People are paying millions for digital collectibles ‘NFTs’ – What to know about this digital asset

People are paying millions for digital collectibles known as “NFTs.” Here’s what you need to know about this new digital asset. For access to live and exclusive video from CNBC subscribe to CNBC PRO: https://cnb.cx/2NGeIvi

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

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

Meanwhile, one of thousands of computer-generated avatars called CryptoPunks recently sold for $2 million. And a crypto art rendition of the Nyan Cat meme from 2011 sold for about $590,000 in an online auction.

Proponents of NFTs say they fix a big problem with the internet: artists not getting paid for the distribution of their content online. At the same time, critics see the NFT craze as another potential speculative frenzy in crypto that’s sure to fizzle out eventually.

So what exactly are NFTs? And why are they suddenly being sold for millions? CNBC runs through everything you need to know.

What are NFTs?

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

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

You can think of them like the crypto alternative to rare Pokémon or baseball cards.

The rise of the internet meant that anyone could view images, videos and songs online for free. People are buying NFTs out of the belief that they’ll be able to prove ownership of a virtual item thanks to blockchain.

NBA Top Shot, an NFT platform based on the U.S. basketball league, lets users buy and sell short clips showing match highlights from star players. The NBA licenses the reels to Dapper Labs, a start-up which digitizes the footage, making a limited amount to create scarcity. NBA Top Shot has facilitated over $280 million in sales to date, according to the website CryptoSlam. Dapper Labs earns a cut on each transaction while the NBA gets royalty payments.

Basketball isn’t the only sport getting into crypto. French start-up Sorare lets users collect and play officially licensed soccer cards in fantasy games. According to NFT data tracker NonFungible, Sorare’s marketplace has generated over $22 million worth of sales to date. Sorare last week announced it had raised $50 million from investors including Benchmark, Accel and Reddit co-founder Alexis Ohanian.

“It is an obvious industry use case for NFTs,” said Lars Rensing, CEO of blockchain firm Protokol. “Trading cards and collectibles have always been a profitable revenue stream for clubs.”

Meanwhile, art dealers are also getting in on the action, with auction house Christie’s running an auction for a virtual art piece from Beeple. The auction is yet to close but the work has already been bid up to $3 million.

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