched its NFT PRO and NFT Insider newsletters. 

NFT Insider sends you one of the best opportunities in NFTs every month, and NFT PRO sends you five of the best opportunities in NFTs every single week. Both are written by Henry Stater, an NFT trading expert with over 1,000 hours of experience researching and trading NFTs and a stellar trading track record. For example, he called out two of the most successful NFT projects of 2022, DigiDaigaku and Art Gobblers, long before they blew up in a single edition of NFT PRO.

Where to Buy

Now that you have read this beginner's guide to NFTs, you need to know where to buy NFTs. Ethereum-based NFTs can be purchased from OpenSea – the world’s first and largest digital marketplace for NFTs. However, you’ll need to take a few important preceding steps that must be followed before purchasing directly from OpenSea. 

Sign up for an exchange account to buy Ether (ETH). The amount of ETH you need to purchase will depend on the price floor (the price of the cheapest item in the collection) or the listed ask price for the NFT you are buying. You should purchase a bit more ETH than you need for the transaction fees that you will pay when transferring ETH to a wallet and making the transaction on OpenSea.

ETH can easily be purchased using any major cryptocurrency exchange such as Gemini, eToro or Uphold. The next step is setting up a browser wallet such as MetaMask. MetaMask is free to use and can be created in a matter of minutes. Once you have an account, transfer ETH from your crypto exchange account to your individual web-based wallet. 

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Is Digital Art a Good Investment?

Investing in an asset just because it is tokenized as an NFT is not a great idea. NFTs themselves are not investments. As an investor, you need to understand the value of the underlying asset that NFT represents before purchasing. 

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