What are NFTs?

Wondering what NFTs are? We explain what they are if you should invest in them.

You’ve probably heard of non-fungible tokens: NFT was even Collins Dictionary’s Word of the Year in 2021. The jargon is off-putting, but what you need to know is that NFTs are digital files - and in that file could be anything from a collectible such as a piece of artwork to an item in a video game.

Buoyed by rising cryptocurrency prices - and plenty of hype - the global NFT market has grown to be worth $40bn (£30bn). In January, Facebook owner Meta revealed it was planning to dive into the NFT craze by allowing users to create and sell their own tokens. 

However, critics fear the NFT phenomenon is a bubble waiting to burst - and others believe the digital files are worthless.

In this article, we explain everything you need to know about NFTs, from how they work and how to buy them, to whether they are regulated and the risks involved.

What is an NFT? 

Non-fungible tokens are digital files stored on a blockchain - an internet-based record keeping technology that cryptocurrencies also use. 

The “non-fungible” bit means they are unique and can’t be replicated. They carry a digital watermark, recording ownership and the digital rights to the item, which could be a video, artwork, a song or something else. But NFTs don’t give you ownership of anything tangible or physical.

Over the past year many sports franchises, fashion brands, artists and musicians have launched NFTs, which are also known as “nifties”.

They are sometimes touted as the digital answer to collectables. John Lennon’s eldest son Julian recently announced he was selling several pieces of music history from his personal collection as NFTs. The auction includes a black cape worn by his father in the film Help! and handwritten notes for The Beatles song Hey Jude.

How much are NFTs worth?

Some NFTs sell for thousands, if not millions, of pounds. Last March, auction house Christie's closed the sale of its first-ever digital-only art piece, a composite of 5,000 pieces by the artist Beeple. The final price tag was an eye-popping $69m (£51m).

Viral videos such as “Charlie bit my finger” and images like "Side-eying Chloe" have sold for thousands of pounds. Gifs, football trading cards, and even a tweet - Twitter co-founder Jack Dorsey listed his first ever tweet for sale - have all fetched high prices.

“The price of an NFT can vary widely depending on its perceived value and what people are willing to pay - just like Van Gogh’s Sunflowers would be worth a lot more than a photo I took of a sunflower in my garden,” comments Hayley Millhouse, managing director of the financial adviser OpenMoney.

How do you buy an NFT?

NFTs can be bought from major auction houses like Christie’s and Sotherby’s, in the same way as physical artworks. 

For most people, however, a specialist online marketplace is the usual route to buy an NFT. 

Marketplaces include OpenSea, Rarible, Mintable, Nifty Gateway and Foundation.

NFTs are either bought at a fixed price or in an auction. While the million-pound sales hit the headlines, nifties can also be picked up for less than £100. 

To get started, buyers need a digital wallet that enables them to store NFTs and cryptocurrencies. They also usually need to purchase some cryptocurrency to buy the NFT. Most NFTs are based on the ethereum network, and accept ether as payment.

A few, like Nifty Gateway, accept credit cards instead of a cryptocurrency wallet. Coinbase, a major cryptocurrency exchange that is building its own NFT marketplace, will also allow users to buy tokens using a credit card as part of a deal with Mastercard. 

When it comes to choosing which NFT to buy, Nikhil Roy, co-founder of the social creative studio Swipe Back, comments: “Look for projects that you truly like, it could be for the art, the community attached to it or the utility. Projects that are transparent about who is behind them are also a good bet. Spend some time on [messaging platform] Discord talking with each community to see which one is the best for you.”

Once you’ve bought an NFT, you can keep it as a collectible, use it as part of a digital project, or display it for others to see (Facebook, Instagram and Twitter are all working on plans to allow this). Alternatively, you could sell it.

What are the fees for NFTs?

There are usually charges for buying and selling an NFT. With ethereum-based platforms, the charge is called a “gas fee”. Patrick McLaren, chief operating officer of Nifty Gateway, explains that the payments “compensate for the computing energy required to process and validate transactions on the ethereum blockchain. A common analogy is cars need fuel to operate, it’s similar to the ethereum network, which needs gas to complete a transaction.”

