Should I Buy an NFT? What to Know Before You Do

Non-fungible Tokens, or NFTs, are unique digital assets recorded on a blockchain, a decentralized and public ledger. The growing interest in NFTs highlights a shift towards valuing digital scarcity and verifiable ownership online. This article guides readers through considerations for acquiring an NFT.

What is an NFT

An NFT is a unique digital identifier recorded on a blockchain, which certifies ownership and authenticity. Unlike traditional currency or cryptocurrencies, NFTs are non-fungible, meaning each one is unique and cannot be directly interchanged with another. This contrasts with fungible assets like a dollar bill, where one unit is identical and interchangeable with any other.

NFTs are data files stored on a blockchain. They typically contain references to digital files such as artworks, photos, videos, and audio. Beyond digital art and collectibles, NFTs can represent various asset types including music, virtual land, in-game items, and even real-world tangible assets. The record of ownership for an NFT is immutable and transparently maintained on the blockchain, allowing for easy verification and transfer.

Preparing for an NFT Purchase

Acquiring an NFT requires setting up a digital wallet. A digital wallet is a software application that securely stores cryptographic keys necessary to access and manage cryptocurrencies and NFTs. When creating a wallet, carefully record and secure the seed phrase—a series of words that acts as a master key for recovery. This phrase should be kept private and stored in a safe, offline location.

After setting up a digital wallet, acquire the necessary cryptocurrency for the purchase. NFTs are typically bought using specific cryptocurrencies, such as Ether (ETH). Obtain these cryptocurrencies from reputable exchanges, which often require identity verification.

Once cryptocurrency is acquired, transfer it from the exchange to your digital wallet. This involves sending the purchased cryptocurrency to the wallet’s unique public address. Confirm the correct wallet address to avoid irreversible loss of funds. Ensure the digital wallet is funded before browsing NFT marketplaces.

The NFT Purchase Process

The purchase process involves navigating NFT marketplaces. These platforms list a wide array of NFTs for sale, allowing users to browse different collections and discover NFTs. The interface displays the NFT’s image, description, price, and history.

To initiate a purchase, connect your digital wallet to the chosen marketplace. This connection is usually facilitated through a browser extension or a QR code, securely linking the wallet to the platform for transactions. Buyers can then select an NFT and choose to either make an offer or opt for an immediate “buy now” purchase. The “buy now” option functions similarly to a standard e-commerce transaction, allowing for instant acquisition at a set price.

Upon selecting an NFT and proceeding with the purchase, the marketplace will prompt you to confirm the transaction through your connected digital wallet. This confirmation step displays the total cost, including the NFT’s price and any associated transaction fees. After confirming, the transaction is processed on the blockchain. Once successfully recorded, the purchased NFT will appear in the buyer’s digital wallet.

Understanding NFT Costs and Ownership

Beyond the initial purchase price, buyers encounter additional costs, primarily gas fees. Gas fees are network transaction fees paid to validators on a blockchain for processing and recording transactions. These fees compensate the computational power required to execute smart contracts and maintain network security. Gas fees can fluctuate significantly based on network congestion and the complexity of the transaction.

Another financial consideration is creator royalties, often programmed into an NFT’s smart contract. This allows the original creator to receive a predetermined percentage of the sale price each time their digital asset is resold on a secondary market. These royalties are automatically distributed to the creator’s wallet by the smart contract, ensuring continuous compensation for their work.

Understanding what “ownership” entails for an NFT is important. Owning an NFT means possessing the unique token on the blockchain, which serves as verifiable proof of ownership. However, this ownership does not automatically transfer the copyright or intellectual property rights of the underlying digital asset. Unless explicitly stated in a separate licensing agreement, the original creator usually retains the intellectual property rights, meaning the NFT owner may not have the right to reproduce, modify, or commercially use the associated content beyond personal display or resale of the token itself.

Key Considerations Before Buying

Before buying an NFT, evaluate the project’s utility and roadmap. Some NFTs offer practical use cases beyond being a collectible, such as providing access to exclusive communities, in-game benefits, or future digital experiences. A clear roadmap from the creators can indicate the project’s long-term vision and potential for sustained relevance.

Research the community and team behind an NFT project. A strong, engaged community often signals a project’s viability and potential for growth. Investigating the creators and developers can provide insight into their experience, reputation, and commitment to the project’s success. Transparency from the team contributes to the project’s credibility.

Assess an NFT’s provenance and rarity. Provenance refers to the NFT’s history, including its origin and previous ownership, which can be verified on the blockchain. Rarity, determined by unique attributes within a collection, often contributes to an NFT’s desirability and potential value.

Align the purchase with personal goals and understand your risk tolerance. The NFT market can be highly volatile, with prices subject to rapid fluctuations. Consider whether your intent is for speculative investment, collecting for artistic appreciation, or participating in a digital community. Recognizing the inherent risks, including market illiquidity and potential for scams, allows for a more informed decision-making process.