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Everything You Need to Know About Non-Fungible Tokens

This year, non-fungible tokens (NFTs) appear to have exploded out of the Ether. From art and music to tacos and toilet paper, these digital assets are as valuable as 17th-century exotic Dutch tulips, fetching millions of dollars in some cases

However, are NFTs worth the money—or the hype? Some experts believe they are a bubble that will burst, similar to the dot-com craze or the Beanie Babies craze. Others believe that NFTs are here to stay and will forever change investing.

What Exactly Is an NFT?

An NFT is a digital asset representing physical objects such as art, music, in-game items, and videos. They are purchased and sold online, frequently with cryptocurrency, and are typically encoded with the same underlying software as many cryptos. Despite the fact that they have been around since 2014, NFTs are gaining popularity as a popular way to buy and sell digital artwork. Since November 2017, a whopping $174 million has been spent on NFTs.

NFTs are also typically one-of-a-kind, or at the very least one of a very limited run, with unique identifying codes. “Essentially, NFTs create digital scarcity,” says Arry Yu, managing director of Yellow Umbrella Ventures and chair of the Washington Technology Industry Association Cascadia Blockchain Council. This is in sharp contrast to the vast majority of digital creations, which are almost always infinite in supply. So, assuming a given asset is in demand, cutting off supply should theoretically increase its value.

However, many NFTs, at least in their early stages, were digital creations that already existed in some form elsewhere, such as iconic video clips from NBA games or securitized versions of digital art that was already floating around on Instagram.  For example, famous digital artist Mike Winklemann, better known as “Beeple,” crafted a composite of 5,000 daily drawings to create “EVERYDAYS: The First 5000 Days,” which sold at Christie’s for a record-breaking $69.3 million.

Individual images—or even the entire collage of images—can be viewed online for free by anyone. So why are people willing to spend millions of dollars on something that they can easily screenshot or download?

Because an NFT enables the buyer to own the original item, it also includes built-in authentication proof of ownership. As a result, collectors value “digital bragging rights” nearly as much as the item itself.

The Asset Internet

NFTs and Ethereum address some of the issues that plague the internet today. As everything becomes more digital, there is a greater need to replicate physical properties such as scarcity, uniqueness, and proof of ownership. Not to mention that digital items frequently only function within the context of their product. For example, you cannot resell an iTunes mp3 that you have purchased, nor can you exchange one company’s loyalty points for a credit on another platform, even if there is a market for it.

Here’s how the internet of NFTs looks today compared to what most of us use.

An NFT Internet
  1. NFTs are digitally distinct. No two NFTs are alike.
  2. Every NFT must have an owner, and this information is public and easily verifiable.
  3. NFTs are compatible with any Ethereum-based product. An NFT ticket for an event can be exchanged for a completely different NFT on any Ethereum marketplace. You could exchange a work of art for a ticket.
  4. Content creators have access to a global market and can sell their work anywhere.
  5. Content creators have access to a global market and can sell their work anywhere.
  6. Items can be used in unexpected ways. You can, for example, use digital artwork as collateral in a decentralised loan.

The Internet Today

  1. A duplicate of a file, such as.mp3 or.jpg, is identical to the original.
  2. A duplicate of a file, such as.mp3 or.jpg, is identical to the original.
  3. Companies that sell digital products must invest in infrastructure. For example, an app that sells digital event tickets would need to create its ticket exchange.
  4. Creators rely on the platforms’ infrastructure and distribution. These are frequently subject to usage restrictions and geographical limitations.
  5. Platforms, such as music streaming services, keep most sales profits.

What is the Difference Between an NFT and a Cryptocurrency?

NFT is an abbreviation for non-fungible tokens. It’s built with the same programming as cryptocurrencies, such as Bitcoin or Ethereum, but that’s where the similarities end.

Physical currency and cryptocurrencies are both “fungible,” which means they can be traded or exchanged for one another. They also have the same monetary value—one dollar is always worth another dollar and one Bitcoin is always equal to another. The fungibility of cryptocurrency makes it a reliable method of conducting blockchain transactions.

NFTs are distinct. Each has a digital signature that prevents NFTs from being exchanged for or equal to another (hence, non-fungible). Because they’re both NFTs, one NBA Top Shot clip isn’t the same as EVERYDAYS. (For that matter, one NBA Top Shot clip isn’t necessarily equal to another NBA Top Shot clip.)

How Does an NFT Operate?

NFTs are based on a blockchain, a distributed public ledger that records transactions. You’ve probably heard of blockchain as the underlying process that allows cryptocurrencies to exist. NFTs are typically held on the Ethereum blockchain, though other blockchains also support them.

