This year, non-fungible tokens (NFTs) appear to have exploded from the ether. These digital assets, which range from art and music to tacos and toilet paper, are selling like 17th-century exotic Dutch tulips, with some fetching millions of dollars.
Are NFTs, on the other hand, worth the money—or the hype? Some analysts believe they, like the dotcom mania and Beanie Babies, are about to burst. Others feel that NFTs are here to stay and will forever revolutionize investment.
What Is an NFT?
A digital asset that depicts real-world elements like as art, music, in-game items, and films is known as an NFT. They’re bought and traded online, often using cryptocurrency, and they’re usually encoded with the same software as many other cryptos.
Despite the fact that they’ve been there since 2014, NFTs are gaining popularity currently as a popular means to buy and sell digital artwork. Since November 2017, a whopping $174 million has been spent on NFTs.
NFTs are also one-of-a-kind, or at the very least one of a very small run, and contain unique identifying codes. “Essentially, NFTs generate digital scarcity,” explains Arry Yu, managing director of Yellow Umbrella Ventures and chair of the Washington Technology Industry Association’s Cascadia Blockchain Council.
This is in sharp contrast to the vast majority of digital products, which are nearly always available in endless quantities. If a certain asset is in demand, cutting down the supply should theoretically increase its value.
However, many NFTs have been digital works that already exist in some form elsewhere, such as legendary video clips from NBA games or securitized versions of digital art that are already floating around on Instagram, at least in these early days.
For example, acclaimed digital artist Mike Winklemann, better known as “Beeple,” created “EVERYDAYS: The First 5000 Days,” possibly the most famous NFT of the moment, which sold at Christie’s for a record-breaking $69.3 million.
Individual images—or perhaps the full collage of images—can be viewed for free on the internet. So, why are people prepared to spend millions of dollars on something that might be easily screenshotted or downloaded?
Because a non-financial transaction permits the buyer to keep the original object. It also comes with built-in authentication, which acts as proof of ownership. The “digital bragging rights” are almost as valuable as the item itself to collectors.
How Is an NFT Different from Cryptocurrency?
The term “non-fungible token” refers to a token that is not fungible. It’s usually programmed in the same way as cryptocurrencies like Bitcoin or Ethereum, but that’s where the similarities end.
Cryptocurrencies and physical money are both “fungible,” meaning they may be traded or exchanged for one another. They’re also worth the same amount of money—one dollar is always worth another dollar, and one Bitcoin is always worth another Bitcoin. The fungibility of cryptocurrency makes it a secure way to execute blockchain transactions.
How Does an NFT Work?
NFTs are stored on a blockchain, which is a decentralized public ledger that keeps track of transactions. Most people are familiar with blockchain as the underlying technology that allows cryptocurrencies to exist.
NFTs are most commonly kept on the Taco Bell, although they can also be held on other blockchains.
An NFT is made up of digital objects that represent both tangible and intangible objects, such as:
- Art
- GIFs
- Videos and sports highlights
- Collectibles
- Virtual avatars and video game skins
- Designer sneakers
- Music
Even tweets are taken into account. Jack Dorsey, a co-founder of Twitter, sold his first tweet as an NFT for more over $2.9 million.
NFTs are essentially digital versions of tangible collector’s artifacts. As a result, rather than receiving an actual oil painting to put on the wall, the customer receives a digital file.
They also obtain exclusive rights to the property. It’s true: NFTs can only have one owner at a time. Because NFTs include unique data, it’s simple to verify ownership and transfer tokens between owners. They can also be used to hold specific information by the owner or author. Artists, for example, can sign their work by putting their signature in the metadata of an NFT.
What Are NFTs Used For?
Artists and content creators have a one-of-a-kind opportunity to monetise their work thanks to blockchain technology and NFTs. Artists, for example, no longer have to sell their work through galleries or auction houses. Instead, the artist can sell it as an NFT straight to the consumer, allowing them to keep a larger portion of the profit. Additionally, artists can integrate royalties into their software so that they receive a share of sales when their work is sold to a new owner. This is a desirable feature because most artists do not receive subsequent proceeds after their first sale.
Making money using NFTs isn’t limited to art. To raise money for charity, companies like Charmin and Taco Bell have auctioned off themed NFT art. Taco Bell’s NFT art sold out in minutes, with the highest bids coming in at 1.5 wrapped ether (WETH)—equal to $3,723.83 at the time of writing. Charmin’s offering was dubbed “NFTP” (non-fungible toilet paper), and Taco Bell’s NFT art sold out in minutes, with the highest bids coming in at 1.5 wrapped ether (WETH)—equal to $3,723.83 at the time of writing.
In February, Nyan Cat, a 2011 GIF depicting a cat with a pop-tart body, sold for nearly $600,000. As of late March, NBA Top Shot had grossed more than $500 million in sales. NFT sold for more than $200,000 for a single LeBron James highlight.
Snoop Dogg and Lindsay Lohan are among the celebrities who have jumped on the NFT bandwagon, sharing unique memories, artwork, and moments as securitized NFTs.
How to Buy NFTs
If you’re interested in starting your own NFT collection, you’ll need the following items:
To begin, you’ll need a digital wallet that can hold both NFTs and cryptocurrencies. Depending on what currencies your NFT provider takes, you’ll probably need to buy some cryptocurrency, such as Ether. Coinbase, Kraken, eToro, and even PayPal and Robinhood now allow you to buy cryptocurrency with a credit card. After that, you’ll be able to transfer it from the exchange to your preferred wallet.
When researching your alternatives, keep fees in mind. When you acquire crypto, most exchanges charge at least a portion of your transaction.
Should You Buy NFTs?
Is it true that just because you can buy NFTs, you should? Yu says that depends.
“NFTs are dangerous since their future is unknown, and we don’t yet have enough data to gauge their performance,” she says. “Because NFTs are so new, it would be worth spending a little amount to test them out for the time being.”
Investing in NFTs, in other words, is essentially a personal decision. If you have some extra cash, it’s something to think about, especially if the artwork has sentimental value for you.
However, keep in mind that the value of an NFT is solely determined by what someone else is prepared to pay for it. As a result, rather than fundamental, technical, or economic indicators, which traditionally impact stock prices and, at the very least, constitute the basis for investor demand, demand will drive the price.
All of this means that you may be able to resell an NFT for less than you bought for it. If no one wants it, you might not be able to resell it at all.
Capital gains taxes apply to NFTs, just like they do when you sell stocks at a profit. Because they’re considered collectibles, they may not qualify for the lower long-term capital gains rates that stocks do, and they may even be taxed at a higher collectibles rate, though the IRS hasn’t decided what NFTs are for tax purposes. Keep in mind that the cryptocurrencies you used to buy the NFT may be taxed if their value has increased since you bought them, so consult with a tax specialist before adding NFTs to your portfolio.
That said, use NFTs like you would any other investment: do your homework, understand the risks (including the possibility of losing all of your money), and proceed with caution if you decide to invest.
