What Is An NFT? Non-Fungible Tokens Explained

These days, non-fungible tokens, or NFTs, are everywhere. These digital assets, which range from tacos and toilet paper to music and art, are selling for millions of dollars, much like 17th-century exotic Dutch tulips.

But do NFTs live up to the hype or the cost? Like the dot-com bubble or Beanie Babies, some experts believe they are a bubble ready to burst. Some think NFTs are here to stay and will permanently alter the investing landscape.

What Is an NFT?

A non-fungible token (NFT) is a digital asset that can be images, sounds, videos, in-game items, and more. It is typically encoded with the same underlying software as many cryptos and is bought and sold online, often with cryptocurrency.

NFTs have existed since 2014, but they are only now becoming well-known because they are becoming a more common means of purchasing and selling digital art. The value of the NFT market alone in 2021 was an astounding $41 billion, almost equal to the whole market for fine art worldwide.

NFTs have distinct identifying codes and are typically one of a kind or at least one of a minimal run. "Essentially, NFTs create digital scarcity," says Arry Yu, chair of the Washington Technology Industry Association Cascadia Blockchain Council and managing director of Yellow Umbrella Ventures.

This contrasts sharply with most digital works, which are virtually never-ending. Theoretically, if an asset is in demand, stopping its supply should increase its value.

However, at least in the early going, many NFTs have been digital works already existing elsewhere, such as well-known NBA game video clips or securitized versions of digital art already famous on Instagram.

Perhaps the most well-known NFT of 2021, "Every Day: The First 5000 Days," was created by renowned digital artist Mike Winkelmann, better known by his stage name "Beeple," using a composite of 5,000 daily drawings. It sold at Christie's for an astounding $69.3 million.

The individual photos—or even the whole collage of images—can be viewed for free online by anybody. So why are people willing to pay millions for something they could download or take a screenshot of?

Because the buyer can own the original item through an NFT, it has integrated authentication, which acts as ownership verification. Collectors value the "digital bragging rights" nearly as highly as the actual item.

How Is an NFT Different from Cryptocurrency?

The acronym for non-fungible tokens is NFT. Despite some similarities, it is not built with the same programming as cryptocurrencies such as Bitcoin or Ethereum.

Both fiat money and cryptocurrency are "fungible," which allows for trading or exchanging of one for the other. Their values are equal: one Bitcoin is always similar to another, and one dollar is always worth another. Due to its fungibility, cryptocurrency is a reliable way to transact on the blockchain.

NFTs are different. Each has a digital signature that makes it impossible for NFTs to be exchanged for or equal to one another (hence, non-fungible). For example, just because two NBA Top Shot clips are NFTs doesn't mean they are identical. (There is no guarantee that one NBA Top Shot clip is equivalent to another.)

How Does an NFT Work?

Blockchains are distributed public ledgers that record transactions. They are where NFTs are found. You are most likely familiar with blockchain technology as the backbone of cryptocurrencies.

In particular, NFTs are generally maintained on the Ethereum network but can also be held on other networks.

An NFT is produced, or "minted," using digital representations of both material and immaterial objects, such as:

• Graphic art

• GIFs

• Videos and sports highlights

• Collectables

• Virtual avatars and video game skins

• Designer sneakers

• Music

Tweets are also considered. Jack Dorsey, a co-founder of Twitter, sold his first tweet as an NFT for more than $2.9 million.

NFTs are digital versions of actual collector's items. Thus, the buyer receives a digital file rather than an oil painting hanging on the wall.

They also receive the right of exclusive ownership. NFTs are limited to one owner at a time, and because they use blockchain technology, transferring tokens between owners and confirming ownership is simple. The creator can also store specific information in the metadata of an NFT. Artists can sign their pieces, for example, by signing the file itself.

What Are NFTs Used For?

NFTs and blockchain technology give artists and content producers a unique chance to profit from their creations. For instance, artists no longer depend on auction houses or galleries to sell their creations. As an NFT, the artist can instead sell it straight to the customer and keep a more significant portion of the proceeds. Additionally, when their work is sold to a new owner, artists can program in royalties to receive a portion of the proceeds. This is a desirable feature because, after their initial sale, artists typically do not accept any additional revenue.

