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What is an NFT? – Forbes Advisor
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Non-fungible tokens (NFTs) seem to be everywhere these days. From art and music to tacos and toilet paper, these digital assets sell like they did in the 17th century Exotic Dutch tulips– some for millions of dollars.
But are NFTs worth the money or the hype? Some experts say they are a bubble ready to burst, like the dot-com craze or Beanie Babies. Others believe that NFTs are here to stay and will change investing forever.
What is an NFT?
An NFT is a digital asset that can come in the form of art, music, game items, videos, and more. They are bought and sold online, often with cryptocurrencyand are generally coded with the same underlying software as many cryptocurrencies.
Although they have been around since 2014, NFTs are gaining notoriety now because they are becoming an increasingly popular way to buy and sell digital artwork. The NFT market was worth a staggering $41 billion in 2021 alone, a figure approaching the total value of the entire global fine art market.
NFTs are also generally one-of-a-kind, or at least very limited-run, and have unique identifying codes. “Essentially, NFTs create digital scarcity,” says Arry Yu, president of the Washington Technology Industry Association’s Cascadia Blockchain Council and managing director of Yellow Umbrella Ventures.
This is in stark contrast to most digital creations, the supply of which is almost always infinite. Hypothetically, cutting supply should increase the value of a given asset, assuming it is in demand.
But many NFTs, at least in these early days, have been digital creations that already exist in some form elsewhere, like iconic video clips from NBA games or securitized versions of digital art already floating around Instagram.
Renowned digital artist Mike Winklemann, better known as “Beeple,” created a set of 5,000 daily drawings to create perhaps the most famous NFT of 2021, “EVERYDAYS: The First 5000 Days,” which sold at Christie’s for a record $69.3 million.
Anyone can view individual images or even the entire image collage online for free. So why are people willing to spend millions on something they could easily screenshot or download?
Because an NFT allows the buyer to own the original item. Not only that, it contains built-in authentication, which serves as proof of ownership. Collectors value these “digital bragging rights” almost more than the object itself.
How is an NFT different from cryptocurrency?
NFT stands for non-fungible token. It is generally built using the same type of programming as cryptocurrency, for example Bitcoin OR Ethereumbut that’s where the similarities end.
Physical money and cryptocurrencies are “fungible,” meaning they can be exchanged or exchanged with each other. They also have the same value: a dollar is always worth another dollar; one Bitcoin is always the same as another Bitcoin. The fungibility of cryptocurrencies makes them a reliable means of conducting transactions on the blockchain.
NFTs are different. Each has a digital signature that makes NFTs impossible to exchange or match with each other (hence non-fungible). An NBA Top Shot clip, for example, is not the same as EVERYDAYS simply because they are both NFTs. (One NBA Top Shot clip isn’t even necessarily the same as another NBA Top Shot clip, for that matter.)
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How does an NFT work?
NFTs exist on a blockchain, which is a distributed public ledger that records transactions. You are probably more familiar with blockchain as the underlying process that makes cryptocurrencies possible.
Specifically, NFTs are generally held on Ethereum blockchain, although other blockchains also support them.
An NFT is created, or “minted” from digital objects that represent both tangible and intangible items, including:
- Graphic art
- GIF
- Sports videos and highlights
- Collectibles
- Virtual avatars and skins for video games
- Designer sneakers
- Music
Tweets matter too. Twitter co-founder Jack Dorsey sold his first-ever tweet as an NFT more than $2.9 million.
Essentially, NFTs are like physical collectibles, only digital. So instead of getting a real oil painting to hang on the wall, the buyer receives a digital file instead.
They also have exclusive ownership rights. NFTs can only have one owner at a time, and their use of blockchain technology makes it easy to verify ownership and transfer tokens between owners. The creator can also store specific information in an NFT’s metadata. For example, artists can sign their artwork by including their signature in the file.
What are NFTs for?
Blockchain technology and NFTs offer artists and content creators a unique opportunity to monetize their wares. 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 allows him to keep more of the profits. Additionally, artists can schedule royalties to receive a percentage of sales each time their art is sold to a new owner. This is an interesting feature since artists generally do not receive future proceeds after their art is sold for the first time.
