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NFT art: What it is and how it works

NFTs are shaking up the art industry, and creators stand to benefit.

Disclaimer: This information is not financial advice or an endorsement of cryptocurrency or any specific provider, service or offering. Cryptocurrencies are highly volatile and high risk. Do your own research and seek financial advice before buying. And make sure the provider you're interested in is available in your state.

With the explosion of NFTs hitting headlines, it can feel like this new artform has come out of left field. But NFTs go way back to 2014, when Kevin McCoy became the first person to create one. In 2021 alone, the market for non-fungible tokens grew to generate more than $23 billion (yes, with a B), according to DappRadar. Even the revered Sotheby’s art house is all in, launching its Sotheby’s Metaverse in October 2021.

But what exactly is an NFT? And how seriously should art collectors — and creators — take this fickle newcomer to the art scene? Strap in, because it’s a wild ride.

What’s an NFT?

A non-fungible token — better known as an NFT — is a one-of-a-kind digital asset that often takes the form of artwork. Sometimes they represent items you can find IRL, though NFTs can also include music, videos, text and digital real estate titles. You can even buy an NFT character to play within video game universes.

The “non-fungible” part of NFT refers to the distinct identifiers behind these cryptographic tokens. Physical money is fungible, meaning you can exchange a dollar bill for another one with no loss of value during the exchange.

An NFT exists on a blockchain with unique identifiers that proves ownership and renders them wholly unique from other NFTs. You can buy, swap and sell them with potential gains and losses in value.

Because sales of NFTs are recorded, creators who mint their own NFTs can continue to make money beyond the initial sale — an advantage that the traditional art world doesn’t offer.

Plus, having NFTs tracked on a blockchain creates a form of provenance, where there is proof of the arts supply chain, original creator and ownership.

How does an art NFT work?

An art NFT is a piece of digital artwork that exists on a blockchain, the decentralized public ledger most cryptocurrency relies on. NFT art can be created, minted and sold for a profit, bought and sold on an NFT marketplace or collected and displayed.

Many NFT marketplaces have stepped in to help broker and track the sale of NFTs, including OpenSea, Rarible and SuperRare. The types of NFTs that you can buy or sell depend on what the marketplace supports.

But before an NFT can be considered digital art, it must first go through a process of being “minted” — or tokenizing a digital file so that it can be recorded on a blockchain.

NFT marketplaces assist with minting too, helping you turn your MP3s, JPEGs, 3D artwork, photography, tweets or any other digital video or audio format into an NFT on a blockchain and list it for sale.

NFT marketplaces

An NFT marketplace is an online space where NFT artists — often called creators — can list NFTs for sale. Marketplaces offer exposure to NFT buyers — or collectors — who can purchase NFT art with cryptocurrency through a wallet, crypto credit card or other crypto banking products.

Marketplaces include OpenSea, DraftKings, Axie Marketplace and Sotheby’s Metaverse, with cryptocurrency platforms like Crypto.com developing their own marketplaces for their users to discover NFTs.

Marketplaces feature and sell NFTs of different types and genres. Most include artwork, with others focusing on sports, gaming and even trading cards.

Occasionally, you’ll find an exclusive marketplace, such as Foundation, that requires an invitation from an existing member to become a verified creator.

Name Product Categories Payment methods Services Blockchains
Crypto.com NFT
Sports, Collectibles, Art, Gaming, Music, Photography
Credit card, Debit card, Cryptocurrency, Bank transfer
Buy, Sell
Ethereum, Crypto.com, Crypto.org Chain
A curated NFT marketplace with famous brands and artists, supported by the Crypto.com cryptocurrency exchange.
SoRare
Sports, Collectibles, Gaming, Trading cards
Credit card, Debit card, Cryptocurrency, Bank transfer
Buy, Sell
Ethereum
A fantasy football game with collectible NFT cards, officially supported by the biggest soccer leagues in the world.
Splinterlands
Collectibles, Gaming, Trading cards
Cryptocurrency, PayPal
Buy, Sell, Stake
Hive
Splinterlands is a digital, play-to-earn, collectible card game built on hive blockchain technology.
Unstoppable Domains
Domain names
Credit card, Cryptocurrency, PayPal
Buy, Sell, Mint
Ethereum
Binance NFT Marketplace
Sports, Collectibles, Art, Gaming, Music, Trading cards, Domain names, Metaverse (Virtual Worlds), Memes, DeFi, Mixed
Credit card, Debit card, Cryptocurrency, Bank transfer
Buy, Sell, Mint
Ethereum
A peer-to-peer marketplace supported by one of the worlds largest cryptocurrency exchange, Binance. Not currently available to U.S. residents.
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How to make money with art NFTs

Buying and selling NFTs for a profit can take patience and research. Similar to flipping any other asset, the key is to buy low and sell high.

