What are NFTs? Everything you need to know about crypto collectibles

From art to sports stickers, people are spending millions of dollars on digital collector’s items.

These collectible cryptography, known as NFTs, have exploded in popularity recently. A video clip created by digital artist Beeple, whose real name is Mike Winkelmann, was released for a record $ 6.6 million last week. It had originally been purchased for around $ 67,000.

Meanwhile, one of the thousands of computer-generated avatars, called CryptoPunks, was recently sold for $ 2 million. And a cryptographic version of the 2011 Nyan Cat meme was sold for about $ 590,000 at an online auction.

At the same time, critics see the NFT craze as another potential speculative frenzy in cryptography that is certain to disappear eventually.

So, what are NFTs? And why are they suddenly being sold by millions? CNBC analyzes what you need to know.

NFTs, or non-fungible tokens, are a new type of digital asset. Ownership of these assets is registered on a blockchain – a digital ledger similar to the networks that support bitcoin and other cryptocurrencies.

But unlike most virtual currencies, you wouldn’t be able to exchange one NFT for another in the same way you would exchange dollars or gold bars. Each NFT is unique and acts as a collector’s item that cannot be duplicated, making them rare by design.

You can think of them as the cryptographic alternative to rare Pokémon or baseball cards.

The rise of the Internet means that anyone can view images, videos and music online for free. People are buying NFTs believing they can prove ownership of a virtual item thanks to the blockchain.

NBA Top Shot, an NFT platform based on the United States basketball league, allows users to buy and sell short clips showing the highlights of famous players’ matches. The NBA licenses the reels to Dapper Labs, a start-up that digitizes the footage, making a limited amount to create shortages. NBA Top Shot has facilitated more than $ 277 million in sales to date, according to the CryptoSlam website. Dapper Labs receives a share in each transaction, while the NBA receives royalties.

Basketball is not the only sport that is entering encryption. French startup Sorare allows users to collect and play football cards officially licensed in fantasy games. According to NFT NonFungible’s data tracker, the Sorare market has generated more than $ 21 million in sales to date. Sorare announced last week that it has raised $ 50 million from investors, including Benchmark, Accel and Reddit co-founder Alexis Ohanion.

“It’s an obvious industry use case for NFTs,” said Lars Rensing, CEO of blockchain company Protokol. “Collectable and collectible cards have always been a profitable source of revenue for clubs.”

Meanwhile, art dealers are also taking action, with auction house Christie’s holding an auction for a piece of virtual art by Beeple. The auction has not yet been closed, but the work has already been auctioned at up to R $ 3 million.

NFTs are not a new phenomenon. CryptoKitties, one of the first examples, were once so popular that they obstructed the ether network of digital currency. To date, CryptoKitties have generated sales of more than $ 40 million, according to NonFungible.

The coronavirus pandemic played a big role in the NFT boom. Last year, the total value of NFT transactions quadrupled to $ 250 million, according to a study by L’Atelier, a research firm affiliated with NonFungible and BNP Paribas.

This is largely due to restrictions on staying at home, which has resulted in people spending much more time on the internet and saving money due to the lack of commuting. It is similar to the increase in retail merchants betting on GameStop on other historically unloved actions promoted within the framework of Reddit WallStreetBets.

Meanwhile, it also comes at a time when bitcoin, ether and other digital currencies have increased in value, with bitcoin reaching $ 1 trillion in market value last month.

“At the moment, we are living in a point in the world where the majority of the population spends 50% of their time online and a significant portion of their time on a PC,” said Whale Shark, a pseudonym NFT collector who claims to have amassed a collection worth more than $ 2.7 million, he told CNBC.

Many investors buy NFTs as a speculative investment in the hope that they will be able to launch them at a much higher price than what they originally paid. But an increasing number of people also keep them for a long time as collectibles.

“Like any cycle of technological exaggeration, we are starting with speculative activities and generally this gives rise to a more fundamental value,” Nadya Ivanova, L’Atelier’s chief operating officer, told CNBC.

“NFTs started in 2017. A lot was about speculation. What we saw in 2020 is that the market is really maturing.”

The NFTs have attracted celebrities like Mark Cuban, Lindsay Lohan and Gary Vaynerchuk, while big brands are also getting involved. And people are discovering other use cases for NFTs, like virtual real estate and games.

However, the NFT space was met with skepticism from some artists and investors. Critics see it as another cryptographic fad similar to the initial 2017 coin offerings, which will eventually become irrelevant. Predictably, the companies behind these tokens disagree.

“I think 99% of the projects that are in space today may not exist two or three years later, very similar to the ICO boom,” said WhaleShark.

Many NFTs cost in ether, the digital token of the Ethereum blockchain. The digital asset briefly hit a record price of more than $ 2,000 last month, before dropping around $ 600 in a matter of days, reminding investors of the great volatility of cryptocurrencies.