There’s no doubt about it, cryptocurrency and other digital assets are on the rise. They offer a value promise that seems to outstrip the concepts of cash value. NFT rubs shoulders with a lot of popular cryptocurrencies, to the point that it is drawing considerable interest from a lot of sectors.
What Does NFT Stand For?
NFT stands for Non-Fungible Tokens and has become one of the more popular forms of digital assets linked to things with real-world value. With the rapid increase in NFT, it has some people wondering if they are the wave of the future, or if it is just another short-term bubble that’s doomed to pop.
To help you understand whether or not NFTs are right for you, it helps to take a closer look at them and how they work.
Non-Fungible Tokens have been around since 2014 and they are bought and sold online. They are often used along with cryptocurrency as they are generally encoded with the same underlying software that you see being used with a lot of the more common forms of cryptocurrency.
To date, more and $174 million has been spent on NFTs. Though NFTs typically have a very limited run, with highly unique identifying codes. This essentially creates an interesting form of digital scarcity, which further accentuates their value.
This makes them unique from a lot of other digital creations, which tend to be in infinite supply. This is due in part to the fact that many NFTs are essentially digital creations that already exist in some form elsewhere. This includes things like:
- Exclusive video clips
- Collage images
- A unique digital artwork
- A unique sneaker in a limited-run fashion line
- An item that was worn in a game
- A moving essay from a well-known author
- A digital collectible
- A strong domain name
- A ticket that gives you access to a special event
- When you purchase that NFT it allows you, the buyer to own the original item, and it comes with a special built-in authentication. This essentially serves as proof of ownership, which further provides a special type of collector’s value as “Virtual Bragging Rights” that go beyond the tangible value of possessing it in hand.
How Do NFTs Differ From Cryptocurrency?
As a non-fungible token, NFT’s are typically engineered via the same kind of programming as cryptocurrency just like Bitcoin or Ethereum. Though this is the end of the similarities. The key difference comes in that strange-sounding term “Fungible.”
You see things like cash, coins, cryptocurrency, and other forms of physical money are considered “Fungible” in that they can be exchanged or traded for one another. They are also technically considered to be equal in relative value. In the case of cryptocurrency, “Fungibility” comes via a trusted means of conducting transactions using that specific blockchain.
This puts NFTs in a sort of gray area that can make it somewhat challenging to place a cold hard value on them. Technically, each of them has a digital signature which makes it impossible for an NFT to be exchanged for another one.
How Do NFTs Work?
NFTs exist as part of a sophisticated blockchain, which is distributed via a public ledger that accurately records all transactions. This infrastructure is often held on the Ethereum blockchain, though other blockchains are equally capable of supporting NFTs as well.
An NFT is generated or “Minted” from specific digital objects that represent intangible as well as tangible items. This includes things like:
- Original Works of Art
- Viral Videos
- Popular Sports Highlights
- Collectibles & Memorabilia
- Virtual Avatars
- Video Game Skins
- Designer Sneakers & Footwear
- Music Files
Taken in context and NFT is similar to a physical collector’s items, only it’s digital. This means that rather than possessing an actual oil painting to hang on the wall, you as the buyer possess a digital file instead. This also comes with exclusive ownership rights, and an NFT can have only one owner at a time.
At the same time, an NFT’s unique data encryption makes it easy to verify ownership as well as transfer tokens from one owner to the next. The owner can also host-specific information inside an NFT, including things like the original artist signing their artwork by embedding their signature in an NFT’s metadata.
How Do I Buy An NFT?
To start an NFT collection, you will first need to set up some key items.
You will need to start a “Digital Wallet” that is set up to allow you to store NFTs and cryptocurrencies. This typically requires you to purchase some cryptocurrency. Since a lot of NFTs are hosted via Ethereum, it’s probably convenient to invest in that blockchain. Though make sure to double-check with the preferred type of cryptocurrencies your NFT provider accepts. Many times you can use a special credit card on platforms like Coinbase, Kraken, eToro, and even PayPal and Robinhood now. At that point, you will be able to move it from the exchange to your digital wallet.
It’s also worth bearing in mind that there might be some fees in mind as you research options, as most crypto exchanges charge a small percentage of your transaction every time you purchase crypto.
Are NFTs A Good Investment?
At this time, a lot of industry experts see NFTs as having an above-average risk exposure line to their uncertain future. A lot of investors want to see a long history of performance, and NFTs are very new, though their potential to increase in value is high.
If you aren’t “Risk Averse” making a few small investments in NFTs might be a feasible way to diversify. Though this is a largely personal decision, and should only be embraced if you truly do have the money to spare. Especially if a piece holds meaning for you.
Just bear in mind that as a non-fungible item an NFT’s value will always be based on what someone else is willing to pay for it. This means that the virtual demand will drive the price rather than fundamental, technical, or economic factors.
This means that any NFT may resell for less than you originally paid for it. It might also be that no one wants to purchase the NFT in question, which could result in a complete loss.
You should also bear in mind that NFTs are also subject to capital gains taxes. This means that you will need to shoulder the tax burden of the transfer just like when you sell stocks or other investments at a profit. Though they are considered collectibles, which means that an NFT might not receive the preferential long-term capital gain rates that typical stocks do.
An NFT might even be taxed at a higher collectibles tax rate. However, the Internal Revenue Service has not yet ruled what NFTs are considered for tax purposes. Though, the cryptocurrencies used to purchase most NFTs might also be taxed. Especially if the cryptocurrency has recently increased in value since your original purchase.