There are other ways to monetize NFTs besides art. To support charitable causes, companies like Taco Bell and Charmin have auctioned off themed NFT artwork. Taco Bell's NFT artwork sold out in minutes, with the highest bidder coming in at 1.5 wrapped ether (WETH), or $3,723.83 at the time of writing. Charmin called their offering "NFTP" (non-fungible toilet paper).

Nyan Cat, a 2011-era GIF of a cat with a pop-tart body, sold for nearly $600,000 in February. As of late March, NBA Top Shot had generated over $500 million in sales. LeBron James's single highlight, NFT, sold for over $200,000.

Celebrities like Lindsay Lohan and Snoop Dogg also embrace NFTs, releasing original artwork, memories, and moments as securitized NFTs.

How to Buy NFTs

Should you be eager to begin collecting NFTs, you will need to obtain a few essential items:

To begin with, you must purchase a digital wallet that enables you to keep cryptocurrency and NFTs. Depending on what currencies your NFT provider accepts, you may need to buy some cryptocurrency, such as Ether. These days, you can purchase cryptocurrency with a credit card on websites like Coinbase, Kraken, eToro, PayPal, and Robinhood. After that, you can transfer it from the exchange to your chosen wallet.

When considering your options, consider the costs. When you purchase cryptocurrency, most exchanges take at least a transaction cut.

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Popular NFT Marketplaces

After setting up and funding your wallet, there are plenty of NFT sites to choose from. The biggest NFT marketplaces at the moment are:

• OpenSea.io is a peer-to-peer marketplace offering "rare digital items and collectables." All you have to do to explore NFT collections is register for an account. You may arrange the pieces to find new artists according to sales volume.

• Rarible: A democratic, open marketplace that enables artists and creators to issue and sell NFTs, Rarible is comparable to OpenSea. The platform's RARI tokens allow holders to comment on features like fees and community guidelines.

• Foundation: To post their artwork here, artists must first receive "upvotes," or invitations, from other creators. Because of its exclusivity and entry requirements (artists need to buy "gas" to mint NFTs), the community may produce higher-quality works of art. For example, Chris Torres, the creator of Nyan Cat, marketed the NFT on the Foundation platform. Additionally, it might result in higher prices, which might not be bad for collectors and artists looking to profit, provided that the demand for NFTs stays the same or even rises over time.

Thousands of NFT creators and collectors can be found on these and other platforms, but thoroughly investigate any purchases you make beforehand. Impersonators have sold and listed works of art without the artists' consent, besetting some artists.

Furthermore, not all platforms have the same verification procedures for creators and NFT listings; some have stricter requirements than others. For NFT listings, OpenSea and Rarible, for instance, do not require owner verification. The old proverb "caveat emptor" (let the buyer beware) may apply when looking for NFTs, as buyer protections seem meagre.

Should You Buy NFTs?

Does that mean you should buy NFTs just because you can? According to Yu, it depends.

She says, "NFTs are risky because we don't yet have enough history to judge their performance, and their future is uncertain." "Given the novelty of NFTs, it might be worthwhile to experiment with small investments initially."

Put differently, investing in NFTs is primarily an individual choice. Consider whether you have extra cash, particularly if the item has personal significance.

But remember that the only factor determining an NFT's value is the price another party is willing to pay. Consequently, rather than fundamental, technical, or economic indicators—which often affect stock prices and, at the very least, serve as the foundation for investor demand—demand will determine cost.

This implies you might get less money for an NFT when selling it. If no one wants it, you might be unable to resell it.

For example, when you sell stocks profitably, NFTs are liable to capital gains taxes. However, because they are regarded as collectables, they might not be eligible for the same favourable long-term capital gains rates as stocks, and they might even face a higher tax rate on collectables; the IRS still needs to decide what constitutes a collectable for tax purposes. When considering adding NFTs to your portfolio, remember that the cryptocurrencies used to buy them might also be taxed if their value has increased since you purchased them. For more information, consult a tax expert.

Nevertheless, treat NFTs like any other investment:

• Do your homework.
• Be aware of the risks (such as the possibility that you won't get any money back).
• Exercise extreme caution if you decide to jump in.