Gas fees fluctuate according to supply and demand. They can be significant - and even result in a loss when selling an NFT.

There are often charges for creating (known as “minting”) an NFT, and listing it for sale on a marketplace.

In addition, the digital wallet that you use to buy the NFT may levy fees, and there could be charges for withdrawing your money back into a UK bank account.

Why is there such a buzz around NFTs? 

Nifties have been around since 2014 but it is only in the past couple of years that they have really started to take off. This has been due to several factors: the huge rise in the value of cryptocurrencies, more artists embracing them as a way to make money (as well as sports clubs and fashion brands), and buyers and investors becoming interested in the technology during the pandemic. 

“Technology is one of the investment megatrends of the decade and, I believe, that we can expect NFTs to become an integral part of this,” notes Nigel Green, CEO and founder of the wealth manager deVere Group.

While nifties have been labelled as risky, the sector is not short of admirers. Green says: “It’s hard to overplay the impact that NFTs will have on business models in the future as our digital lives and real lives increasingly overlap. All major businesses will move into this space including major entertainment and media brands. The hype is real.”

Other enthusiasts were also keen to tell The Money Edit why nifties were so exciting. MusicArt, an NFT marketplace, says: “NFTs are a killer new application that will drive adoption of the metaverse and this is why we hear so much about them and why they won’t be going away anytime soon.” 

Meanwhile, Ryan Grace, chief market strategist at the financial network Tasty Trade, says part of the interest in the tokens is around using them as a digital status symbol. "Given the rise in value of some popular NFT projects, NFTs have become a sort of digital status symbol; no different than how a Rolex watch or designer clothing might signal status in the real world.”

What are the risks?

There are plenty of risks associated with NFTs, from hidden fees and a lack of regulation, to scams where buyers lose all their money.

A rug pull is a type of scam in which creators quickly cash out their gains after launching a crypto project. Buyers have collectively lost millions in NFT scams like this.

Other risks include hackers stealing NFTs and gas fees and other hidden costs guzzling up a seller’s profits.

Like most new investments, especially those of a digital kind, a lack of understanding can also be a risk to those wanting to dabble in this space. And then there is the question of how much are NFTs really worth.

Millhouse at OpenMoney is a sceptic. “Some NFTs can be bought fairly cheaply, but if no one else wants to buy it, you’ll never get your money back, let alone make money.”

Martin Bamford, a chartered financial planner at Informed Choice, believes NFTs are worthless.

“While art is always subjective, those buying NFTs are, in the main, purchasing worthless digital pixel images. The use of flash cryptocurrency loans has been demonstrated to artificially inflate the recorded prices of some NFT projects.

“The usual suspects who pop up to promote every new innovation have come out of the woodwork to shill or support NFT projects, and talk of the value in these being in the associated community or access to creators is utter nonsense.”

Are NFTs regulated?

Non-fungible tokens are not regulated in the UK. The Financial Conduct Authority recently proposed new rules for high-risk investments that include fungible crypto-assets like cryptocurrencies (which can be replicated), but excludes non-fungible crypto-assets, like NFTs.

Millhouse comments: “If these proposed regulations are made into law, companies offering cryptocurrencies will have to meet stricter standards around how they advertise and sell them, and investors will have greater protection against mis-selling. 

“But NFTs will remain outside of this regulation, so those buyers will have no protection at all if things go wrong.”

Bamford adds: “As an unregulated marketplace, those parting with money to buy NFTs are risking everything.”

Should I invest in NFTs?

Financial experts generally sound a loud note of caution. “Currently, investing in NFTs is incredibly risky and you have no protection if you buy one and regret it,” says Millhouse.  

If you’re intrigued about the tokens, or perhaps keen to buy a digital artwork, make sure you do your research, understand that you could lose all your investment, and be on your guard for scams.