Art isn’t the only way to make money with NFTs. Brands like Charmin and Taco Bell have auctioned off themed NFT artwork to raise money for charity. Charmin dubbed its offering “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.
Nyan Cat, a 2011 GIF of a cat with a pop-tart body, sold for almost $600,000 in February. And NBA Top Shot has generated more than $500 million in sales starting at the end of March. A single LeBron James NFT brought in more than $200,000.
Celebrities like Snoop Dogg and Lindsay Lohan are also jumping on the NFT bandwagon, releasing mementos, artworks and one-of-a-kind moments as securitized NFTs.
How to buy NFTs
If you want to start your NFT collection, you’ll need to acquire a few key items:
First, you’ll need to get a digital wallet that allows you to store NFTs and cryptocurrencies. You will probably have to buy some cryptocurrency, such as Ether, depending on the currencies accepted by your NFT provider. You can buy cryptocurrencies using a credit card on platforms like Coinbase, Kraken, eToro and even PayPal and Robinhood now. You can then move it from the exchange to your favorite wallet.
You’ll want to keep rates in mind as you research your options. Most exchanges charge at least a percentage of the transaction when you purchase cryptocurrencies.
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Popular NFT Markets
Once you’ve set up and funded your wallet, there’s no shortage of NFT sites to shop on. Currently, the largest NFT markets are:
• OpenSea.io: This peer-to-peer platform bills itself as a provider of “rare and collectible digital items.” To get started, all you need to do is create an account to browse NFT collections. You can also sort pieces by sales volume to discover new artists.
• Rare: Similar to OpenSea, Rarible is a democratic and open marketplace that allows artists and creators to issue and sell NFTs. RARI tokens issued on the platform allow holders to evaluate features such as fees and community rules.
• Foundation: Here, artists must receive “upvotes” or an invitation from other creators to post their art. The community’s exclusivity and cost of entry – artists also have to purchase “gas” to mint NFTs – means it can boast artwork of a higher caliber. For example, Nyan Cat creator Chris Torres sold the NFT on the Foundation platform. It could also mean higher prices – not necessarily a bad thing for artists and collectors looking to capitalize, assuming demand for NFTs remains at current levels, or even increases over time.
While these and other platforms are home to thousands of NFT creators and collectors, be sure to do your research carefully before purchasing. Some artists have fallen victim to imitators who have published and sold their works without their permission.
Additionally, the verification processes for NFT creators and listings are not consistent across all platforms – some are more rigorous than others. OpenSea and Rarible, for example, do not require owner verification for NFT listings. Buyer protections seem slim at best, so when purchasing NFTs, it may be best to keep the old adage “caveat emptor” (let the buyer beware) in mind.
Should You Buy NFTs?
Just because you can buy NFTs, does that mean you should? It depends, says Yu.
“NFTs are risky because their future is uncertain and we don’t yet have much history to judge their performance,” he notes. “Since NFTs are so new, it may be worth investing small sums to try them for now.”
In other words, investing in NFTs is a largely personal decision. If you have money to spend, it might be worth considering, especially if a piece has meaning to you.
But keep in mind that the value of an NFT is based entirely on what someone else is willing to pay for it. Therefore, demand will drive price rather than fundamental, technical or economic indicators, which typically influence stock prices and at least generally form the basis for investor demand.
All of this means that an NFT can be resold for less than you paid for it. Or you may not be able to resell it at all if no one wants it.
NFTs are also subject to capital gains taxes– just like when you sell shares at a profit. Since they are considered collectibles, however, they may not receive the preferential long-term capital gains rates of stocks and may also be taxed at a higher collectible tax rate, although the IRS has not yet determined which NFTs are considered for tax purposes. Please note the cryptocurrencies used to purchase the NFT they may also be taxed if they have increased in value since you purchased them, which means you may want to check with a tax professional when considering adding NFTs to your portfolio.
That said, approach NFTs just as you would any investment: do your research, understand the risks, including that you could lose all of your invested dollars, and if you decide to take the plunge, proceed with a healthy dose of caution.