Explaining Non-Fungible Tokens: NFTs (non-fungible tokens) appear to be everywhere. Digital assets ranging from artwork and music to tacos and toilet paper are fetching prices reminiscent of exotic Dutch tulips from the 17th century, sometimes reaching millions of dollars. Is NFTs worth the hype and the investment? Some experts compare them to the dot-com boom and Beanie Babies, calling them a bubble that will burst. Many think NFTs will revolutionize the investment industry and are here to stay.
What Is an NFT?
NFTs can be art, music, in-game objects, films, or more. Online sales often involve bitcoin, encoded with the same software as other cryptocurrencies.
NFTs have existed since 2014, but they’re growing more popular for buying and selling digital art. The 2021 NFT market was valued at $41 billion, nearly equal to the worldwide fine art market. NFTs have unique codes and are usually one-of-a-kind or limited-run. “Essentially, NFTs create digital scarcity,” explains Arry Yu, Washington Technology Industry Association Cascadia Blockchain Council chair and Yellow Umbrella Ventures managing director.
This is unlike most digital works, which are almost unlimited. If an asset is in demand, lowering supply should increase its value. In the early days, many NFTs were digital works that already existed, such as legendary NBA game clips or securitized Instagram digital art.
Digital artist MiWinkelmannann, known as “Beeple,” created the renowned NFT “Every Day: The First 5000 Days,” which sold for $69.3 million at Christie’s in 2021. Individual photographs or the whole collage can be seen online for free. Explaining Non-Fungible Tokens: Why would someone pay millions for something they can screenshot or download? Because NFT buyers possess the original item. Additionally, it has built-in authentication to prove ownership. Collectors appreciate “digital bragging rights” almost more than the thing.
How Is an NFT Different from Cryptocurrency?
A non-fungible token, or NFT. It shares certain similarities with cryptocurrencies like Bitcoin and Ethereum regarding programming style, but that’s about it. Exchangeable fiat cash and cryptocurrency are “fungible.” Additionally, their value is always equal; just as one dollar is always worth another dollar, so is one Bitcoin. Thanks to its fungibility, one reliable way to do blockchain transactions is with cryptocurrency.
Contrast this with NFTs. Due to their unique digital signatures, NFTs cannot be “mined” or “sold” for other NFTs. The fact that two NBA Top Shot clips are NFTs does not make them equivalent. (There is no universally applicable standard for evaluating NBA Top Shot clips.)
How Does an NFT Work?
The distributed public ledger, a blockchain, is where NFTs reside. Explaining Non-Fungible Tokens, The term “blockchain” is probably most connected with Bitcoin technologies. Although other blockchains do accept NFTs, Ethereum is the most common place to store them.
An NFT is created or “minted” from digital objects that represent both tangible and intangible items, including:
- Graphic art
- GIFs
- Videos and sports highlights
- Collectibles
- Virtual avatars and video game skins
- Designer sneakers
- Music
Twitter counts, too. Jack Dorsey, co-founder of Twitter, made about $2.9 million from selling his first tweet in the form of an NFT. Natural Fiat Coins (NFTs) are digital equivalents of tangible collectibles. Consequently, the purchaser does not receive a physical oil painting but a digital download.
They are also granted the right to exclusive ownership. Using blockchain technology, NFTs make verifying ownership and transferring tokens between owners easy, yet they can only have one owner at a time. An NFT’s metadata can also contain information that the inventor has chosen to include. For example, artists can add their signature to their artwork by putting it in the file.
What Are NFTs Used For?
Thanks to blockchain technology and NFTs, creatives in the arts now have a new way to make money from their work. For example, art galleries and auction houses aren’t necessary for artists to sell their jobs. Alternatively, the artist can retain a more significant portion of the earnings by selling it straight to the customer as an NFT. Also, if someone buys an artist’s work, they can set up royalties to get a cut of the profits. This is a good advantage since artists rarely get a percentage of post-sale revenues.
