The Basics of Non-Fungible Tokens (NFTs)

Digital assets—such as art, music, -tacos- and toilet paper—seem to be selling like hotcakes this year. Some were even sold at millions of dollars!

But are Non-Fungible Tokens worth the time and money – or even the hype? While there’s been a lot of speculation from both sides, some experts say they’re just an overhyped bubble that’ll pop like the dot-com craze or Beanie Babies. Others believe NFTs are here to stay and will be a big part of investing for many years to come.

What Is an NFT?

“Non-fungible tokens” format the world of blockchain, the internet, and digital assets in a way that is comparable to what we know from online shopping for traditional items such as books, BluRay DVDs, and concert tickets.

NFTs are a relatively new thing but their popularity is growing thanks to the way they make it possible to buy and sell digital art. This might make you think twice about investing your money in things like crypto and stocks!

NFTs are unique and generally one of a kind, following the idea of digital scarcity. Arry Yu, chair of the Washington Technology Industry Association says “Essentially, NFTs create digital scarcity.”

Every other digital creation is infinitely reproducible, so the demand for anyone piece should theoretically rise if it’s no longer available.

But a lot of these first-generation decentralized applications, at least for now, have been digital creations that already exist somewhere else. For example, there’s vinyl records (Securitized version of digital music), or there are The Daily Show clips (Iconic video clips from NBA games)

One of the most famous “Non-Fungible Tokens” (NFTs) of all time is called every day: The First 5000 Days. It was created by digital artist Mike Winklemann, aka “Beeple” and records the most important days in his life. A copy sold for over $69.3 million at Christie’s back in March 2019.

Anyone can see the images for free online, so why would people who can easily take a screenshot or download the collage be willing to pay millions of dollars?

NFTs allow you to own a piece of art outright and have a physical copy to display. They also have the advantage of being authentic, which proves you have ownership. Collectors love having bragging rights about their collection and won’t care too much if their NFTs get stolen.

How are NFTs different from traditional cryptocurrencies?

There are a number of differences between an NFT and cryptocurrency. One difference is that an NFT can be time-bound without expiration, but this is different from cryptocurrencies which are not time-bound.

Non-fungible tokens (NFTs) are similar in programming to cryptocurrencies like Bitcoin or Ethereum, yet they differ in what they’re based on. Rather than coins, NFTs are uniquely identified game items that can be traded for value in a game.

Physical money and cryptocurrencies are interchangeable; they can be traded or exchanged for one another. The worth of cryptocurrency is always in line with one another – it’s like one dollar is always equivalent to another. As a result, cryptocurrencies can be trusted when conducting transactions on the blockchain.

Non-fungible tokens (NFTs) are individual and distinctive. That means they can’t be exchanged or replaced with any other token. Individuals make judgments about the things they encounter in life – even if they are both NBA Top Shots. One example is not necessarily comparable to another example.

How Does an NFT Work?

Non-fungible tokens exist on a blockchain. This is a type of distributed ledger that’s found in cryptocurrencies and it records all transactions. You may be most familiar with the process blockchain performs: it approves and records cryptocurrency payments. It does this by generating consensus across a peer-to-peer network, such that everyone on that network agrees on what transactions should be approved and confirmed.

Specifically, non-fungible tokens (NFTs) are usually stored on the Ethereum blockchain, although other blockchains also enable them.

NFTs are created through the use of digital objects that represent tangible and intangible items, including:

•  Art

•  GIFs

•  Videos and sports highlights

•  Collectibles

•  Virtual avatars and video game skins

•  Designer sneakers

•  Music

This remarkable tweet sold for more than $2.9 million. The Twitter co-founder, Jack Dorsey, had first drafted this tweet on the social media platform many years ago.

Essentially, NFTs are like digital collector’s items – you can buy them & hang them on the wall without having to worry about them being damaged.

They also provide exclusive ownership rights – only one person can own the token at any given moment. This ensures that it is easy to trace and transfer tokens, which can be challenging for some gaming utility tokens out there. The metadata stored inside NFTs is often used by creators to store relevant information about their content. For example, artists can sign their artwork with a signature stored in the NFT’s metadata.

What Are NFTs Used For?