Consumer interest and a perceived exclusivity is what’s driving the value of NFTs. But the market is new and highly volatile, which means there’s no guarantee that you can make money at all, similar to other types of investments.

Buy and sell art NFTs for a profit

If you’re looking to buy or collect NFTs, start by browsing popular marketplaces to see what’s for sale, what’s trending and what strikes your fancy for collecting and selling later.

Some marketplaces specialize in niches of NFTs such as Foundation or Rarible for art NFTs or NBA TopShot for sports NFTs.

Create, mint and sell your own NFTs

Marketplaces often specialize in a particular NFT genre, so finding the right one for your style can be key in exposing your NFT artwork to the right buyers.

Creators that mint NFTs can earn royalties from their work in perpetuity through smart contracts. Smart contracts rely on code to establish ownership and allow for transferability when the NFT is sold to another collector. They also allow for permanent identification information, which ensures that the NFT can’t be replicated — and the original creator can continue earning off subsequent sales.

Each time an NFT is sold, the creator may collect a percentage of the most recent sale price — around 1% to 10%, depending on the marketplace through which the NFT was originally minted and how the person who minted it set it up.

How to buy NFT art

Whether you buy NFT art through a marketplace or with a private seller, the process requires a set of general steps:

  1. Set up a digital wallet. You’ll need a digital wallet to store the identifiers of your asset on a blockchain. Many top cryptocurrency wallets, such as MetaMask or ZenGo, offer the ability to store your crypto and NFTs in the same place.
  2. Add crypto to your wallet. You can either buy crypto with an exchange or transfer existing coins to your wallet. Most NFTs are bought and sold on the Ethereum network, so investing in ETH may be a good starting point.
  3. Find a marketplace. Compare NFT marketplaces to find one specializing in the art niche you’re interested in.
  4. Choose an NFT. Explore available NFTs by artist, art type, look up purchase history, popular collections or what’s trending. Some NFTs offer fixed prices, while others are available at auction, requiring you to bid what you’re willing to pay. Once approved, the cost is deducted from your crypto wallet.

Crypto wallets like Coinbase and Gate.io allow you to display your new NFT artwork for viewing or showing to others — but these aren’t the only way to store your newly acquired NFT art.

Image source: Larva Labs
Image source: Gate.io

How to store and protect your art

Art NFTs you buy are sent to your crypto wallet. When you set up a digital wallet, you receive a seed phrase that acts as a master password of sorts — this gives you access to your cryptocurrency and private keys. Once you buy an NFT, where you store, display or interact with it is up to you.

To best protect the artwork and cryptocurrency in your wallet, you need to understand the terms custodial and noncustodial. These terms determine who holds your wallet’s private keys — the passwords and recovery phrases that control and prove ownership of your assets.

  • Custodial wallets. With these accounts, a third party — often a web-based exchange — controls the keys to your wallet. That custodian looks after your assets on your behalf. Nexo is an example of a custodial wallet.
  • Noncustodial wallets. With noncustodial wallets, you have full control of your keys and what they unlock. There’s no third party to trust, but if you don’t set up password backup, you risk losing everything. Coinbase Wallet and BitBox are examples of noncustodial wallets.

How to create and sell art NFTs

Creating and selling an art NFT requires a crypto wallet that’s compatible with the marketplace you’ve chosen. MetaMask and WalletConnect are popular, and are typically supported.

The steps to create an NFT depend on the marketplace you’re minting it with and where you plan to sell it, though expect a set of general steps.

