Tokens that aren’t fungible are explained
This year, non-fungible tokens (NFTs) seem to have burst 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 permanently revolutionize investment.
What Is a Non-Financial Transaction (NFT)?
A digital asset that depicts real-world elements like as art, music, in-game goods, and films is known as an NFT. They’re purchased 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 purchase and sell digital artwork. Since November 2017, a whopping $174 million has been spent on NFTs.
NFTs are likewise one-of-a-kind, or at the very least one of a very small run, and contain unique identification codes. “Essentially, NFTs generate digital scarcity,” explains Arry Yu, managing director of Yellow Umbrella Ventures and head 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 item is in demand, shutting 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 copies 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 time, which sold at Christie’s for a record-breaking $69.3 million.
Individual images—or perhaps the full collage of images—can be seen for free on the internet. So, why are individuals prepared to spend millions of dollars on something that might be simply 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 evidence of ownership. The “digital bragging rights” are nearly as valuable as the object itself to collectors.
What Is the Difference Between an NFT and 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 stop.
Cryptocurrencies and physical money are both “fungible,” meaning they may be traded or swapped 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 gives it a secure way to execute blockchain transactions.
NFTs aren’t like other materials. Each contains a digital signature that prevents NFTs from being substituted for or compared to one another (hence, non-fungible). Simply though they’re both NFTs, one NBA Top Shot clip isn’t the same as EVERYDAYS. (For that matter, one NBA Top Shot footage isn’t necessarily comparable to another NBA Top Shot clip.)
What Is an NFT and How Does It Work?
NFTs are stored on a blockchain, which is a decentralized public ledger that keeps track of transactions. Most people are acquainted with blockchain as the underlying technology that allows cryptocurrencies to exist.
NFTs are most often kept on the Ethereum blockchain, although they may also be stored on other blockchains.
An NFT is made up of digital objects that represent both physical and ethereal things, such as:
• Craftsmanship
• Animated GIFs
• Highlights from sports and videos
• Antiques and collectibles
• Video game skins and virtual avatars
• Sneakers by a designer
• Instrumental 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 of receiving a real 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 may also be used to hold particular information by the owner or author. Artists, for example, may sign their work by putting their signature in the metadata of an NFT.
What Is the Purpose of NFTs?
Artists and content producers have a one-of-a-kind chance to monetise their work thanks to blockchain technology and NFTs. Artists, for example, no longer have to sell their work via galleries or auction houses. Instead, the artist may sell it as an NFT straight to the customer, allowing them to retain a larger portion of the earnings. Additionally, artists may integrate royalties into their software so that they get a share of revenues when their work is sold to a new owner. This is a desirable feature since most artists do not earn subsequent revenue after their initial 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 paintings. 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 over $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 experiences, artwork, and moments as securitized NFTs.
How to Purchase 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 purchase cryptocurrency using 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.
NFT Marketplaces in High Demand
There are many of NFT sites to choose from after you’ve set up and funded your wallet. The following are the major NFT markets at the moment:
• OpenSea.io: This peer-to-peer marketplace claims to sell “rare digital objects and treasures.” To get started, just create an account and explore the NFT collections. You may also sort works by how much they sold to find new artists.
• Rarible: Rarible is a democratic, open marketplace that lets artists and producers to issue and sell NFTs, similar to OpenSea. The platform’s RARI tokens let users to vote on features such as fees and community regulations.
• Foundation: To upload their work here, artists must get “upvotes” or an invitation from other creators. Because of the community’s exclusivity and high admission cost—artists must also acquire “gas” to mint NFTs—it is likely to attract higher-quality work. Chris Torres, the developer of Nyan Cat, for example, sold the NFT on the Foundation platform. It might also imply higher pricing, which isn’t necessarily a negative thing for artists and collectors looking to profit if demand for NFTs stays the same or even rises over time.
Although these and other sites are home to hundreds of NFT artists and collectors, do your homework before purchasing. Some artists have been defrauded by impersonators who have advertised and sold their work without their knowledge.
Furthermore, the verification methods for creators and NFT listings vary per platform, with some being more strict than others. For NFT postings, OpenSea and Rarible, for example, do not need owner verification. Buyer safeguards seem to be limited at best, therefore it’s wise to remember the ancient adage “caveat emptor” (let the buyer beware) while buying for NFTs.
Should You Invest in NFTs?
Is it true that just because you can purchase NFTs, you should? Yu replies 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 choice. If you have some extra cash, it’s something to think about, particularly if the artwork has sentimental value for you.
However, bear 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 factors, which traditionally impact stock prices and, at the very least, constitute the foundation for investor demand, demand will drive the price.
All of this implies that you may be able to resell an NFT for less than you bought for it. If no one wants it, you may not be able to resell it at all.
Capital gains taxes apply to NFTs, just as they do when you sell equities 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 reasons. Keep in mind that the cryptocurrencies you used to buy the NFT may be taxed if their value has grown since you acquired 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 care if you decide to invest.
