This year, non-fungible tokens (NFTs), seem to have burst from the ether. These digital assets, which include art, music and even tacos and toilet papers are selling for millions of dollars.
Experts believe they are a bubble that is poised to burst, similar to the Beanie Babies or dotcom craze. Others believe NFTs will transform investing forever and are here to stay.
What is an NFT?
An NFT (networked financial asset) is a digital asset that can be used to represent real-world objects such as art, music and video. These digital assets can be bought and sold online using cryptocurrency. They generally have the same underlying software that many cryptos have.
NFTs have been around since 2014 but are now gaining popularity as a popular way to sell and buy digital artwork. Since November 2017, NFTs have been worth $174 million.
Also, NFTs are usually one-of-a-kind or in a very limited number of copies and come with unique identifying codes. Arry Yu, chairman of the Washington Technology Industry Association Cascadia Blockchain Council, and managing director at Yellow Umbrella Ventures, says that NFTs are fundamentally a source of digital scarcity.
This is in sharp contrast to digital creations that are almost always in short supply. Hypothetically, if an asset is in high demand, cutting off its supply would increase its value.
However, many NFTs were digital creations that existed in some form somewhere else, such as iconic clips from NBA games and securitized digital art that's floating around on Instagram.
Mike Winklemann, a digital artist best known as Beeple, created a compilation of 5,000 daily sketches to create "EVERYDAYS": The First 5000 days, which Christie's sold for a record breaking $69.3 million.
You can view individual images or the entire collage online free of charge. Why would anyone spend millions to view something that they can easily download or screenshot?
An NFT is a way for the buyer to purchase the original item. It also includes built-in authentication that serves as proof of ownership. These "digital bragging points" are valued by collectors more than the actual item.
What is the difference between NFT and Cryptocurrency?
NFT stands for non-fungible token. The token is generally constructed using the same programming techniques as cryptocurrency like Bitcoin and Ethereum. But that's about the end of the similarities.
Both physical money and digital currencies are "fungible," which means they can be traded or exchanged. They are also equal in value - one dollar is always worth another; one bitcoin is always equal to another bitcoin. Crypto's fungibility allows it to be trusted for transactions on the blockchain.
Different NFTs exist. Each NFT has a unique digital signature, which makes it impossible to exchange them for or make them equal (hence, non-fungible). Because they are both NFTs, one NBA Top Shot clip is not equivalent to EVERYDAYS. One NBA Top Shot clip may not be equal to another NBA Top Shot video.
What is an NFT?
Blockchain is a distributed public ledger that records transactions. NFTs are possible on blockchain. Blockchain is the process that makes cryptocurrency possible.
NFTs are held on the Ethereum blockchain. However, other blockchains can also support them.
An NFT is made from digital objects, which can be both tangible and intangible.
Art
GIFs
Highlights from sports and videos
Collectibles
Virtual avatars and skins for video games
Designer sneakers
Music
Tweets count. Jack Dorsey, Twitter's co-founder, sold his first tweet as an NFT to raise more than $2.9million.
NFTs can be described as digital collector's items but are not physically tangible. Instead of an oil painting that can be hung on the wall, buyers get a digital file.
They also have exclusive ownership rights. NFTs can only have one owner at any given time.
NFTs have unique data that makes it easy for owners to verify ownership and transfer tokens. They can also be stored by the creator or owner. Artists can sign their work by adding their signature to the metadata of an NFT.
What are NFTs used for?
Artists and content creators have unique opportunities to monetize their work with NFTs and blockchain technology. Artists no longer need to depend on auction houses or galleries to sell their art. The artist can instead sell their art directly to the customer as an NFT. This allows them to keep more of the profit. Artists can also program in royalties to receive a portion of the sales proceeds when their art is sold. This is a great feature because artists don't usually receive any future proceeds once their art has been sold.
NFTs aren't just about making money through art. To raise money for charities, brands like Taco Bell and Charmin have sold NFT art themed to auction. Charmin called its offering "NFTP" or non-fungible toilet tissue. Taco Bell's NFT artwork sold out in minutes. The highest bid was 1.5 wrapped ether, which is equal to $3723.83 at the time of writing.
Nyan Cat, a GIF of a cat wearing a pop-tart body from 2011, sold for almost $600,000. In late March, NBA Top Shot had sold more than $500,000,000 in sales. One LeBron James highlight NFT sold more than $200,000.
Celebrities like Lindsay Lohan and Snoop Dogg are joining the NFT wagon, creating unique memories, artwork, and moments with securitized NFTs.
How to buy NFTs
You will need some key items if you want to start your own NFT collection.
First, you will need a digital wallet to store NFTs or cryptocurrencies. Depending on which currencies your NFT provider allows, you will likely need to buy Ether. On platforms such as Coinbase, Kraken and eToro, you can now buy crypto with a credit card. The exchange will allow you to transfer the crypto to your preferred wallet.
As you explore your options, fees should be considered. When you buy crypto, most exchanges will charge a minimum of 1%.
Once your wallet is set up and funded you will have no problem finding NFT sites to shop at once. The largest NFT marketplaces currently available are:
OpenSea.io is a peer-to-peer marketplace that sells "rare digital items and collectibles." All you have to do to get started is to create an account to view NFT collections. To discover new artists, you can also sort pieces based on their sales volume.
Rarible: Rarible, similar to OpenSea is an open, democratic marketplace that allows creators and artists to sell and issue NFTs. RARI tokens, which are issued on the platform, allow holders to participate in features such as fees and community rules.
Foundation: Artists must be invited by fellow creators to submit their artwork. Artists must purchase gas to make NFTs, which increases the community's exclusivity. Chris Torres, Nyan Cat creator, sold the NFT via the Foundation platform. This may lead to higher prices, which is not necessarily a bad thing, for collectors and artists looking to capitalise, provided that the demand for NFTs continues at current levels or increases in the future.
These platforms, as well as others, are home to thousands of NFT creators. However, it is important that you do your research before purchasing. Many artists have been sold by imposters who list their work and sell it without their permission.
Additionally, verification procedures for creators and NFT listing listings are not consistent across platforms. Some are more stringent than other. OpenSea, Rarible, and other platforms don't require owner verification to list NFTs. Buyer protections seem to be minimal at best. Therefore, when looking for NFTs it is a good idea to remember the old saying "caveat inemptor" (let buyers beware).
Are NFTs Worth It?
Does that mean you have to buy NFTs? It depends, Yu says. She notes that NFTs are "risky" because they have uncertain futures and there is not much historical data to evaluate their performance. NFTs are still relatively new so it might be worthwhile to invest small amounts in order to test it out.
NFTs are a personal investment decision. It may be worth looking into if you have the money, particularly if you are interested in a particular piece.
Keep in mind that an NFT's worth is determined entirely by what another person is willing to pay. Demand will determine the price, not fundamental, technical, or economic indicators that typically affect stock prices but which generally provide the basis for investor demand.
An NFT can be resold for less than what you paid for it. If no one is interested, you might not be able sell it.
Capital gains taxes are also applicable to NFTs, just like when you sell stocks for a profit. They are not subject to the long-term capital gains rates that stocks receive. In fact, they could be taxed at the higher collectibles rate. However, the IRS has yet to decide what NFTs should be considered tax-wise. Keep in mind that cryptocurrencies purchased to buy the NFT could also be subject to tax if their value has increased since they were bought. If you are considering adding NFTs, a tax professional may be able to help you.
NFTs should be approached as you would any other investment. Do your research and understand the risks. You might even lose your entire investment. If you do decide to invest, take a healthy dose of caution.
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