What are NFTs, and are they a good investment? We can explain

The nonfungible token, or NFT, for the digital artwork "Everydays: The first 5000 days," by the artist Beeple, was auctioned off by Christie's for $69 million.Christie's Images Ltd. 2021

It’s just a video of Houston Rockets guard Eric Gordon making a layup shot. Nothing special, but I own it. I bought the 20-second clip from the NBA for $10, and maybe someday I’ll sell it to a sports fan for a tidy profit.

Deeply improbable, but you never know. The market for NFTs is just that strange.

NFTs, or nonfungible tokens, are a weird new way to buy and sell digital assets, such as the Eric Gordon video, and music, photos and paintings, too. They act like a certificate or stamp assigned to a specific and unique digital asset, and can be used to prove ownership or to sell or trade the object.

The tokens come out of the cryptocurrency world, based on the same technology as Bitcoin. The artificial currency is going through another crazy run-up in value, and the race to invest in tokens is shaping up to be just as manic.

Indeed, the NFT for the first message ever transmitted over Twitter sold for $2.9 million this week. And you’ve probably heard of the artist Beeple. Earlier this month, the NFT for one of his digital artworks sold at auction for $69 million.

“Personally, I think we’re dealing with a bubble right now,” said Olta Andoni, a Chicago intellectual property attorney who specializes in NFTs. “My concern is the majority of the people in this space don’t understand what they’re buying.”

So what did I get for my $10? Simply an unbreakable digital signature confirming that I had purchased an asset created by the National Basketball Association. This signature is recorded in a blockchain — a permanent, tamperproof database stored on thousands of networked computers scattered around the world. It’s the same system behind Bitcoin and other digital currencies.

You can also use a blockchain to prove that you’ve purchased some asset. It can be something physical, like a house or a car or a rare comic book. Or it can be something that exists only in the digital world.

And of course, this being the Internet, the tokens owe some of their popularity to pictures of kittens.

In 2017, a Canadian outfit called Dapper Labs began selling digital images of cats and issuing NFTs to the buyers. The business, called CryptoKitties, generated millions in revenue. This caught the attention of people at the NBA, who realized they could create a purely digital version of traditional sports trading cards. Last year, the league launched Top Shot, a marketplace where fans can buy NFT ownership of video highlights featuring their favorite players, and trade these “moments” among themselves.

Top Shot is still in beta mode, but already fans have made more than $360 million in trades.

But again, what are they trading? The NFT holder doesn’t literally own the video content. It’s still the copyrighted property of the NBA. And you don’t have to buy the NFT to look at a Top Shot moment. It’s right there on the website. Anyone can watch anytime, for free.

So what’s the point? A curious blend of fan loyalty and business opportunity.

For example, Cameron McKirdy is an avid Portland Trailblazers fan who lives in Central Oregon. He also dreams of someday becoming a play-by-play announcer and makes videos of himself for auditions that he posts on YouTube. Using Trailblazers highlights that he bought on Top Shot, McKirdy mixes in recordings of himself describing each athletic feat with dramatic flair.

But McKirdy is an investor as well as a collector. And he’s still kicking himself for not putting his money into Bitcoin back in the day.

“I definitely would have been a millionaire,” he said. “That’s why I’m early on things now.”

He’s convinced the inexpensive NFTs he currently buys will someday be worth many times what he paid for them. He could be right. This week, the Top Shot marketplace features a video of Lebron James for an asking price of $250,000.

The fine art market is also embracing NFTs, and not just because of the potential for a Beeple-sized payoff. NFTs can prove that a digital artwork is authentic and that its seller really owns it. That can be a major challenge with physical artworks that are stolen.

With NFTs, “it’s all in the open and auditable,” said John Crain, founder of the NFT art gallery SuperRare. “Anyone can go and see who minted this certificate.”

But fraud is still possible. A scammer can copy someone’s digital artwork, get an NFT for it, then sell it to an unsuspecting collector as his own. It’s already happening, and there’s probably just one foolproof solution: In the future, artists will have to slap their own NFTs onto every work they produce, before the bad guys do.

NFTs also let artists create “smart contracts” with self-reinforcing terms. Say you buy an NFT for a digital painting on SuperRare, then resell it. At SuperRare, all NFTs include a provision that the original artist gets 10 percent of the sale price whenever the piece is resold; ownership can’t be transferred until the artist receives his money. Paint a portrait in oils, and you get paid for it only once. Paint it digitally, and you can cash in for years to come.

Neha Narula, director of the Digital Currency Initiative at the Media Lab of the Massachusetts Institute of Technology, said smart contracts for digital artworks could carry even more radical terms. An artist could create a work intended for just one user, with an NFT programmed to self-destruct if the owner tries to sell it. Narula also imagines an NFT that copies itself with every sale. That way, the owner can sell the same digital art work 10 or 100 times, but each copy would be an “original.”

NFTs are a grand idea for creators, who can get more control over their work and more income from it. The buyer, meanwhile, gets ironclad proof that his or her digital Beeple painting was created by the artist himself, or that a basketball video came straight from the NBA.

To someone like me, who’ll happily watch sports highlights for free on ESPN, the hundreds of millions being spent on NFTs looks like an exercise in frivolity, and destined to end in tears. But I won’t be too upset if I’m wrong. I paid $10 for an NBA-certified Eric Gordon video, so I’ve got skin in the game.