Blockchain and NFT technology can be used by artists and content creators to monetize their wares in ways that are currently unavailable. They are free to sell their own work without having to rely on galleries or auction houses which could potentially provide them with better deals. Artists can sell their pieces as NFTs that consumers will be able to own and keep forever. Retailers can also offer digital shares of limited edition items so artists will get a percentage of the profits from those sales. In addition, they can set royalty dates so they’ll receive a cut from any future retail purchases. One of the attractive features of this is that it supports artists who often forfeit future proceeds after their art is first sold.

Different brands, like Charmin and Taco Bell, have used NFTs to make money and raise essential funds for worthy causes. To commemorate the winners of its first annual NFT, Taco Bell has announced plans to release limited-edition pieces of art created by prominent creators in the cryptocurrency space.

A 2011-era GIF of a cat with a pop-tart body called Nyan Cat sold for nearly $600,000 in February. And the NBA Top Shot generated $500 million in sales as of late March. A single LeBron James highlight NFT fetched more than $200,000

Recent developments in the entertainment space have given us celebrities like Snoop Dogg who are releasing unique memories, artwork, and moments as Securitized Non-Fungible Tokens.

How to Buy NFTs

If you want to start collecting NFTs, here are some key items you’ll need to get:

This is a list of requirements to start using an NFT. First, you’ll need a digital wallet that stores both crypto and NFTs. You might need to purchase cryptocurrency, like Ether, depending on what type of NFTs your provider accepts. It’s now possible to buy crypto with a credit card. Platforms like Coinbase, Kraken, eToro, and even PayPal and Robinhood allow you to convert the money into other currencies. Then you can transfer it to your chosen cryptocurrency wallet.

When you purchase cryptocurrency through an exchange, be mindful of the transaction fees. Most charge at least a percentage of the transaction when purchasing crypto.

Popular NFT Marketplaces

Once you’ve set up your wallet and funded it, there are a lot of NFT sites to shop on. Currently, the largest marketplaces for NFTs are:

• This peer-to-peer platform sells rare digital items & collectibles. To start, all you need to do is create an account to browse their collections of NFTs (non-fungible tokens). You can also sort and filter them by sales volume.

•  Rarible: Similar to OpenSea, Rarible is a democratic, open market where artists & creators can issue digital assets and NFTs for sale. The platform enables holders to provide input on features like fees and community rules through RARI tokens – giving all stakeholders a say in how they want their marketplace to look.

•  Foundation: Artists on this platform need to get upvotes or invitations from fellow creators before they may post their work of art. The community might be set up in a way that means you need to buy “gas” with real money to make art, which means it’s more exclusive & expensive. This may mean the artwork is better quality. For example, Chris Torres sold his Nyan Cat artwork on the Foundation platform. At the same time, this may also mean higher prices—not necessarily a bad thing if you are looking to make money from your artwork or just enjoy collecting pieces.

It’s important when buying NFTs to make sure you research the platform thoroughly in order to avoid scammers. Some artists have experienced forged paintings and other artworks done in their name and put up for sale, owing to impersonators who do not ask permission before taking up such work.

In contrast to this, the verification processes for creators and NFT listings aren’t consistent across platforms — some are more stringent than others. Platforms like OpenSea and Rarible do not require verification for listing NFT. You will need to be extra careful when buying these digital assets, so remember the old saying “caveat emptor” (let the buyer beware).

Should You Buy NFTs?

Not sure if you should buy these NFTs? Yu has some thoughts on the matter.

New financing tools (NFTs) are risky because of their early stage of development and lack of data. “Since NFT’s are so new, it may be worth investing small amounts to see what happens.”

The benefits of investing in NFTs are largely personal. It depends on how readily you have money to spare, but if something resonates with you then it may be worth considering.

But remember that an NFT’s value is determined strictly by what people are willing to pay for it. So, even if the asset is deemed to be worth a certain amount, demand will dictate the actual price.

All that being said, you may not be able to resell an NFT if there’s no demand for it.

Non-fungible tokens are also subject to capital gains taxes—just like when you sell stocks at a profit. Non-traditional financial assets like this may not receive preferential long-term capital gains rates as stocks do. They may be taxed as investments instead, and the IRS has not yet clarified what qualifies as a collectible for tax purposes. Be aware that crypto may also be taxed if its worth has risen since you bought it. Make sure to consult with a tax professional before adding affordable blockchain-based digital tokens to your portfolio.

Also Read: What’s the Big Deal with NFTs and How to Use them Practically?

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