Making money with NFTs isn’t limited to the art world. Explaining Non-Fungible Tokens: To support good causes, companies like Taco Bell and Charmin have auctioned off themed NFT artwork. The “NFTP” (non-fungible toilet paper) product from Charmin and the NFT artwork from Taco Bell sold out in minutes. The highest bids reached 1.5 wrapped ether (WETH), equivalent to $3,723.83 as of this writing.
An animated GIF of a pop tart-shaped cat named Nyan Cat went for about $600,000 in February. The GIF was created in 2011. By the end of March, NBA Top Shot had made over $500 million. More than $200,000 was paid for just one LeBron James highlight NFT. Notable figures such as Lindsay Lohan and Snoop Dogg are also getting on the NFT bandwagon by releasing one-of-a-kind artwork, memories, and experiences as securitized NFTs.
How to Buy NFTs
The first step is to acquire a digital wallet that can hold your NFTs and other cryptocurrency. If your NFT provider accepts Ether, you may need to buy i. Many online marketplaces now accept credit card purchases of cryptocurrency, including Coinbase, Kraken, eToro, PayPal, and Robinhood. After that, you can transfer money from the exchange to any wallet you like. Consider the costs associated with each choice as you do your study. When you buy cryptocurrency on an exchange, they will likely take a cut of your transaction.
Popular NFT Marketplaces
After funding your wallet, you will find many NFT sites to shop on. Currently, the largest NFT marketplaces are:
• OpenSea.io: “Rare digital items and collectibles” are what this P2P platform claims to sell. First, sign up for an account to peruse NFT collections. Finding new artists is as easy as sorting pieces by sales volume.
• Rarible: Rarible, like OpenSea, is an open marketplace where producers and artists can sell and issue NFTs. The platform’s RARI tokens give holders a say in fees and community regulations.
• Foundation: To share their work, artists here need to get “upvotes” or invitations from other artists. Due to exclusivity and the need to pay “gas” to mint NFTs, the community may showcase higher-quality art. For example, Chris Torres, creator of Nyan Cat, sold the NFT on the Foundation platform. Assuming demand for NFTs stays the same or grows over time, it might also increase prices, which isn’t always bad for collectors and artists looking to cash in.
Do your homework before purchasing, even though thousands of NFT producers and collectors call these and other platforms home. Imposters have listed and sold some artists’ work without permission, causing them to suffer.
Also, different platforms have different levels of strictness when verifying creators and NFT listings. Owner verification is unnecessary for NFT listings for OpenSea and Rarible. Remember the old saying “caveat emptor” (let the buyer beware) while you’re looking for NFTs since buyer safeguards seem to be lacking, to put it mildly.
Should You Buy NFTs?
Does the availability of NFTs imply that you should? That is up to Yu. She warns that NFTs pose a threat due to the lack of data to assess their performance and the uncertainty of their future. “It might be worthwhile to invest little to test it out for now, since NFTs are so new.” Putting it another way, the choice to invest in NFTs is highly individual. Especially if the item has sentimental value to you, it can be worthwhile to consider if you have extra cash.
However, remember that the value of an NFT depends only on the price that someone else is ready to pay for it. So, rather than fundamental, technical, or economic indicators—which commonly impact stock prices and, at the very least, provide the groundwork for investor demand—demand alone will determine the price. This indicates that the value of an NFT may decrease after resale. You might not have any luck reselling it if nobody is interested.
For example, when you sell equities for a profit, NFTs are subject to capital gains taxes. However, due to their classification as collectibles, NFTs might be subject to a higher collectibles tax rate and denied the preferential long-term capital gains rates that stocks enjoy. The IRS has not yet determined the exact nature of NFTs’ tax treatment. You should consult a tax expert before adding NFTs to your portfolio since the cryptocurrencies you used to buy them might be subject to taxes if their value has grown since you purchased them. Treat NFTs like any other investment: Do your homework and learn about the risks of losing all your investment money.