  1. Create a digital file to mint. Save your file in a commonly supported format like JPG, PNG, MP4, WAV and GIF. You may need to compress files larger than 100MB. Learn more about your marketplace’s limitations and restrictions.
  2. Submit NFT details. Complete your marketplace’s form with a description of your NFT and its genre, associated collections and more. You may be able to choose a royalty percentage for future sales at the same time.
  3. Mint the file. Tokenizing your file for a blockchain requires a transaction fee — often called a gas fee — that covers the energy required to validate the transaction. Pay this fee and complete your transaction to complete the creation of your NFT.
  4. Choose a sale method. Marketplaces can require you to list a minimum cost for your art NFT to go up for auction, or you might have the option to list it for a fixed price. Popular marketplaces like OpenSea allow for private sales as well.

NFT art and gas fees

It isn’t free to mint, buy or sell an art NFT. Instead, you will pay for the transaction in the form of gas fees.

Gas fees support the cost of powering the exchange of cryptocurrency, similar to a processing fee on your credit card. Fees fluctuate often, sometimes by the hour, depending on consumer demand for the currency and blockchain your marketplace uses.

In most cases, gas fees are the only fees required to purchase an NFT.

Why buy NFT art?

Why are people buying Internet pictures for big money — I mean, why not just save a copy of the picture for free?

Valid questions, however, you could ask similar questions of physical art. Is there a difference between The Mona Lisa and a print you buy in a gift shop? You can take pleasure from both, but most people would argue there is a difference. And it comes down to the scarcity of a one-of-a-kind (non-fungible!) thing out in the world.

More seriously, NFTs can help to solve issues of provenance in the digital art world. It’s increasingly difficult to prove ownership of digital art otherwise, because it’s so easily duplicated. Because NFTs are recorded on a public ledger (a blockchain) for all to see, they offer a secure way to certify authenticity, prove a history of ownership and confirm who owns it today.

And, yes, give you solid bragging rights to a unique piece of art with control over how it’s sold next.

Contributors to NFT value

While the value of an art NFT can fluctuate wildly, contributors stretch beyond scarcity to include:

  • Ownership history — who owned the artwork previously can influence interest
  • Historical significance — Twitter CEO Jack Dorsey sold his first ever tweet as an NFT for nearly $3 million in 2021
  • Specific use — The blockchain game CryptoKitties sells NFTs of virtual cats for collecting and playing, with select cats bringing in more than $300 million each.
  • Famous provenance — The artist Beeple minted the NFT Everydays that sold for $69 million at Christie’s in 2021, while a Paris Hilton collaboration went for more than $1.11 million not long after.

NFT art collections

Some artists and marketplaces gather individual NFTs into groups called both collections and projects. A collection may be a group of NFTs created by the same artist, a collaboration among several artists represented by a particular studio or simply a group of NFTs on a marketplace.

Some collections include up to 10,000 unique NFTs or more. You may have seen headlines around a $532M avatar sold in the CryptoPunks collection. But you can find collections of NFTs to buy for pennies on marketplaces like Crypto.com and NFTX.

Image source: Larva Labs
Image source: Larva Labs

As NFTs take off, creators and collectors are showing off their NFT art within both physical and digital galleries. And it’s not only displaying art: in some cases, the gallery is designed to showcase art that’s available for sale.

Some NFT galleries are created to be viewed within digital worlds or the metaverse, like the popular virtual gallery MarkersPlace in Decentraland. Visitors can walk around these virtual galleries using an avatar, listening to NFT songs or watching NFT video clips at the same time.

Chicago has a physical NFT gallery called imnotArt gallery. It uses screens to display the digital artwork, where visitors can scan QR codes to view the art.

What to watch out for

Cryptocurrency is a speculative investment, and that goes for crypto-backed art NFTs as well.

There’s no guarantee that you’ll make money with an art NFT.

Marketplaces exist to facilitate the buying and selling of art NFTs, and that means any grievances you might have with a seller are between you and that seller. The terms and conditions of many marketplaces include protection against liability for scams or fraud.

And while theft is rare, NFT can be hacked in the same way that cryptocurrency is stolen from wallets and exchanges. As recently as January 2022, art dealer Todd Kramer, a victim of phishing, tweeted about a collection of 15 Bored Ape NFTs worth a whopping $2.2 million that were stolen from his digital wallet. Phishing scams surrounding cryptocurrency typically target crypto private keys. Scammers often send a link via email that redirects victims to enter their private key information on a separate site. Once a scammer has this information, your assets are vulnerable.

Before signing up with an NFT art marketplace, carefully read the terms and conditions to learn how it handles frauds, refunds and security. Store your login details and wallet keys in a safe place offline to help avoid phishing and hacking attempts.

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