NFTs (non-fungible tokens) appear to have exploded in popularity this year. Digital assets ranging from art and music to tacos and toilet paper are selling like 17th-century exotic Dutch tulips — some for millions of dollars.
What is the value of NFTs? Unlike the dot-com bubble or Beanie Babies, they are considered a bubble that could burst anytime soon. Others believe NFTs are here to stay, and that they will change investing forever.
What Is an NFT?
NFTs are digital assets that represent real-world objects like art, music, in-game items, and videos. The majority of them are bought and sold online, typically with cryptocurrency, and their underlying software is the same as that used for cryptos.
Despite being around since 2014, NFTs are gaining notoriety now because they are becoming a popular method of purchasing and selling digital artwork. In the months since November 2017, NFTs have cost $174 million.
NFTs also have unique identifiers and are usually one of a kind or a limited run. “In essence, NFTs create digital scarcity,” says Arry Yu, chair of the Washington Technology Industry Association Cascadia Blockchain Council and managing director of Yellow Umbrella Ventures.
Digital creations, on the other hand, almost always have an infinite supply, which makes them stand out. Assuming an asset is in demand, cutting off its supply should raise its value.
However, many NFTs are digital creations that already exist in some form elsewhere, such as iconic video clips from NBA games or securitized versions of digital art that’s already available on Instagram.
“Beeple,” a famous digital artist, created perhaps the most famous NFT of the moment, “Every day: The First 5000 Days,” which sold at Christie’s for a record-breaking $69.3 million.
Viewing individual photos or a collage of images online is free for anyone. How can people possibly justify spending millions on something that they could easily screenshot or download?
Because the original item is owned by the buyer of an NFT. Additionally, it comes with built-in authentication that proves ownership. The “digital bragging rights” of collectors are almost as valuable as the item itself.
How Is an NFT Different from Cryptocurrency?
A non-fungible token is what NFT stands for. Bitcoin and Ethereum are primarily built through the same kind of programming, but that’s where the similarities end.
A physical currency and a cryptocurrency can be exchanged for each other because they are “fungible.” The basic unit of value is the dollar, and it is always equal to another dollar; the same goes for Bitcoin. A blockchain transaction is trusted because of crypto’s fungibility.
Compared to NFTs, they are different. They each have a digital signature that prevents them from being exchanged for or equal to one another (hence, they are non-fungible). Just because they’re both nuts does not mean there’s a correlation between one NBA Top Shot and the next. (One NBA Top Shot clip isn’t even necessarily the same as another NBA Top Shot clip.)
How Does an NFT Work?
Blockchains, which are distributed public ledgers that record transactions, are used to store NFTs. You’re probably most familiar with blockchain as the underlying process that makes cryptocurrencies possible.
The Ethereum blockchain is often used to store NFTs, although other blockchains may also support them.
An NFT is a combination of digital objects that represent tangible and intangible items, including:
• Videos and sports highlights
• Virtual avatars and video game skins
• Designer sneakers
Twitter counts, too. Twitter co-founder Jack Dorsey sold his first-ever tweet as an NFT for more than $2.9 million.
It’s like a physical collector’s item, except that it’s digital. Therefore, the buyer gets a digital file instead of an actual oil painting to hang on the wall.
The rights of ownership also belong to them exclusively. In other words, no more than one owner can own an NFT at one time. It is easy to verify the ownership of NFTs and transfer tokens between owners thanks to their unique data. Additionally, specific information can be stored by its owners or creators. In addition to signing their artwork, artists can also include their signatures in an NFT’s metadata.
What Are NFTs Used For?
NFTs and blockchain technology offer unique monetization opportunities to content creators and artists. For example, artists no longer have to rely on galleries or auction houses to sell their art. Instead, the artist can sell it directly to the consumer as an NFT, which also lets them keep more of the profits. In addition, artists can program in royalties so they’ll receive a percentage of sales whenever their art is sold to a new owner. This is an attractive feature as artists generally do not receive future proceeds after their art is first sold.