An NFT is created or “minted” by combining digital objects that represent both tangible and intangible items, such as:

  1. Art
  2. GIFs
  3. Videos and sports highlights
  4. Collectables
  5. Virtual avatars and video game skins
  6. Designer sneakers
  7. Music

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

NFTs are digital collector’s items, similar to physical collector’s items. However, the buyer receives a digital file instead of receiving an actual oil painting to hang on the wall. They will also have sole ownership rights. That’s correct: NFTs can only have one owner at a time. The unique data of NFTs makes it possible to verify ownership and transfer tokens between owners. They can also store specific information by the owner or creator. Artists, for example, can sign their work by including their signature in the metadata of an NFT.

What Is the Purpose of NFTs?

Blockchain technology and NFTs provide artists and content creators with a one-of-a-kind opportunity to monetize their work. Artists, for example, no longer rely on galleries or auction houses to sell their work. Instead, the artist can sell it as an NFT directly to the consumer, allowing them to keep more profits. Furthermore, artists can programme in royalties to receive a percentage of sales whenever their artwork is sold to a new owner. This is an appealing feature because most artists do not receive future proceeds after selling their work.

Art isn’t the only way to profit from NFTs. Charmin and Taco Bell, for example, have auctioned off themed NFT art to raise funds for charity. 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), or $3,723.83 at the time of writing.

Nyan Cat, a GIF of a cat with a pop-tart body from 2011, sold for nearly $600,000 in February. In late March, NBA Top Shot sold for more than $500 million. A single LeBron James highlight NFT sold for more than $200,000 on eBay. In addition, celebrities such as Snoop Dogg and Lindsay Lohan have jumped on the NFT bandwagon, releasing unique memories, artwork, and moments as securitized NFTs.

How Do I Purchase NFTs?

If you want to start your NFT collection, you’ll need to get the following items:

First, you must obtain a digital wallet that allows you to store NFTs and cryptocurrencies. Then, depending on which currencies your NFT provider accepts, you’ll probably need to buy some cryptocurrency, such as Ether. Finally, you can use a credit card to purchase cryptocurrency on Coinbase, Kraken, eToro, and even PayPal and Robinhood. You’ll then be able to transfer it from the exchange to your preferred wallet.

As you research your options, keep fees in mind. Most exchanges charge at least a percentage of the transaction when purchasing cryptocurrency.

Popular NFT Exchanges

Once you’ve set up and funded your wallet, there’s no shortage of NFT sites to choose from. The following are the largest NFT marketplaces at the moment:

  1. OpenSea.io:  OpenSea.io is a peer-to-peer platform that sells “rare digital items and collectibles.” To get started, create an account and browse NFT collections. You can also sort pieces based on sales volume to find new artists.
  2. Rarible: Rarible, like OpenSea, is a democratic, open marketplace where artists and creators can issue and sell NFTs. Furthermore, RARI tokens issued on the platform allow holders to vote on features such as fees and community rules.
  3. Foundation: To post their art here, artists must receive “upvotes” or an invitation from other creators. Because of the community’s exclusivity and high cost of entry—artists must also purchase “gas” to mint NFTs—it may have higher-quality artwork. For example, Chris Torres, the creator of Nyan Cat, sold the NFT on the Foundation platform. On the other hand, it may mean higher prices, which isn’t necessarily bad for artists and collectors looking to profit, assuming that demand for NFTs remains stable or even rises over time.

Although these and other platforms are home to thousands of NFT creators and collectors, make sure you do your homework before purchasing. Some artists have been duped by imposters who have listed and sold their work without their permission.

Furthermore, the verification processes for creators and NFT listings differ across platforms, with some being more stringent than others. For NFT listings, OpenSea and Rarible, for example, do not require owner verification. However, buyer protections appear to be limited at best, so when shopping for NFTs, remember the adage “caveat emptor” (let the buyer beware).

Should You Invest in NFTs?

“Does the fact that you can purchase NFTs imply that you should? It is conditional “, Yu claims. “NFTs are risky because their future is uncertain, and we don’t yet have a lot of historical data to judge their performance,” she says. “Because NFTs are so new, it may be worth investing small amounts to test them out for the time being.”

In other words, investing in NFTs is primarily a personal choice. However, if you have money to spare, it may be worth considering, especially if the piece has meaning for you.

However, keep in mind that the value of an NFT is entirely determined by what someone else is willing to pay for it. As a result, demand will drive the price rather than fundamental, technical, or economic indicators, which typically influence stock prices and serve as the foundation for investor demand. All of this means that an NFT may be resold for less than what you paid for it. If no one wants it, you might not be able to resell it at all.

Capital gains taxes are also levied on NFTs, just like when you sell stocks for a profit. However, because they are considered collectables, they may not receive the preferential long-term capital gains rates that stocks do. They may even be taxed at a higher collectables tax rate, though the IRS has not yet ruled on what NFTs are considered for tax purposes. Furthermore, keep in mind that the cryptocurrencies used to purchase the NFT may be taxed if their value has increased since you purchased them, so consult with a tax professional before adding NFTs to your portfolio.

However, approach NFTs in the same way you would any other investment:

  1. Do your research.
  2. Understand the risks—including that you might lose all of your investing dollars—and if you decide to take the plunge.
  3. Proceed with a healthy dose of caution.

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