Non-Fungible Tokens (NFTs) seem to be everywhere these days. From art and music to tacos and toilet paper, these digital resources are being sold like they were 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 about 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 represents real-world objects such as art, music, game elements, and videos. They are bought and sold online, often with cryptocurrencyand are generally encrypted with the same underlying software as many cryptocurrencies.
Although they have been around since 2014, NFTs are now gaining notoriety because they are becoming an increasingly popular way to buy and sell digital artwork. The NFT market it was worth it a staggering $15.70 billion in 2021 alone, and is expected to reach $122 billion by 2028.
NFTs are also generally one-of-a-kind, or at least one from a very limited run, and have unique identification codes. “Essentially, NFTs create digital scarcity,” says Arry Yu, chairman of the Cascadia Blockchain Council of the Washington Tech Industry Association and CEO of Yellow Umbrella Ventures.
This is in stark contrast to most digital creations, which are almost always in endless supply. Hypothetically, cutting off supply should increase the value of a given asset, assuming there is 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 of NBA games or securitized versions of digital art already floating around Instagram.
Famed digital artist Mike Winklemann, better known as “Beeple,” created a composite of 5,000 daily drawings to create perhaps the most famous NFT of 2021, “EVERYDAYS: The First 5,000 Days,” which sold at Christie’s for a record $69.3 million.
Anyone can view the individual images, or even the entire collage of images online for free. So why are people willing to spend millions on something they could easily capture 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 those “digital bragging rights” almost more than the item itself.
How is an NFT different from a cryptocurrency?
Physical money and cryptocurrencies are “fungible”, meaning they can be traded or traded for each other. They also have the same value: a dollar is always worth another dollar; one Bitcoin is always equal to another Bitcoin. Crypto’s fungibility makes it a reliable means of transacting on the blockchain.
NFTs are different. Each one has a digital signature that makes it impossible for the NFTs to be exchanged or the same as each other (therefore non-fungible). An NBA Top Shot clip, for example, is not the same as EVERYDAYS simply because they are both NFTs. (An NBA Top Shot clip isn’t even necessarily the same as another NBA Top Shot clip, for that matter.)
How does an NFT work?
NFTs exist on a blockchain, which is a distributed public ledger that records transactions. You are probably most familiar with blockchain as the underlying process that makes cryptocurrencies possible.
Specifically, NFTs are generally held in the Ethereal 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
- Sports videos and summaries
- Virtual avatars and video game skins
- designer slippers
Even tweets count. Twitter co-founder Jack Dorsey sold his first tweet as NFT to more than $2.9 million.
Essentially, NFTs are like physical collectibles, only digital. So instead of getting an actual oil painting to hang on the wall, the buyer gets a digital file.
They also get exclusive property 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 the metadata of an NFT. For example, artists can sign their artwork by including their signature on file.
What are NFTs used for?
Blockchain technology and NFTs provide artists and content creators with a unique opportunity to monetize their products. 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 NFTs, which also allows them to keep a larger share 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 attractive feature as artists generally do not receive future earnings after their art is first sold.
Art is not the only way to make money with NFTs. Brands like Charmin and Taco Bell have auctioned off themed NFT art 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), equivalent to $3,723.83 at time of writing.
Nyan Cat, a 2011-era GIF of a cat with a pop-tart body, sold for nearly $600,000 USD in February 2021. And NBA Top Shot generated more than $1 billion dollars in sales as of May 2022. A single featured LeBron James NFT netted over $200,000 USD.
Even celebrities like Snoop Dogg and Lindsay Lohan are jumping on the NFT bandwagon, releasing memorabilia, artwork, and one-of-a-kind moments as securitized NFTs.
How to buy NFTs
If you’re interested in starting your own NFT collection, you’ll need to purchase a few key items:
First, you will need to get a digital wallet that allows you to store NFTs and cryptocurrencies. You may need to buy some cryptocurrency, such as Ether, depending on the currencies your NFT provider accepts. You can buy crypto with a credit card on platforms like Coinbase, Kraken, Netcoins, and even Wealthsimple now, through Wealthsimple Crypto. You will then be able to move it from the exchange to the wallet of your choice.
You’ll need to keep fees in mind when researching options. Most exchanges charge at least a percentage of your transaction when you buy crypto.
Popular NFT markets
Once you’ve got your wallet set up and funded, there’s no shortage of NFT sites to buy from. Currently, the largest NFT markets are:
- OpenSea.io: This peer-to-peer platform advertises itself as a provider of “rare and collectible digital items.” To get started, all you need to do is create an account to browse the NFT collections. You can also sort pieces by sales volume to discover new artists.
- rare: Like OpenSea, Rarible is an open and democratic marketplace that allows artists and creators to issue and sell NFTs. RARI tokens issued on the platform allow holders to have a say in features such as fees and community rules.
- Base: Here, artists must receive “upvotes” or an invitation from other creators to post their art. The exclusivity of the community and the cost of entry (artists must also buy “gasoline” to mint NFTs) means you can boast higher-caliber artwork. For example, Nyan Cat creator Chris Torres sold the NFT on the Foundation platform. It can also mean higher prices, which isn’t necessarily a bad thing for artists and collectors looking to capitalize, assuming demand for NFTs stays at current levels, or even rises over time.
Although these platforms and others are home to thousands of NFT creators and collectors, be sure to do your research carefully before you buy. Some artists have fallen victim to copycats who have published and sold their work without their permission.
Additionally, the verification processes for creators and NFT lists are not uniform across platforms; some are stricter than others. OpenSea and Rarible, for example, do not require owner verification for NFT listings. Buyer protections appear to be slim at best, so when shopping for NFTs, it may be best to heed the old adage “caveat emptor” (buyer beware).
Should you buy NFTs?
The fact that you can buy NFTs means that you should. It depends, Yu says.
“NFTs are risky because their future is uncertain and we still don’t have much track record to judge their performance,” he says. “Since NFTs are so new, it may be worth investing small amounts to test it out for now.”
In other words, investing in NFTs is largely a personal decision. If you have money to spare, it may be worth considering, especially if a piece has meaning to you.
But keep in mind that the value of an NFT is entirely based on what someone else is willing to pay for it. Therefore, demand will drive the price rather than fundamental, technical, or economic indicators, which typically influence stock prices and, at least generally, form the basis of investor demand.
All of this means that an NFT can be resold for less than what you paid for it. Or you may not be able to resell it if nobody wants it.
NFTs are also subject to capital gains tax—just like when you sell stocks at a profit. However, since they are considered collectibles, they may not receive the preferential long-term capital gains rates that stocks receive and may even be taxed at a higher tax rate for collectibles, although the IRS has not yet ruled. which NFTs are considered for tax purposes. Note the cryptocurrencies used to purchase the NFT can also be recorded if they have increased in value since you bought them, which means you may want to consult with a tax professional when considering adding NFTs to your portfolio.
That said, approach NFTs as you would any investment: do your research, understand the risks, including the fact that you could lose all of your investment dollars, and if you decide to take the plunge, proceed with a healthy dose of caution.