Making money with NFTs isn’t limited to art. Taco Bell and Charmin have auctioned themed NFT art to raise money for charities. Taco Bell’s NFT art sold out in minutes for 1.5 wrapped ether (WETH)-equivalent to $3,723.83 at the moment — according to Charmin’s NFTP (non-fungible toilet paper) offering.
The most expensive GIF sold in February was Nyan Cat, a cat with a pop-tart body from 2011. The NBA Top Shot game sold more than $500 million as of March 31st. NFT highlights by LeBron James have fetched more than $200,000.
NFTs are releasing securitized copies of unique memories, artwork and moments by celebrities like Snoop Dogg and Lindsay Lohan.
How to Buy NFTs
Getting started with your own NFT collection will require you to acquire the following items:
The first step is to get a digital wallet compatible with NFTs and cryptocurrencies. If your NFT provider accepts Ether as a currency, you’ll probably need to purchase some cryptocurrency. On platforms like Coinbase, Kraken, eToro, PayPal, and even Robinhood, you can buy crypto with a credit card. Afterwards, you’ll be able to move it to the wallet that you choose.
As you research options, you should consider fees. It is common for exchanges to charge a percentage of your purchase when buying crypto.
Popular NFT MarketplacesThere is no shortage of NFT sites to shop from once your wallet is set up and funded. Currently, the largest NFT marketplaces are:
You can browse NFT collections on OpenSea.io, a peer-to-peer platform described as a seller of “rare digital items and collectables.” To get started, just sign up for an account. Discover new artists by sorting pieces based on their sales volume.
• Rarible: Similar to OpenSea, Rarible is a democratic, open marketplace that enables artists and creators to issue and sell NFTs. RARI token holders can influence features such as fees and rules on the platform with their tokens.
Artists post their work to Foundation only after receiving “upvotes” from fellow creators. Since NFTs are exclusive and expensive to mint, high-quality artwork may be created within the community. Founder of Nyan Cat Chris Torres sold the NFT onto the Foundation platform. If the demand for NFTs remains at current levels, or even increases, higher prices may also arise – not necessarily a bad thing for artists and collectors.
There are thousands of talented NFT creators and collectors on these platforms and others but do your research carefully before you buy. The work of some artists has been listed and sold by impersonators without their consent.
Additionally, the verification processes for creators and NFT listings are inconsistent across platforms – some are more rigorous than others. For example, OpenSea and Rarible do not require owner verification for NFT listings. Since there don’t appear to be many protections for buyers, it’s probably best to follow the adage “caveat emptor” (let the buyer beware) when shopping for NFTs.
Should You Buy NFTs?
Should you buy NFTs just because they are available? It depends, Yu says.
It is risky to invest in NFTs because their future is uncertain, and we do not yet have enough data to judge their performance. “Since NFTs are so new, it may be worth investing small amounts to try it out for now.”
A lot of investment decisions are made on a personal level when it comes to NFTs. If you have money to spare, it may be worth considering, especially if a piece holds meaning for you.
It’s important to remember, however, that the value of an NFT depends entirely on what someone else will pay for it. Due to this, stock prices will be driven by the demand for the stock rather than by fundamental, technical, or economic indicators, which at least generally shape investor demand.
All of this means you may have less money left after reselling an NFT. Or you may not be able to resell it at all if no one wants it.
Just like stocks, NFTs can also generate capital gains taxes. Since they’re considered collectables, however, they may not receive the preferential long-term capital gains rates stocks do and may even be taxed at a higher collectables tax rate, though the IRS has not yet ruled what NFTs are considered for tax purposes.
When considering adding NFTs to your portfolio, you may want to check with a tax professional to determine if the cryptocurrencies used to purchase the NFTs have increased in value since you purchased them.
If you do decide to invest in NFTs, treat them with the same caution you would with any other investment: Research, understand the risks and proceed with a healthy dose of caution.