Imagine that you “own” a specific star. Ostensibly, you own it because you have its specific coordinates stored in a star registry, and a colorful certificate you received after purchasing the star says so. The star may be visible to all, but only you can claim to own that specific star.

One day, you decide to sell the star’s coordinates to someone else who buys it as an investment. The buyer, however, cannot hold the star, feel it, frame it, put it on display or store it in a box any more than you could when you owned it. The only “property” that conveys is the coordinates. And, just as you had hoped the star would one day increase in value, so does its new “owner.”

If you understand any of that, welcome to the world of the non-fungible token, or NFT. As a newbie, there are some basic points to understand. 

First, the term “non-fungible” means that the item is one-of-a-kind and completely irreplaceable. Your car, for example, is non-fungible as it will have a different value from other cars, even if those cars were built in the same year and may appear identical. Anything that can be exchanged with the same value is “fungible.” A five-dollar bill is easily exchanged with another bill of the same type as both have the same value. Investopedia.com explains the concept this way: just as “… No. 2 yellow corn [is] fungible because it does not matter where the corn was grown; all corn designated as No. 2 yellow corn is worth the same amount.” 

Every line of computer code, by definition, is strictly unique, or non-fungible. When composed as an online token on a cryptocurrency blockchain – the online registry that serves as a certificate of authenticity of sorts – it becomes an NFT that cannot be changed or altered in any way. Once downloaded, the computer code defines the specialized image or plays only the unique sound that is bought and sold at online auctions.

NFTs can take many different forms. They exist as digital-game characters and trading cards, crypto art and also Internet memes, but NFTs are also being created as a kind of license for patents or online sports. So, according to theverge.com, “… anything digital such as drawings, music, [or even] your brain downloaded and turned into an AI [artificial intelligence] …” can become an NFT along with any abstraction, idea or thought. The first-ever tweet, composed and sent in March 2006 by Twitter co-founder and former CEO Jack Dorsey, sold as an NFT for nearly $3 million in March 2021.

There are positive and negative aspects to creating, buying and owning an NFT. One of the positive aspects can be illustrated with the star registry example above. The key difference between owning a star on a printed registry and an NFT made from computer code is that the creators of the star registry can’t collect royalties if the same star is resold, while the creator of the NFT does. Told another way, in the United States, contemporary artists are paid when their artwork is first sold, but not when it is resold.

 In 2021, Chris Torres, creator of the Nyan Cat Internet meme, said to businessinsider.com, “Most NFT platforms allow the artist to retain their copyright and trademarked work, which I feel is huge for an artist because it lets them keep their creative rights.” Also in 2021, Torres sold an NFT of Nyan Cat, a flying cat with a pop tart as its body, for nearly $600,000. NFTs allow creators of crypto art, as the Nyan Cat is called, to retain the copyright and continue to collect royalties every time the same NFT is resold to a new owner. More importantly, an artist can sell directly to a buyer without the need for a dealer or an agent who works on commission.

The NFT marketplace is relatively new. The first example, made by Kevin McCoy and Anil Dash and consisting of a short video clip of the sale itself, sold for $4 in May 2014. (Dash was the buyer.) By 2017, series of NFTs such as the CryptoPunks, CryptoKitties, Pepe trading cards and the Bored Ape Yacht Club were part of a $250 million marketplace and growing. An NFT by the artist known as Beeple (aka Mike Winkelmann) achieved $69 million at Christie’s in March 2021, generating headlines worldwide.

These types of digital artworks, as well as video and gaming characters are the most traded NFTs to date. According to a financial report by globenewswire.com, NFTs represent a $3 billion worldwide market that is expected to grow to $13.6 billion in 2027. The growth is expected to come from celebrity endorsements and the increasing use of game characters that can be bought and sold via game platforms. Crypto exchange platforms are also creating NFT marketplaces such as OpenSea, Rarible, Larva Labs, Cloudflare and Dapper Labs. All that is very positive for creators of NFTs, but what are the drawbacks of the NFT itself?

As with anything considered valuable, only time and another buyer will determine its worth in the future. Remember the NFT of the very first tweet that sold for $3 million in March 2021? It was auctioned again in April 2022 and anticipated to sell for $50 million. But when no one bid more than $280, the NFT was withdrawn. Not even celebrity can help sell an NFT. In January 2022, Former First Lady Melania Trump created an NFT called Head of State Collection, featuring an image of her wearing a unique white outfit worn at a state visit with the president of France. It realized about $180,000, but public blockchain records later revealed Mrs. Trump herself purchased it after few interested buyers participated in the auction.

A fickle market aside, there are issues around the copyright of an image, video or game token represented by the NFT. Just creating an NFT doesn’t always mean ownership rights automatically transfer with it. Because of what are known as “personality rights,” buyers need to be sure the seller is also the owner of the image depicted in the NFT itself.

One of the most obvious downsides of an NFT is that if it is on the Internet, anyone can access it. You may have bought a video or graphic artwork as an NFT, but everyone else can still download it, too. It’s not unlike owning an original Picasso while everyone else owns a print. With an NFT, you, as the purchaser, may not own the copyright, which gives the original creator the ability to continue selling the same NFT many times over if they so desire. It wouldn’t make sense for the creator to do this, as it dilutes the scarcity of the NFT, but it can happen. Potential buyers should consider whether owning something that they can’t really control is in their best interest, bragging rights aside.

Also, it should be noted that anything created for a blockchain requires large amounts of energy to produce and maintain. According to Columbia (University) Climate School’s website, a University of Cambridge analysis estimated that bitcoin mining consumes 121.36 terawatt hours a year. This is more than all of Argentina consumes in a year, or more than the annual consumption of Google, Apple, Facebook and Microsoft combined. This results in pumping some 65 megatons of carbon dioxide into the atmosphere, equivalent to the output of the nation of Greece. Generating Bitcoins, or any of the other 19,000 cryptocurrencies out there, makes a significant contribution to climate change. Minting an NFT is no different. 

NFTs are also closely linked to the cryptocurrency market, which is undergoing its own grim adventures. The Guardian newspaper reported on July 2, 2022 that the market for NFTs had hit a 12-month low of slightly more than $1 billion in June after peaking at $12.6 billion in January.

Nor are NFTs any less prone to theft than tangible artworks. Burglars come for them as well, as celebrity Seth Green found out. In May 2022, news broke that Green had lost four of his NFTs in a phishing scam, including a Bored Ape upon which he intended to base an animated TV show. The theft of the Bored Ape meant Green no longer controlled its likeness, placing the future of the show in doubt. The following month, Buzzfeed reported that Green regained his missing NFT by paying $260,000 to an entity known as 165 ETH, as confirmed by public blockchain records.

Any new opportunity to buy and sell will have its pros and cons. To get started in collecting NFTs requires a reasonable understanding of cryptocurrency, the blockchain, access to markets, online auctions, the attendant scams and various fees involved. You also need to school yourself on how to securitize the NFT you buy and on the marketability of any NFTs you create. And you need to understand how accessible the NFT would be in the future if the website, cloud platform or Tor network that hosts it is no longer online.

In the end, owning an NFT could conceivably help to preserve a small part of the Internet as a historical snapshot in time, making your collection a digital museum of sorts. Whatever the motivation, an NFT is just another way to own unique items that aren’t necessarily accessible. They may lead to future monetary and economic innovations that will benefit collectors and the world to come.