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What Is An NFT? Non-Fungible Tokens Explained

It seems like non-fungible tokens (NFTs) are everywhere these days. From art and music to tacos and toilet paper, these digital assets are selling like 17th-century exotic Dutch tulips—some for millions of dollars.

Are NFTs worth the money or the buzz they’re generating? Some experts believe they’re a bubble waiting to burst, a la dot-com frenzy or Beanie Babies. Others, however, think these tokens will transform investing permanently.

What Are Non-Fungible Tokens (NFTs)?

What is an NFT?
What is an NFT?

NFTs are digital assets that may consist of art, music, in-game items, videos, and more. They are bought and sold online, frequently using cryptocurrency, and they are typically encoded with the same software as many cryptos.

NFTs have become increasingly popular as a way to buy and sell digital artwork, as they’ve been around since 2014. The entire global fine art market is worth $41 billion, and the NFT market was worth $41 billion in 2021 alone.

NFTs are generally one of a kind, with unique identifying codes, or at least one of a limited run. According to Arry Yu, chair of the Washington Technology Industry Association Cascadia Blockchain Council and managing director of Yellow Umbrella Ventures, digital scarcity is essentially created by NFTs.

The fact that digital creations are always in high demand is the opposite of what we normally see with physical goods. In this case, the value of the asset should have risen, assuming that it was still in demand.

These early NFTs have been digital recreations of existing physical items, like NBA video clips or securitized digital art that has already been posted on Instagram.

Beeple, a well-known digital artist, created “EVERYDAYS: The First 5000 Days”, a NFT that sold for a record-breaking $69.3 million at Christie’s in 2021, using 5,000 daily drawings.

People are willing to spend millions on something they could easily screenshot or download, since anyone can view the individual images or the entire collage online for free.

An NFT offers the original item in addition to authentication to prove ownership. Collectors value the “digital bragging rights” almost as much as the item itself.

How Is an NFT Different from Cryptocurrency?

Non-fungible tokens are built using the same type of code as cryptocurrencies such as Bitcoin or Ethereum, but the two differ in pretty much everything else.

Physical money and cryptocurrencies can be exchanged for one another or traded. They are of equal value—one dollar is always worth the same as another dollar; one Bitcoin is always equal to another Bitcoin. The blockchain relies on crypto’s fungibility for trustworthy transactions.

NFTs are unique. Each has a cryptographic signature that ensures they cannot be exchanged for or equated with one another (hence, non-fungible). For example, NBA Top Shot clips are not equivalent to EVERYDAYS just because they are both NFTs. (In fact, NBA Top Shot clips may not even be equal to one another.)

How Does an NFT Work?

A blockchain records NFT transactions on a distributed public ledger. A blockchain is the technology that enables cryptocurrencies, and an NFT is no exception.

NFTs are typically held on the Ethereum blockchain, but other blockchains also support them.

NFTs are “minted” from digital representations of both tangible and intangible objects:

Even a single tweet has been sold as a NFT for as much as $2.9 million, thanks to Jack Dorsey, co-founder of Twitter.

NFTs are like physical collector’s items, only digital. The buyer therefore gets a digital file rather than an oil painting to hang on the wall.

NFTs are able to store metadata containing specific information in addition to the data they store. Because they employ blockchain technology, NFTs can be verified as being owned or transferred between owners. Only one person can own an NFT at any given time, making them unique and difficult to counterfeit.

What purposes are NFTs used for?

Artists and content creators can now benefit from blockchain technology and Non-Fungible Tokens (NFTs) by monetizing their wares more directly. Rather than relying on galleries or auction houses to sell their art, the artist can sell directly to consumers as an NFT and keep more of the profits. In addition, the artist can receive a percentage of each sale whenever their art is resold by setting up royalties. Artists rarely get further payments after their art is first sold, making this an appealing function.

NFT art can be used to make money in addition to being an art form. Charmin and Taco Bell have sold NFT themed toilet paper to raise money for charities. Charmin named their toilet paper ‘NFTP’ (non-fungible toilet paper), and Taco Bell’s NFT art sold out instantly, with the highest bids being 1.5 wrapped WETH (ether)—equal to $3,723.83 at the moment of writing.

In February, the Nyan Cat, a 2011-era GIF of a cat with a pop-tart body, was sold for nearly $600,000. NBA Top Shot generated over $500 million in sales as of late March. On a single LeBron James highlight NFT, more than $200,000 was paid.

Even celebrities such as Snoop Dogg and Lindsay Lohan are using NFTs to issue personalized memories, art, and moments, all of which are secured.

How to Buy NFTs

To begin your own NFT collection, you must acquire some important items:

The first step is to purchase an NFT digital wallet that allows you to store both crypto and NFTs. You may need to buy some crypto, like Ether, depending on what types of NFTs your provider offers. You may then move the crypto from the exchange to your preferred wallet. You can buy crypto with a credit card on platforms like Coinbase, Kraken, eToro, and PayPal and Robinhood, among others.

When you research cryptocurrency exchanges, keep transaction fees in mind. Typically, exchanges charge at least a percentage of your transaction when you buy crypto.

Popular NFT Marketplaces

Once you have set up and funded your wallet, there is no shortage of NFT sites to shop on. Currently, the largest NFT marketplaces are:

OpenSea is a peer-to-peer platform that advertises itself as a provider of “rare digital items and collectibles.” To get started, all you need to do is create an account to peruse NFT collections. You may also sort items by sales volume to discover new artists.

Rarible is a democratic, open marketplace where artists and creators can issue and sell NFTs. RARI tokens issued on the platform allow holders to vote on features like fees and community rules.

Artists must be invited or “upvoted” by other members in order to post their work on Foundation. It is an exclusive community with a high barrier to entry, meaning that the artwork is of higher quality. For example, Nyan Cat creator Chris Torres sold the NFT on Foundation. Increased prices might also result, although this is not necessarily a bad thing for artists or collectors seeking to profit, provided that demand for NFTs remains the same or increases in the future.

Despite the fact that there are thousands of NFT creators and collectors on these platforms, do your research carefully before purchasing. Some artists have been victimized by impersonators who have listed and sold their work without their permission.

Across platforms, verification processes for creators and NFT listings aren’t consistent — some are more stringent than others. OpenSea and Rarible, for example, don’t require owner verification for NFTs. When buying NFTs, buyer protections may be minimal, so it may be best to remember the old saying ‘caveat emptor’ (‘let the buyer beware’ in Latin).

Should You Buy NFTs?

Is buying NFTs a good idea? It depends, Yu says.

Fetters are risky because their future is unknown, and we have little precedent to assess their performance,” she says. “Since fetters are so novel, it might be worth investing a small amount to try them out for now.”

Investing in NFTs is a largely personal decision. If you have money to spare, it may be worth considering, especially if a piece holds significance for you.

An NFT’s value is solely determined by what someone else is willing to pay for it. Therefore, demand rather than economic indicators, technical considerations, or fundamental considerations will determine its price.

An NFT may resell for less than you paid for it, or you may not be able to resell it at all if no one wants it.

While NFTs are treated as collectibles for tax purposes and are therefore subject to capital gains taxes, the IRS has not yet determined whether they are taxed as collectibles or not. The long-term capital gains rate on stocks is not offered to NFTs, although they may be taxed at a higher collectibles rate. You may want to consult a tax professional before adding NFTs to your portfolio if you have purchased cryptocurrencies to purchase the NFTs, as they may also be taxed if they have increased in value since you bought them.

However, when investing in NFTs, approach them just as you would any other investment: Research them, be aware of the risks, and proceed with caution if you choose to invest.

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